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The Top 5 things to check when sourcing an investment property to add to your portfolio

21/05/2010

 

1. Learn about the area

Even if you know the area that you are interested in, for example, you may have grown up there or have family and friends living nearby. Do you really have a feel for the demographics (characteristics of the population) of that area?

 The best way to find out this information is to visit the area of interest. Not just once but make a number of visits. My suggestion would be at least four visits as a minimum if you don’t know the area very well i) Midweek during the day; What sort of buzz is there? Are people staying at home or mainly at work? What sort of people are around? ii) Midweek evening; if possible wait until most people have “settled in” for the evening.

Again, see who is around at that time, how noisy or quiet is the area? What shops, take-aways, restaurants are open? Are the bars, pubs in the area busy? noisy? iii) Weekend during the day; ideally you would want to visit on a Saturday and a Sunday as the dynamic can be quite different but check out the same things as midweek days, can you spot obvious differences? iv) That’s it! Weekend nights, Saturday is probably the better night and you should again compare with weekday nights.

If you are unable to visit the area, maybe you are an “armchair” investor? It is still important to undertake your own investigation. Remember, it’s your money that’s being invested and probably over a long time. There are a number of websites that can provide you with information about the area and the typical occupants. A popular site is www.upmystreet.com which provides an impartial view with easy-to-use pages let you search and compare detailed information about a specific postcode, city, town, district or region. Simply type in your location, and then click on the links to whatever you need.

2. Decide on the type of property

It is beneficial if you focus on a particular type of property when sourcing your latest acquisition. It is important to locate your niche market, as it is when it comes to any kind of business.

To be successful you need to have better knowledge about the property type and its niche marketing and if the demand is more and you need to succeed in your business, then you need to find a niche market to let your property. It is always better to select a type of property that is of your interest, so that you can market it well to the right target audience after gathering relevant information about the property and niche marketing. You would need to conduct research, which may need a lot of initial time investment. The first important thing is to choose a property type carefully.

When you choose a property type, you need to make sure there is a market for the property to let well. Coming up with a business or product that has no demand for rentals would be a complete failure. Hence, you would again need to conduct a research to find out the market status for your niche product. To run any business successfully, there is a need for continuous demand for your style of property. If the demand is hampered, then your business will bear the brunt. Hence, to be on a safer side, it is better to go for a property that has a constant demand.

Niche market helps you only to concentrate on your target audience without being bothered about the rest. You are only focused on your prospects and their needs. Use marketing methods that work well for niche market and success will just be round the corner. Many investors fail to understand the importance of niche marketing, but realise it only after losing a great deal of money.

3. Find a property

Easy you might think, just go down to the High Street, visit a few Estate Agents and pick out properties that fit your requirements and in the right location, right? Wrong!

Estate Agents work on behalf of the seller in order to attain them the highest possible price. Their principle fee is almost always based on a percentage of the selling price so it’s naturally going to be in their interests to get the highest possible price for their client, not you the buyer but the seller or vendor.

 The prices that Estate Agents look to facilitate sales at are open market value or “OMV” Therefore, in order to obtain the best deal for the buyer, (YOU) you need to look to purchase below market value or “BMV”

A popular way of finding property is to use a professional property sourcer, these companies or individuals represent buyers across all budgets to ensure that they get access to the best properties, and negotiate the lowest possible price for them.

A Sourcer will search for property on your behalf, according to your specified criteria, saving you both time and money. Using their own expert property market knowledge and negotiating power to make sure that you get the best deal possible.

If you were going to court it would never cross your mind to go it alone; you would always seek a professional lawyer to represent you. Why should buying or renting a property be any different? Having an expert to handle the whole process ensures that you have access to properties, both on and off the market, and using a sourcer to undertake property negotiation can save you money, regardless of your budget. However, using a sourcer should never be a substitute for undertaking your own checks or due diligence regarding the suitability of a property. A good sourcer will always share information with you. If they are reluctant or vague, walk away!

