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Property Investment – The Opportunity

19/04/2010

Over recent years it has become increasingly difficult for an individual or “entrepreneur” to find a viable business, which works. The world is becoming an increasingly smaller place and  “get rich quick” businesses if they actually exist elude most of us unless we choose to capitalise on someone elses lack of understanding which to me is entirely unethical in business.

Franchises can work, but many of the big names require significant capital investment which would leave most of us breathless and, can also go out of business!

Network marketing can also work although many would disagree. As a concept it is workable but only really successful for those who get in early and almost entirely reliant on a hard-working ‘downline’ that is ever-expanding.

As an alternative to the statement “the world is becoming increasing smaller” and in fact to be more accurate, would be to say that “the world is not getting any bigger” It is for this reason that investing in land and/or property should, if undertaken in a businesslike manner can be a very prosperous business to be in.

In simple terms, the value of land and the property that may or can be built on it must increase in value over time. Must? you ask? Yes, not only must increase but has increased year after year, decade after decade. It’s important not to focus on the short-term however. Recently we have seen a severe decrease in many (but not all) property prices throughout the country. This should be seen as a correction of the huge and disproportionate increases in value of the last few years. Looking at the medium to long-term property has increased in value year after year. Many investors swap and change their markets, their strategies chasing the perfect investment when in reality they may already own part of it, their homes of the homes of others!

If you think that you are going to get rich by sitting in your house and doing nothing then you are wrong, you will still be sat there in a years time and no better off.

There is a saying that “If you give a man with no understanding a million pounds there is a high chance he will lose ALL of the money. conversely, a man with knowledge who has made and lost a million has a very high chance of making another one with nothing other than his knowledge”

If I gave you say £100,000 and told you to go and build  a property portfolio the conventional way, say through an Estate Agents you would probably put at least £20,000 down on each house and end up with 4 or 5 houses, good but no money left in the bank and mortgaged to the hilt! There is also the matter of mortgage fee’s, brokers fee’s, legal fee’s etc. to take into consideration.

Now the alternative to this is to buy below what the Estate Agents are selling for! Below market value or BMV.

This is not a way of avoiding putting your own money down and certainly not a way of misleading your mortgage lender or solicitor, thats mortgage fraud and illegal, do you want to go to prison? No I thought not, me neither!

You need to be able to connect with people who are motivated to sell their property without waiting the potential months and months of having it listed with an Estate Agent and without paying the Estate Agents fees.  Sellers are motivated by a number of reasons; they may be emigrating, have inherited a property they don’t want to keep, downsizing an existing portfolio or moving to a smaller property or, they may have financial problems and need to release equity quickly.

By locating a BMV property, you should be able to obtain a ready-made discount of between 15% and 25% below the ‘shop window’ price in an Estate Agents.

Therefore, using the same £100,000 and based on a 20% deposit, you could be able to purchase 6 or 7 similar houses and have a significant amount of equity in each one.

As interest rates remain low due to the state of the global economy, opportunities to make money out of property investment get better and better. It’s not so long ago when mortgage rates were in double figures.

When rates were so high, you may remember that house prices did not drop significantly. The reason that property prices did not slow down when mortgage rates were high is something that some people find hard to understand, when reality it’s quite straightforward.

As rates remained high, so did the return on other investments. For example, if you had savings in the bank, although you may have been paying double-digit interest on your mortgage you will probably have had double-digit (or close) interest paid on your savings.

Property prices in the long-term should not be adversely affected by economic conditions. They are affected by one simple factor…that property prices will always rise due to a decreasing availability of suitable land and an increasing population.

What if the market drops again?

People become very nervous about their investments dropping, especially after such recent financial turmoil. However, your properties should always have a minimum of 15% or more equity in them over and above the cash deposit you used on the day that you complete. Therefore, in the unlikely event that the market does drop significantly further, you should be able to sell the property for no less than you actually paid for it. It must be stressed that before buying a BMV property, you should satisfy YOURSELF that the market valuation is a genuine one and not made up just to make the discount more attractive.

Another very important consideration is the yield from a property or, the amount that the property (assuming you are wanting to rent it out) pays you as an income after all expenses have been taken into consideration.

As a general rule of thumb, you should be looking to achieve a monthly rental of around £200.00 per month over and above the monthly mortgage commitment.

Income Tax Implications

When running a business, income received has to be declared to the Inland Revenue at the appropriate intervals either via self assessment or with the assistance of a professional accountant or financial adviser.

The property market is no difference as rental income is classed as earned income. However, income tax is only payable on net profits. A list of legitimate expenses such as mortgage interest, marketing costs, agents fees, some refurbishment costs etc. can be obtained either from the Inland Revenue or any reputable accountant. As income tax is only paid on net profits and if expenditure is equal to or more than the rental income then no income tax will be due. It is important that you add any income earned from letting your property to any other income earned. It’s also important that you keep detailed records of all income and expenditure relating to your properties for a minimum of at least six years.

IN ALL CIRCUMSTANCES, YOU SHOULD SEEK ADVICE FROM A QUALIFIED FINANCIAL ADVISOR OR SOLICITOR

If you have enjoyed reading this instalment of my blog and are considering a business in property investment, we will be able to help you out in sourcing BMV properties. Please feel free to contact us to find out more by telephoning 0800 327 7286, email info@walkerfox.co.uk or visit or website http://www.walkerfox.co.uk

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