property investors network

Back to Basics

Any property investor who knows what they are doing realises that now is a great time to invest in property because it is a buyers market and all property is on sale! However the current lack of same day re-mortgages, means that many investors are not taking advantage of the current buyers market because they are not prepared to leave money in their property investments. I understand this view but I think many investors have completely forgotten why we invest and I think it is time we go back to the fundamentals of investing.

Before this No Money Down Investing became so popular most investors would expect to have to put some money into their investment properties. Typically a property investor would need to put in a 15% deposit and would obtain an 85% Buy to let mortgage. The basic concept being that the property would be rented out to tenants who pay rent which should cover all the costs of holding the property and maybe even make a positive cash flow each month. The investor then benefits from the long term growth of the property value, receiving a fantastic return on their investment due to the gearing of the investment.

The problem with this of course is that at some point most property investors run out of funds that they can use as a deposit and so they can not buy any more investment properties. This is why no money down investing is so attractive as it means potentially you could buy and unlimited number of investment properties.

With this in mind it is important to remember why someone would even consider putting money into a property. Well simply it is because of the fantastic return on your investment. Let’s consider an example to illustrate this.

Let’s say you buy an investment property for £200k (which is currently the average price of a house in the UK). To buy this investment property you would put in a deposit of £30k (15%) and obtain a buy to let mortgage of £170k (85%). Historically property prices double ever 7 to 9 years. Now personally I don’t think we will see much growth for the next 2 to 3 year but by 7 years after that I think prices will have doubled again. So let’s say it takes 10 years from now from prices to double again. No one can say exactly when it will happen but 10 years is probable a fairly safe bet. So the value of your investment property will have increased from £200k to £400k. That is an increase of 100% with just a 15% investment from you which equates to a 766% Return on your investment. That is why we invest in property.

As we now have a buyers market you should be buying property at 20% to 30% below market value. If the property is worth £200k now you should be only dealing with motivated sellers who will be happy to sell it to you for somewhere between £140k and £160k.

Buying at this low price has three main benefits. First of all you will make a profit on the day you buy the property rather than having to wait for the property to increase in value over time. Secondly if the property market does drop in value the very fact that you have purchased well below market value will give you a natural buffer to protect you against a downturn in the market. Finally you will have a lower mortgage and so the investment will stack up better than if you were buying at full price.

So why aren’t more investors rushing out to buy property when it is all on sale? Well it is because smart investors have become used to not having to put any money into their purchases. We have become spoilt and many investors have forgotten the fundamentals of why we invest. Yes you may have to put money in now, but if you get a big enough discount on the purchase price potentially you could re-mortgage in 6 months to get most or all of your money out.

There are a number of creative scheme available right now where you can buy property with no money down but I feel that many of them will be shut down soon as they rather close to mortgage fraud. That’s my view but we will have to see what happens. However if you accept that you are going to have to put some money in, at least for the short term, it means that you will be able to buy some really good investments in the market right now. If you don’t have your own equity that you can use you need to find your funds elsewhere. Perhaps you should consider doing some joint ventures.

If you would like to find out how you go about finding these motivated sellers and how to deal with them then you need to come on my “BMV Quick Start” seminar. The next one is on Sunday 15th June in Birmingham. Full details here. http://www.bmvquickstart.com
Kind regards

Simon Zutshi

4 thoughts on “Back to Basics

  1. DARSHAN BHARJ

    Hi Simon

    Having attended your BMV Quickstart seminar on 27th september, I just like to say I gained a lot of knowledge and find your style of teaching excellent. I like the idea of networking with other investors and met some lovely people. Thank you for all your help and advice.

    Regards

    Darshan

    Darshan

  2. Gren Cartwright

    I’ve just read your Back to Basics article (It is now May 2010). What is the current situation with no money down finance. Can it still be done legally (and ethically) or do you need a pot of money to fund 25% deposits?

  3. Simon Zutshi

    Hi Gren,

    Two great questions.

    First of all on the point of ehtics, as long as you solve the sellers problem in a way that works for you and for them then buying at a discount is perfectly ethical.
    There are many people who still use creative finance to use the discount to represent the deposit. However, as lendeers have tightened up their criteria some of the methods being used are very close to the line. As long as the lenders criteria are all being met and everyone is declaring everything they need to declare there are no problmes but I doubt lenders would like it if they know that the investor had not put any money in .
    We now teach the very best way to buy (to make sure everything is legal and ethical) is to buy at a discounted great price and put the 25% deposit in> the deposit does not have to be your money. You could do a joint venture with another investor who funds the deposit for you and you give them a return on their investmentand or maybe a share in the equity. With the current very low interst rates there are many peole who are getting literally no return on their svaings and yet you could easily offer them an 8% to 10% annual return on their money if you find the right kind of property deal.
    I hope this helps

    Kind regards

    Simon

  4. Louise

    Hi Simon,
    I have had a bit of a distraction from property(family stuff), now having a recap. Anyway, have seen 1 bed cottage, asking price £149,950, probate, on market for a month. Was gonna offer £120, but thats not embarassing enough, £110K? Putting down hefty deposit!
    Best Wishes

    Louise