The third and possibly most rewarding method is to source BMV properties yourself. In order to do this you need to connect with people who are actively looking to sell quickly. These people are known as “distressed” (not a term I like) or “motivated” sellers. There are a number of reasons why people are motivated sellers

here are a few of them…..

Repossession,

Financial Difficulties,

Equity Release,

Chain Breakdown,

Divorce or Separation,

Buying another house quickly,

Relocation or Emigration,

Bereavement & Probate,

Illness or want to avoid the stress of selling their home,

Bad investment or portfolio reduction,

How do you find these motivated sellers? By connecting with them! By talking to people, friends, family etc. and letting them know that if they know of anyone who is looking to secure a quick property sale then you may be interested in helping them out.

You can also place and advert in the local paper or newsagents and even have some leaflets printed that can be delivered to your choice of properties in your desired area. It is important that you ensure that you do not make incorrect statements on your advertising or offer regulated services (Sale and Rent Back or SARB for example) without having the appropriate licence or taking legal and or financial advice.

Once you have made contact with a motivated seller, you need to make an offer that is mutually agreeable. This is where your knowledge of the area, property type and market really works for you. This will allow you to make an informed decision on the level of the offer that you decide to make. However, before you do that you need to determine how to…

4. Confirm the numbers

My previous blog article entitled “Deal or No Deal” goes into detail of how you can quickly determine both an approximate OMV and also decide whether you choose to source a property from an Estate Agent, A Sourcing Company or even source property yourself

You should employ these tools in determining the suitability of the property in terms of value. Again, be very wary of anyone who tries to sell you a property that has 25, 30, 40% or even more discount off OMV. It is highly likely that in these cases that the person “selling” the deal is not being entirely honest is ignorant to key information or, is preying on inexperience or naivety. You really can’t do enough of your own due diligence.

You need to be clear as to what numbers you are seeking to achieve be it in terms of discount which would prove equity or rental yield.

5. Rental Yields

Rental yield is the amount of money that you as a landlord could expect to receive in rent over the course of one year, expressed as a percentage of the amount of money invested in the property.

For example, if you buy a house costing £200,000 of your money (including deposit and mortgage or other finance) – and tenants pay £10,000 a year in rent – the rental yield on the property would be five per cent. i.e. return (£10,000) divided by investment (£200,000) multiplied by 100 (to turn it into a percentage).

There are two often overlooked aspects that could seriously affect your rental yield.

The first and most common of these are aspects that your property is empty and therefore not receiving any rental income, these are known as rental voids or just voids. This could be for a number of reasons for example, between tenancies, during maintenance etc. one of the worst problems you can experience financially is rental void periods.

Rental voids can be a real blow for the investor, but if you are prepared you can cover such eventualities by investing in the appropriate landlord insurance or budgeting for voids in each given year. For example, allow one month at the end of each tenancy period to “spruce” up your property and to find a replacement tenant. Over a period of time, this budgeted money could build up to be a healthy contingency that may well assist in further acquisitions to your portfolio.

The other significant aspect is ongoing maintenance costs. These can include gas & electrical servicing costs, electrical appliance testing, decorating. You should also budget an allowance each year, divided back into months for replacing bigger items such as carpets, kitchens and bathrooms. If you can start off with a budget for these larger items, this “sinking fund” should protect you from the unknown breakdowns and other such issues that always seem to come un-expected.

Disclaimer

The author is not regulated by the Financial Services Authority or any other body to give financial advice and the information herein is an expression of opinion by the author. The author recommends that you seek independent legal and/or financial advice before entering into any agreement in relation to property investment. This article assumes that you have the correct and adequate funding in place for your acquisition. We are able to make referrals to an IFA for further information on financial products related to property purchase.

About Walker Fox

Walker Fox Land & Property Ltd act as professional property sourcers working with investors to add to their property portfolio in West Yorkshire

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