Following on from Adam's poll on house prices in 2011, I was wondering what the Tycoon members thoughts were on the factors that will determin house prices. We are all aware of the govenments cuts, VAT increases, job losses and availability of mortgage finance which will surely put downward pressure on the housing market but what about the factors that might help to stabalise them?

Is the potential for strong rental yeilds enough to temp investors into property and reverse any downward trend? What other factors are there to encourage house price rises or at least minimise falls? Lack of supply?

I'm looking for silver linings here as my day started off badly with my radio alarm clock (set to radio 5 live) warning of rising interest rates and falling house prices.

Please, somebody, cheer me up. I need good news.

Rob West

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Property market come down to how confident you feel either in your job or short/medium term capital appreciation in general. And also which newspaper you read...

If people are uncertain of the well being of their future finances (i.e. affordability) than they will not commit - period. With the data flowing out of markets as it is (rising unemployment & capacity & inflation & interest rates and contracting demand etc), companies are unlikely to throw caution to the wind and start recruiting any time soon. Which means employees will inevitably delay making one of the most expensive decisions of their lives.

As for Joe investor, if no clear signs of imminent capital appreciation are visible then they are unlikely to commit large deposits to buy a house. After all capital appreciation is one of the main reasons most people get on the BTL bandwagon (cash flow investors are in minority). And as the upward capital movement is looking scarce at the moment, why not hold on to the deposit and invest when market is showing signs of life? Higher yields may be an attraction but if they add only an extra £1000 a year to a deposit investment of £40-50k in buying a property (plus joys of maintenance and voids) then it is hardly a juicer proposition.

Which brings us to the popular newspapers and radio. As most journalists and economists read the same data and are predicting another 5% drop this year, it is hardly surprising that housing market is unlikely to spring back to life any time soon.

So I really doubt if there is any point in being either optimistic or even pessimistic. We should be realistic. Investors ought to plan ahead, expect the worst but hope that it never comes to it. Be prepared if market does throw some pleasant surprises. Fortune comes to those who are ready - because they can know what an opportunity looks and feels like and can grab it with both hands!

Diversify but avoid over committing! Stop listening to the so-called 'experts'!

Hope it helps.

Regards
Pankaj


PS: I know you wanted to hear some positives to make your day :-) There is no point in futuristic projections or winning 'intellectual' arguments as no one can be certain who is right. If numbers work and you are confident in your projections then I'd leave it at that. Journalists have a job to do and deadlines to meet - don't take what you hear too seriously (trust me, because I used to work there too and know exactly what it takes to come up with the 'catchy' and 'newsworthy' stories

Makes a lot of sense. Would you count setting up a letting agency (which I am in the process of doing) as diversification?

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Yours is the Earth and everything that's in it.

Hi Rob,

Have you thought about offering the lettings service to a few investor contacts you know aren't happy with the service they're getting to test the market a bit?

Cheers,

Adam

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Rob,

To add to Pankaj's wise words, I am iterating a trading plan for 2011 - my latest jaunt - Forex trading. The really high level stuff I have to keep in mind all the time boils down to just three things - simple when you think about them, and like all good things in life, applicable to more areas of investment than just one.

1 Participation. You have to be in the market to take advantage of any gains it will throw your way. This is the same in property.
2 Low risk entry points. Well, with prices as they are now and rents increasing as a proportion of the capital values of properties, I'd say this one is covered too
3 Growth. An asset becomes a liability if it does not flow cash into your pocket (as Robert Kiyosaki says), so thinking about the long term aspect of property investment, the investor should not really be concerned about the short or medium term value of his assets provided that he can continue to cash flow positively out of that investment. Given that interest rates are at 300 year lows, and have remained so for 21 months, existing landlords should be experiencing extraordinarily high cash flows from existing investments. Even if the BBR goes up in 2011 (and the majority of commentators seem to think that time gets backed off to later each month the monetary committee meets) it's unlikely to go above 2.5% so that really should be not of any concern for existing mortgages.

Where you should be concerned is if you are contemplating taking on NEW debt, at something like BBR + 4%. Whereas this looks cheap now, when BBR is 2.5%, it's 6.5%, and that's above the early 2008 numbers that caused the start of the collapse. If you can sustain cash flows with borrowing costs of around 7%, you should be OK. But if you can't, it's only a matter of time until property investment becomes a liability. Cash is king today, but yields will be king tomorrow.

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Totally agree with Gerry. This uncertainty is perhaps one of the major reasons why BTL or housing market in general is refusing to take off.

What also makes some people anxious is the time when banks will have to start paying off the loan they took from Bank of England under the Quantitative Easing plan. Contractually they have to start paying back from around April this year. Unless the term is extended, it will further suck the liquidity (i.e. cash) out from the market - again not a tremendous news for the housing market.


