Did you see the Channel 4 “Dispatches” TV program last night? More doom and gloom for the property market. To be fair, they did make some good points and come to some reasonable conclusion but there was also a lot of negative hype. Wouldn’t it be better for TV programs to tell people what they can do rather than want they cant?
Unfortunately, it is programs like this that cause their predictions of gloom and doom to become a self fulfilling prophecy. The overriding message that I picked up from the program, was how difficult it is for first time buyers to purchase now for two reasons: 1) Prices are so high, 2) Interest rates are high and so people can not afford the mortgage payments. The suggestion that the program made was for First Time Buyers not to buy now, but instead to wait until prices come down further next year and then buy then.
This is one of the reasons why rental demand and rental rates always increase when house prices are coming down, because more people decide to rent rather than buy. This is of course good news for all of us who have properties we are renting out!
These type of programs are always pitched at the level of the mass audience. Most people are not property investors, they do not think like us and so the message is understandably from the point of view of home owners. It is important that as investors we recognise this. The challenge is when we get all the negative stuff thrown at us by friends and family who believe all the information they hear and see on TV but have no personal investing experience to think any differently.
The fact is that the UK property growth rate has slowed, stalled and in some places has already started to decline. I am sure we will see further price FALLS due to the current oversupply of property and lack of buyers. This means that it is a buyers market. As investors we are buying property not selling it. Of course it is even more important to do your research to make sure you are buying the right investment but as long as you know what you are doing, right now there is a great opportunity to get some real bargains. You have to accept that you need to wait a few years for the capital growth to return and so you need to make sure your investments pay for themselves and you can afford to cover any holding costs.
When investors get into trouble it is usually because they overstretch themselves, and have too many properties that they need to support. This is dangerous as a few void periods or interest rate rises can be too much for them to carry. My recommendation is that you MUST always keep a cash reserve to cover unexpected void periods and interest rate rises. This reserve should be proportional to the amount of property you own and the borrowing on it.
Don’t expect to see good capital growth in the UK over the next few years. Property investing is a long term strategy. I believe that most of my properties will at least double again in value with in 10 years. So I am buying now, prepared to hang onto them. To balance my portfolio I am buying overseas properties which are still enjoying very good capital growth. If this is of interest to you may want to come to our Investors Den events around the country this weekend.
So anyway, back to the “Dispatches” program. They had a financial adviser who was explaining to the First Time Buyers how much they would have to pay to the mortgage company each month. The amounts she was quoting seemed very high but then I realised she must be talking about repayment mortgages, and of course as investors we are used to interest only mortgages. My question would be why not start on interest only payments and then in a few years when income increase and you can afford to do it, change to a repayment mortgage.
I remember when I purchased my first property back in 1995. I had just started work at Cadbury in Birmingham and my monthly mortgage payments seemed a real stretch but I wanted to buy the biggest house I could. It was only a two bed terraced house but it was a stretch for me. I am sure it was a stretch for you, when you purchased your first property. I expected to rent out two of the rooms in my house to help cover the mortgage payments. As time went on and my salary increased the mortgage payment become far more affordable and I then moved up to a bigger house which again, at first, was more of a stretch, but that’s the way it works.
I sympathise with young families who are struggling to get on the property ladder as understandably they can not really rent out rooms in their home, but if people are living alone, why don’t more people think about renting out a spare room? I think one of the problems, is that many young people have very high aspirations and so want to live in their own place on there own. No wonder they can not afford it. On the “Dispatches” program they made a real fuss about this single guy who was going to HAVE to rent out his second room to make the figures work. That is not a problem that is a solution.
The program also talked about people who had to get help from their parents to be able to get a deposit. What is so strange about this? Any parent who has owned their own home for the last five years will have seen fantastic growth in their property and so should have more than enough equity to help their kids out. I have met many investors who have got into property for this very reason of being able to help their children get onto the property ladder.
So in conclusion, if you know any first time buyers here are my tips to help get them on the property ladder:
- Get to know the market where you want to buy so that you have a good understanding of the local values and so can spot a bargain.
- Use the current market conditions to negotiate a good price
- Buy the largest property you can with spare rooms which you can rent out to friends to help cover the cost of the mortgage.
- Borrow the deposit from a family member who you can repay in the future by re-mortgaging when property prices start to rise.
- Consider buying with interest only mortgages until you can afford to switch to repayments.
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