Property Investment Articles & Resources: How To Invest £25k For Income

How To Invest £25k For Income
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Parmdeep Vadesha on 29 July, 2008 07:21:00
 
You no doubt will have heard people saying recently “those with money are
really going to clean up now that property prices are falling” or “this is
the best buyers market for nearly two decades”. Today I will be explaining why
it makes a lot of sense to purchase income producing assets when prices are
stabilising or even falling.
I will also give you some ideas on how you can invest £25k or more to generate
varying levels of income depending upon how much work you want to put in and the
levels of risk you are comfortable with.
Let us first be clear on one important thing - no matter how careful or clever
you are, the price of any investment you make whether it be property, shares or
commodities will fluctuate. Sometimes the price will go up. Sometimes it won’t
move much and other times it will go down. This is the cyclical nature of
investments.
The trick to making money then, is to recognise that cycles occur and to look
for the bargain basement opportunities when prices fall and to stop yourself
from overpaying when prices are going up. Indeed, when property prices are going
through the roof as they did recently, it was almost absurd to think that prices
would stabilise eventually or even fall.
Now that things have moved on, the investors who paid too much during the boom
are now trying to sell during a period that many are calling the best buyers
market for nearly two decades.  In other words many people paid too much for
their properties and are now attempting to sell them for about the same or less
than what they paid.
These ‘buy high sell low’ investors tend to suffer especially badly when
the income from the property does not cover expenses. This is why it is so
critically vital to buy well below market value and to be careful about how much
you borrow.
To Buy Low Takes Courage During Tough Times…
Journalists and various other people with little or none of their own property
investments are all telling us not to invest right now. That property prices are
going to fall further. That everybody should run away before things get really
bad.
I agree, they do have further to fall and everybody knows that which is why all
the unsophisticated buyers have evaporated from the market and thousands of
estate agents around the country face financial ruin.
Those who believe in the principle of buying low and waiting for prices to go
up are still in the market gobbling up properties. If you don’t believe me go
to any major property auction. You will see far fewer buyers but they will all
be serious people. Many of them are acquiring income producing residential
properties at rock bottom prices. Commercial property yields will start to make
sense again soon and you will see more investors buying those too.
The rental income from these properties will then cover mortgage repayments
along with the other major expenses like insurance and maintenance. If purchased
well in the first place, say 25% or more below market value then the value of
the property should not fall below what you paid - even if the market crashed
and prices fell 20% you could still sell the property and recover most if not
all of your initial investment.
Income Is What It’s All About In The Current Climate!
As I said before we all know property prices have stabilised and are actually
falling in some areas. Most people are scared by this fact and that’s a good
thing. They should be scared because they are not investors. They are often
short term speculators calling themselves investors whilst searching for an easy
way to make a quick buck.
Property provided that for the last few years and now that the party is over
for the speculators you will see many of them getting into options or Internet
marketing or some other hot way to make a mint. Most speculators tend to buy
when the price of something is going up (and therefore becoming more expensive
and risky) and they tend to sell when the price is falling and therefore
becoming cheaper and less risky.
Now that they are out of the market, we are left with the sensible people –
the medium to long term investors. These investors look for their buying
opportunities when the market is down and many fabulous income producing
properties can be had for a song. They buy well, hold and wait.
JP Getty the oil billionaire once said “I buy my straw hats in Winter” and
so the intelligent investor buys when the price has fallen and holds for the
medium to long term.
So What Should The Intelligent Investor Do In The Current Climate?
Before you do anything else you need to take a defensive posture. In the boom
years gone by, anybody could go out and buy pretty much any old property,
refurbish it or wait a while and hey presto the property has gone up in value.
In the current climate, investing without thinking will land you in big
trouble. Not only will you find the property not growing in value very much if
at all over the next three or four years but if you have paid too much for the
property then you may also find that you cannot sell it at a profit either.
You also need a really solid base from which to invest. This means minimal
stress and pressure from financial obligations elsewhere. So before you start
investing I would advise cutting right back on all the non essentials.
For a start we all know food and energy bills are going to continue going up
and who knows where fuel prices are going. So sell the car you don’t really
need and buy a smaller cheaper model or convert your existing car to run on LPG
if it’s a guzzler. Start a home based business to generate an extra income.
