Property Investing

Tuesday, 15 February 2011

Repossession Report 2010: 36,400

Index

The CML published its quarterly report on house repossessions and it's 36,400 well below the WPM's prediction of 38,000. At the time this prediction was made, people said it wasn't possible - but time has proved them wrong. I mean the CML's prediction was 53,000 but they reduced it to 39,000 in the Summer of 2010.
This is another feather in the WPM's cap; the first one was forecasting a repossession rate of 50,000 in 2009 as opposed to the CML's 75,000. At the time, they reduced it 65,000 then 48,000 and it eventually came in at 46,000 but then it was revised to just over 47,000. Notice, that the WPM always stick to their forecast come what may - and we're always vindicated.

The WPM's forecast for 2011 is 32,000. Impossible I hear you say. Well, the RICS believe that the down trend will continue to 33,000 and the CML believe it to be 40,000. With Q4 GDP at -0.5%, I rekon the CML will win this round especially with the spending cuts yet to bite and the base rates yet to rise.

I'm betting that the BoE won't raise rates while the economy is in dire straites - the spending cuts will do enough damage. Besides, it won't affect the real inflation; all it will do is choke demand reducing productivity and sales thus reducing GDP. Politics of a mad house if they go against advice.

The WPM will help stabilise the economy thus helping improve the repossession rate. Remember the latter is an indirect effect of the progress the former is making.

Wednesday, 9 February 2011

The one that got away

Index

I saw a 3bed semi in a posh area advertised for £75K in a road where the most recent semi sold for £139K. Previous sales were £129K and £118K going backwards. In the forward direction, prices are going up. I mentioned this in a property forum and they shot me down in flames.
Whichever way you look at it, £75K is very cheap. I called the agent and he said that they need to see proof of funds - cash or Decision In Principle (DIP) - before I can view it. So I called my broker who said that she'll provide me with a DIP within 24 hours. This came and went and nothing. I called another broker and within 2 hours, he emailed a letter stating that I qualify for £100K mortgage and can complete within 28 days. The next day, the first broker emailed me a DIP.

I called the agent to arrange a viewing now that I have a credit line. He said "Don't waste your time as we have received offers well in excess of the asking price and some of them were cash offers. The vendor will certainly accept the cash offers and yours will simply be rejected....". he kept rambling with cynical laughter at my attempt to buy this property with a mortgage when he had several cash offers well in excess of £75K. I got the hint that he didn't even want to show me the property. So, I abandoned this venture as I can't compete with cash offers.

I then got the idea that I've already applied for £38K further advances from 2 of my properties and I can get
a further £9K from a 3rd one. All I need is another £30K which I can get as a loan: £25K personal loan and £5K on my Credit Card. Then I can buy a property cash and remortgage it after 6 months to get my money out. But then I thought that these loans are too expensive and I'll be taking too great a risk as I may not get all the money I put in.

A week later, I was inundated with emails telling me that I can get an 85% LTV buy-to-let mortgage @5.99 fixed for 2 years. This reduced the risk as the required deposit is substantially lower. However, the increased gearing has its own risks. This product reverts to a LIBOR + 5% standard variable which is a bit pricy. I'm prepared to wait for other offers with lower margins. If there are none before April, I'll go for this product.

Wednesday, 19 January 2011

Analysis Update

Index

The mortgage of my first property had a quarterly rise in December as it's a LIBOR tracker. So the next one is in March. LIBOR is currently 0.8%.

Second property is still in the fixed rate period which will run until May 2012 - not long now. But I have raised the rent to £600 pcm - I'm taking advantage of this high rental demand. Besides, my house looks like a motel. It's cashflowing £33 pcm.

My 3rd property, a 3bed house with front drive now rents for 550 but I receive only 475 after management fees. The tenancy started in November 2010.

My 4th property, a 2bed house and rents for 495 but I receive only 447 after management fees. The tenancy started just before Xmas 2010.

According to the BBC, the actual house price growth was actually 0.4% nowhere near the expected 3% let alone the 5% to 10% rise. It looks like it's gonna get worse in 2011; but this is a buying opportunity for BTL investors. I'm planning to buy 4 properties in 2011.

My forecast for 2011 is still a fall of around 5%. I'm currently negotiating a BMV deal in Birmingham and will post my experience of purchasing and renting that property in due course.

Monday, 27 December 2010

Analysis of the Property Market 2010

Index

Since this is my first analysis, it will encompass my experience since February 2007. At that time, everybody was doing property and we were getting 85% LTV at what seemed to be cheap credit mainly because lenders were giving it away at x% BELOW BoE base rate and others used LIBOR. The deposit was gifted by the developers of new build houses and apartments.

In August 2007, I secured an apartment with a mortgage of £117K @5.79% fixed for 2 years against a value of £135K. It rented for £510 against £563 mortgage and £140 costs - I was subsidising the rent to the tune of £194 pcm. At the same time, the Credit Crunch' was announced and although the base rate went down slowly, my outgoings remained the same as my rate was fixed. Although I raised the rent and eventually took over the management, I was still subsidising the rent by a large margin.