By definition anything other than your core business is diversification. So in theory yes. But as a matter of personal choice my ideal candidate for diversification is something I can try out first with very little investment upfront (i.e. beta testing).

I would pay attention to Adam's suggestion above of dipping toe in the water first. In this period I'd concentrate on selling the service rather than the margins. See how it goes without committing to the infrastructure. If you can (a) convince some landlords, and (b) convince tenants then you are in the game.

After trying some people think that letting business is not for them but others have prospered. Both sets are right here on this forum. It could be for you - I sincerely hope it is and wish you very best of luck with this venture.

Hope it helps.

Regards
Pankaj

Thanks guys for the input. It's people like you that really make this forum such a great place. I'm constantly impressed with the insights put forward.

Adam - I am in no rush to expand rapidly. I currently have a 2nd floor office which is more than adequate to develop the business from. I will need an extra pair of hands which will be my biggest outlay initially. I already manage four properties for other people as well as the 13 of my own so I have a ready made base to build on. My aim is to reach 30 full managed properties (at 10% monthly fee) as quickly as possible as would generate enough cash flow to cover all overheads. I can offer the service VAT free until I reach the £70,000 turnover which I'm hoping will give me a trading advantage (especially with the rise of VAT to 20%). I think this can still be looked upon as beta testing (to use Pankaj's term) as there is really very little initial outlay. If it goes well, I can expand, if it's not for me, I haven't lost much (although I'm sure it will be a very positive experience).

I'm pretty sure I can convince local contacts to use my company so fingers that 30 is an attainable short term figure (I do hope so as I am off the booze until I reach that figure)!

Think I am going to use Southcourt for my initial resourses. Not sure about the web hosting side of things yet but I'm pretty tempted by what they have to offer.

May also go down the route of specialising in LHA as I have some experience in that area although reading John Paul's (the guy behind Castledene) e-book on the subject makes me realise there is much to learn until I can consider mysely an authority on the subject.

Gerry - I also totally agree with what you say. New debt is a bad idea right now. I recently bought a flat with cash (mixture of savings, credit cards and overdrafts). I was tempted to re-finance when the 6-month rule is up but have decided that I just want my investment + profit out asap as mortgage rates are so punitive compared with my existing mortgages.

Pankaj - I hear what you're saying and again, it's all good advice and I appreciate you taking the time to impart your sagatious comments.

So, finally, here I am, 5am on New Year's Day, coming to the end of a night shift (I'm also an electrician working for a large pharmaceutical company) and I'm thinking that this time next year I'll be out of here and doing what I really love - anything to do with property.

Happy New Year to all the Tycoon members and all the very best for 2011. Whatever you do, do something.

__________________
If you can fill the unforgiving minute
With sixty seconds worth of distance run,
Yours is the Earth and everything that's in it.

Lettings is an excellent growth business.

I went into this last year.

However, it is not easy. I would also advise against doing the same as every other agent and competing on price.

Re LHA specialism - a lot of agents do not touch these with a barge pole. The reason is not lack of knowledge. It is knowledge that they require a lot more administration. So you need to have fantastic systems in place to make them work. John Paul is a systems man - that's why it works for him.

Also, whilst 30 is good, you will not make any more at that level. I'd suggest 100 properties to break even.

We decided to specialise in portfolio management for landlords looking to maximise returns and or manage exits and we operate nationally. We did not see any other provider for this so we believe it gives us competitive advantage.

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I'd be interested to know why you feel competing on price isn't a favoured stratergy. Do you feel that the margins are so tight that undercutting on price is a dangerous practice?

What would you estimate is the average fully managed fee charged by a letting agent? Many of the agencies I have looked at operate at 12.5%. It strikes me that this is huge advantage to agents operating in areas where rents are higher (especially London and the South East) as rents can quite easily be double or treble than less affluent parts of the country. Same amount of work involved but differing returns e.g. 12.5% of £700 (average rent for a 2 bed flat where I am) is a far better return than 12.5% of £350 (which is a reasonable rent for a 2 bed flat in other areas) and there's no more work involved! I appreciate that costs are higher but surly not double. I'm sure cleverer people than I have done research on this but my point is, that operating in the South East, 12.5% is a reasonable sum of money.

Do you have any marketing stratergies that have proved effective? An agent in my area is advertising 5% fully managed for the 1st six months. Could this be taken a step further, for example 0% for the 1st three months? Would this temp the landlords in?

Lastly, what is the one peice of advice that you think would help me most as I set out to build a letting agency business?

Thanks

Rob West

__________________
If you can fill the unforgiving minute
With sixty seconds worth of distance run,
Yours is the Earth and everything that's in it.