Cancel subscriptions to magazines or services you hardly use.
And most importantly of all, sort out any challenging properties before you go
off and buy some more! These are properties that are empty at the moment or
require some kind of improvement before they can generate a decent yield. Having
a bunch of those in your portfolio can easily wipe out the juicy returns you may
be earning elsewhere.
You are not just reducing outgoings though. You are also removing clutter from
your head. An open mind with minimal pressures and stress can invest more
intelligently with greater clarity.
Let’s Look At Some Profit Making Opportunities…
The smart investors are going after all sorts of undervalued income generating
assets, investment properties being one of them. As well as below market value
properties I am buying shares at the moment. Whilst conducting my research I
came across many interesting principles that relate directly back to property.
Try this one out… Go to Bloomberg.com and in the top left, in the ‘enter
symbol’ field type the following text within the brackets [UKX:IND]. Then
click the charts tab and finally click on 5y from the top of the chart. This
chart shows the performance of the FTSE 100 (a share index of the 100 most
highly capitalised companies listed on the London stock exchange).
If you look carefully you will see that the FTSE 100 is at about the same price
now as it was in November 2005. People who invested at that time experienced a
gain and then a drop to where we are now. You can now buy into the FTSE 100 for
about the same or less than the price others paid three years ago. You can try
this exercise for many shares and the result will be the same (try banking
shares!)
Property isn’t that different from the stock market. I prefer property
because borrowing against property is relatively straightforward and it is
highly unlikely for property prices to fall more than 20% even in a crash (based
on historical figures). Therefore as long as you buy well and keep your debt
manageable, you should be fine over the medium to long term.
So Who Are The Losers In All Of This?
Well if you built up a big property portfolio and you need to sell your
properties soon for whatever reason then you are not in a great position. If you
are holding the properties forever then you just sit tight and wait for the
prices to go back up again.
The advantage experienced investors will have over new investors is the
contacts, knowledge and experience they gained in acquiring the properties they
already own. They will use all of that to their advantage to continue buying
more income producing properties well below market value during the next few
years.
On the other hand, if you are just starting out or you going to be expanding
your existing portfolio then I believe you are in an excellent position. Not
only will you be buying income generating assets for the same price others paid
several years ago but you will also have the added luxury of investing in a much
more stable and some might say less risky environment.
I spoke with a friend recently who calculated his wealth would be decreasing by
£1m if property prices fall by 20%. He purchased most of his income producing
properties below market value between two and five years ago. To put that into
perspective, think about the prices you will be paying for investment properties
going forward. If you make very low offers and keep your gearing (level of debt
versus equity) manageable then you’ll be paying not much more than he paid AND
your rents will generally be higher too.
So everybody’s a winner no matter where you are coming from!
Tips For The Passive Investor…
Passive investors are those who would rather somebody else find the property,
negotiate the deal, package everything up and manage the acquisition. Often a
property management service is provided too. Passive investors are generally
successful business owners and professionals who want to focus their time
elsewhere.
If you fall into this group look for reputable companies who can source you
ready made below market value property deals. By working with ready made deal
providers you can have other people source deals for you and take care of the
tenant management too. This works really well if the fee you pay them translates
into a return you could not have achieved on your own.
Here’s an example: you can get a property for £30k below it’s true market
value through a ready made deals company. The seller is going through
repossession and wants to sell and rent back hence the reason for the below
market value sale.
You might pay the ready made deals company a £5k fee for this deal. Now
here’s the question to ask yourself – can you spend £5k on advertising and
marketing to consistently source your own £30k below their market value
properties? If you can then you may as well do it yourself. If you are busy
doing other things or you are new to all of this then it makes sense to use
someone else. I buy my ready made deals through www.readymadedeals.co.uk.
Their typical clients are successful business owners and professionals who
haven’t the time or the inclination to source their own properties. They’d
rather someone else do all of that for them so they can focus on making more
money from their main business or job.
So let’s take a look at how £25k could be invested passively... Using a good
ready made deals provider you should have no trouble getting deals £20k-£30k
below market value. Let’s say you put £5k into each deal.