On 15th September 2008, Lehmans Brothers collapsed sparking the biggest financial crisis ever prompting the BoE to aggressively reduce the base rate so that by March 2009, it had reached the magic 0.5% where it had remained since. But I still couldn't take advantage of it because I was STILL in the fixed rate period. Furthermore, the value of my apartment had fallen to under £100K putting me in negative equity AND negative cashflow. Fortunately, I was in a highly paid job as a computer programmer which helped me to more than afford the difference between costs and rent.

In October 2009, my mortgage dropped to £304 + £80 pcm which puts the apartment in cashflow positive territory. Since then it has slowly increased to £314 as it's a LIBOR tracker and this is giving me advanced warning of where base rates are heading.

By now I had purchased another property with a mortgage of £54K and a £25K personal loan. The payments were £236 mortgage + £317 personal loan + £14 insurance = £567 against £560 pcm rent ie £7 casflow negative. But it had a valuation of £96K which meant I had plenty of equity. The mortgage is on a 3-year fixed rate of 5.29%. It now has a valuation of £98K and a rent of £575 ie it's £8 cashflow positive.

2009 saw a slight rise in property prices thus reducing yields. Borrowing criteria tightened raising entry costs for first-time buyers and movers. Those who couldn't sell their houses entered the rental market rather than sell their properties at fire sale prices. This created a shortage of stock which raised prices; and an increase of letting capacity which lowered rental yields. Towards the end of 2009, the tightening criteria reduced the number of buyers and the only buyers in town were experienced cash rich BTL landlords.

This trend continued into the first half of 2010 which continued this price increase which, in turn, encouraged sellers to come out in the 2nd half of 2010. I bought 2 more properties in the first half of 2010 - one in Feb. and one in July. In the second half of 2010, as more sellers entered the market, many things happened:

Prices started to fall thus raising rental yields
But, because credit criteria was very tight, many people opted to rent thus raising yields
Reluctant landlords became sellers thus reducing rental stock which, in turn raised yields

At the start of 2010, many pundits predicted that 2010 would see house prices rising between the round figures of 5% and 10%. It's looking like 2010 will end with a little over 3%. This is the national average and results are highly regional. London being the region that consistently bucks the trend. With the draconian cuts in the Public Sector and the VAT rise to 20% from January, predictions for 2011 are up in the air. But there's a common consensus that prices would continue to fall throughout 2011 and into 2012. The Government, with the help of the EU, will tighten the financial rules making credit difficult to get, at least when compared to pre-recession levels.

So, the forecast for property prices in 2011 is that they would fall by as much as 5%. Yields are unpredictable because if prices continue to fall, sellers may become reluctant landlords thus reducing yields. This may be countermanded by people opting to rent as unemployment rises and wages get cut. There may be a rise in repossessions thus increasing the number of cheap properties in the market. These will be snapped by BTL landlords who will increase the rental stock thus reducing yields. So it seems that yields will be stagnant at 2010 levels. But, if the unemployment rises appreciably, yields will rise.

Thursday, 23 December 2010

Experience 4: The Crewe Property

Index

I've heard a lot about property deal packagers and decided to give one of them a try. In June, one company was offering a 2bed house in Crewe, Cheshire for £5995 all in. There would be a mortgage of £51,000 to maintain at a cost of £200 pcm. I paid the fee and completed in July while my Willenhall property was being refurbished.

The company said that he can find a builder who can put in a central heating system and redecorate for under £3000. In fact, it only cost £2700 but it took 3 months to do. The company also arranged the letting agent who would also manage it for me. The company said that it would rent for £450 pcm.

When the agent showed some tenants round the property, she noticed that there was a musty smell and the presence of flees - the previous owner had pets! She also noticed that the property had an extensive damp problem. So she hired a builder to do an estimate, and he suggested, that if I'm gonna do it, I should do it properly - get a new kitchen and bathroom. I agreed to it immediately because this is what I did to my other properties. The cost was £8000 on top of the £2700 I paid earlier. This took another 10 weeks to complete which is relatively quick considering the amount of work that needed to be done.

Now that the work had been done, the agent managed to let it for £495 pcm - £40 more than the stated rent. So, refurbishing a property to a high standard, not only achieves a higher rent, but it also increases the property's value. Unfortunately, because the equity is used as a deposit in these types of deals, you can't draw any increase in value efficiently. But, if you paid a deposit, you can remortgage after 6 months to release the deposit and any increase in value. So, I completed on the property on 5th July and rented it on 23rd December that's almost 7 months - 7 interest payments of £200 each.

I conclude that the average time to properly refurbish a property is 6 months and the average cost is £11,000. I'm sure there are builders who'll spend less time doing it and hence charge less. Personally, I don't worry about these one-off costs unless they're prohibitively expensive. I calculated that the maximum spend is as follows:

Double glazing	5000
Central Heating	2000
Kitchen	3000
Bathroom	2000
Flooring	1000
Decorating	1000
Drive	2000

This gives a maximum total of £16,000. Barring structural faults this is the most you can expect to pay for proper refurbishment to a high standard.

Experience 3: The Willenhall Property

Index

In December 2009, I put an offer for a 3bed terraced house in Willenhall. Although this was also a repossession, it didn't need as much refurbishment as the Weoley Castle one. The agreed price £59,000 with a mortgage of £45,000. Because I had exhausted all my cash, I had to remortgage my main residence which was unencumbered.

The refurb cost only £8,000 but it took another 5 months from the completion in February 2010. Then I gave the keys to the estat agent who sold it to me to let it for me. Four months later, there was no tenant. Early in November, I found a flyer from a couple of specialist letting agents who noticed that my house hadn't been let all this time. So I took a chance on them and with 2 weeks they found a tenant for me for £475 pcm. This was the net figure as they were DSS tenants and they've negotiated their management fee with the Council.

I should get professional builders who will do a top notch job fairly quickly and with receipts that you can set against CGT. I should've been wiser because I made the same mistake with the Weoley Castle property.

Another lesson to be learnt is that you must place your property with a letting agent who specilises in lettings and nothing else. Furthermore, if your property is still on the market after 2 weeks then change the agent. If it's still not tenanted after a further 2 weeks then drop the price. Researching the market for property prices helps when determining if a purchase is a bargain or not. The research should include information about rental values so that you can set a realistic rent and get it rented quickly.

Experience 2: The Weoley Castle Property

Index

After the nightmare of the apartment, I decided to wait until the the property market had stabilised. Since October 2007 (when I eventually got a tenant) I had been reading a lot of news which made feel that I had made the wrong decision by entering the market at the wrong time. In March 2008, I felt that it was way too early to renter the market and decided to wait another 6 months.

In September 2008, Lehman Brothers collapsed and with it the financial system went down as well. This forced me to lay low a while longer. I still looked at properties but never made any offers. Despite all this, I noticed that some properties were being snapped up quickly but others remained on the market for months on end.

But in January 2009, all 12 properties that I viewed were sold. I was convinced we had reached the bottom of the market and I started looking at property more seriously. In February, I put an offer on a repossessed property in Weoley Castle, Birmingham UK. Unfortunately, my father died that month and it delayed my purchase for 2 months. I thought I had lost that property but the Estate Agent phoned me about it and I told her that I still wanted it. If it didn't get sold in the previous 2 months, it could mean that the market quietened down. So after a survey claimed that it was a high maintenance property, I lowered my offer but they couldn't accept it so I increased it by £1000 and they said they'll let it go for an extra £500 to which I agreed.

The purchase price was £71,500 and I spent a further £13,500 refurbishing it. When I applied for the mortgage, the lender said that it's only available to experienced landlords and asked me to send an AST (Assured Shorthold Tenancy) agreement. Although the mortgage was only £54,000 with a payment of £236 pcm, I had to pay another £317 pcm for a personal loan I took out to pay the deposit and costs. The refurb was from savings, after all, I had saved around £18,000 while I was waiting for the market to stabilise. Because I was a novice, the refurb took 6 months to complete for which I paid over £3000 in interest payments. I completed in May 2009 and got a tenant in November.

I refurbed the house to the same standard as my new-build apartment which meant that I got a high paying tenant quickly - I gave the letting agent the keys on a Saturday, he advertised it on the Monday and he got a deposit on it on Tuesday i.e. the following day. They were long-term tenants i.e. they signed a 12-month tenancy agreement.

In May 2010, the tenants said that they were being harassed by the neighbours and wanted to leave. I said OK provided they they give me a month's notice and that they'll lose their deposit as they're in breach of contract. They eventually agreed as they've found an alternative place which will become available in July. This effectively gave me 2 months notice. The relatives of the tenants tried to get their deposit back so I asked them to give me a written account of the harassment they were subjected to so that I can make an official complaint to Birmingham City Council. I have a duty to protect my future tenants. They refused to give me such an account which led my wife to suspect that it was an excuse to be released from tenancy agreement.

As far as I'm concerned, Weoley Castle is a friendly and quiet place of high demand and high rental values. It had a notorious reputation in the 70s and 80s but Birmingham City Council had cleaned it up since then. There are some rough necks around but you'll find them in most neighbourhoods To be honest, I was worried but my wife wasn't as she's been there and didn't witness any alleged activities and we're Asians in a white community.

I was lazy, I didn't ask the letting agent to market it for me until 10 days before the previous tenants left. The agent was very good, he found one within a few days but they didn't move in until 3 days after the previous tenants had left. Still these 3 days gave me enough time to tidy the place up. To be fair to the previous tenants, they left it in a spotless condition. However, they left a sofa, an armchair, and a broken cupboard in the drive; but Birmingham City Council moved it before the new tenants moved in. I took the opportunity to raise the rent to £575 pcm and the tenants didn't negotiate - I felt that I didn't charge them enough.

This property was a happy investment for me and it sort of compensated me for the fiasco with the apartment. However, the fact that the lender asked me for an AST, means that the fiasco had a uses - it enabled me to get a mortgage and take advantage of the low prices in the market place. Experienced landlords are seen as a lower risk than others.