The £25k therefore gets you four properties (4 x £5k = £20k). The remaining
£5k is left to one side to cover any unexpected costs. If everything goes to
plan then this remaining chunk can be used to purchase another property.
If each property is purchased £20k below it’s true market value from
distressed sellers then £25k cash has been invested to provide at least £80k
in equity. If each property generates £50 per month in positive cashflow (i.e.
after all costs) then the annual cashflow from these four properties would be
£2,400 or 10%.
Most people would be very pleased with a regular 10% return and a quadrupling
of their initial investment. By the way, if you put more of your own money into
these deals to lower your borrowing then your cashflow will increase.
Tips For The Aggressive Investor…
If you have more time and you have the inclination, then it can be worthwhile
setting up your own property sourcing business. This does not necessarily mean
you need to set up a limited company or anything formal however it is a good
idea to set things up in a formalised way otherwise you haven’t a business you
have a hobby and that’s not a good way to treat your financial future.
One of the best ways to start is with your own leafleting campaign.
Cost of delivery = £30 per thousand = £300 for 10,000 leaflets
Leaflet printing cost = £250 for 10,000 leaflets
Total cost = £550
Assuming you pick your area well and your leaflets actually get delivered (this
is the tough part!) then you should expect one deal for every 10,000 leaflets.
If that deal makes you £20k then you’ve turned a £550 investment into £20k
or more not to mention a positive cashflow if you purchased the property well
below market value.
Leaflets are great for aggressive investors who want to put their own deals
together. You will need time to set things up, run them yourself and manage
everything for at least six months. Once you have the systems in place you can
figure out ways in which you can draw yourself out of the process to free up
time for other things.
Estate agents and auctions are making sense again for the active investor. As
we all know, estate agents are crying out for business. Many have or are in the
process of shutting up shop and those that are left are struggling to shift
properties on their books. Often when they do manage to find a buyer, he or she
cannot raise the finance to proceed. Therefore…
If You Have The Money You Will Do Very Well In The Current Climate!
So what type of property should you be going after? As I said at the beginning
of this article, this market is all about income. You are not going to see much
growth for the next three or four years so it’s the income and the fact that
you can buy well below market value from distressed sellers that is the real
opportunity. In fact the cheaper you buy the more income you will have since you
will be borrowing less to fund the property.
Think of it like this – at one extreme you have a property with borrowings of
100% of the value. Very few properties rented to single families would make
sense in this scenario.
At the other end of the scale you have a mortgage free property producing an
income that you get to pocket each and every month (after expenses and taxes of
course). Ten such properties would allow most people to retire financially free.
Now, unless you have a couple of million burning a hole in your pocket, you
will need to seek a middle ground. A point where you have enough borrowing to
allow you to afford the property and not so much that there is little or no
cashflow from the property.
The types of property that make sense  for this purpose are typically ex
council properties and sub £150k semis, terraces and apartments purchased 25%
or more below market value. If you have some spare cash then you might want to
consider putting some of it into the deal to keep the mortgage low and increase
your cashflow as described above.
In some parts of the south you’d struggle to get a parking space for that
kind of money so in that case you will be looking in the Midlands or up North.
If you haven’t the time to go doing deals there, work with a reputable ready
made deals supplier or look for investors who can source you deals there.
You may also want to try the auction route when you have more experience of the
buying process and how to analyse a property interior and exterior for potential
issues.
When it comes to investing any amount of money successfully, there is only so
much you can learn from reading. I would advise meeting experienced investors
face to face to figure out your very own strategy for your own situation. To
help you in this respect I am going to be holding workshops in central London
from next month where myself and my team will be teaching fellow investors how
to invest successfully in this climate.
At the workshops myself and my team of property experts will show you how to
implement many of the strategies that I have covered above for investing surplus
cash. I will also invite some of our existing clients so you can ask them
questions about how they are successfully implementing our advice.
If you want to be informed of the dates and locations of these central London
meetings please visit the following website and enter your details:
http://www.property-system.com/investing25k/
* By the way I strongly recommend you take appropriate expert advice before
making any investment in shares or property. My opinions above do not represent
financial advice or recommendations.