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October 31, 2008

Welcome to Property 2.0 - Home and Away!

Dear fellow investor,

It's been a couple of weeks since my last broadcast, and things are changing so rapidly in the fast moving world of property investment at the moment, that we have to up-date our website on an almost daily basis!

Petrol prices coming down ... food prices coming down .... interest rates coming down (4.5% at the time of writing and will almost certainly drop further) ... so there are some tiny pinpricks of light at the end of a very long dark tunnel. But we still have a long way to go, here in the U.K., make no mistake. Stay tuned to www.4wallsandaceiling.com for all the latest news.

As you have no doubt realised, the world is entering a new era of property investing which means that those that want to survive these challenging times need to adapt their strategies to reflect the reality of what is happening i.e. prices falling, lack of financial products, lack of creative deal structuring etc. The old ways of investing in property are now defunct. At 4 Walls, we call this "Property 2.0" and it is the subject of today's broadcast.

When it comes to purchasing property, one of the fundamental issues that you need to be clear about is the "intrinsic value" of the property i.e. how much is it really worth? There is much talk in property, particularly in respect of NMD and BMV purchasing, of how to determine Open Market Value in the current market conditions. The reality is that it is almost unquantifiable and things are changing all the time. The latest RICS Housing Market Survey shows both a renewed deterioration in the net price balance and a further drop in the level of transactions.

Click here to read the full RICS Survey story.

So we would like to put forward the idea that the new way of determining market value (from an investor's point of view) is quite simply that the property is only worth whatever level of borrowing the achievable rent will support!

This in turn depends on mortgage product interest rates and rental stresses.

If a property pays its way with some net positive cash flow, then that will tell you if it is a good deal and you have paid a reasonable price. You need massive discounts to get anything to stack with present mortgage products. However, if you are being paid by the property every month, you won't be too concerned about house prices going up, down, or staying stagnant! Following this strategy is a far more business-like approach than hoping for a "get rich quick" pay-out from equity release. We all need to face up to the fact that there is not going to be any capital growth in the U.K. anytime soon and prices are probably going to drop further, before stabilising.

To explain this business model using the metaphor of an employee: if you had an employee on a salary of £30k but they brought in £40K net of new business, would you mind? No.

If you had an employee who was on salary was £100K, but they brought in £140K net in new business per annum, would you mind? No.

It's all just numbers, and thankfully numbers never lie.

Accurate rental comparables are now more important than OMV's in our humble opinion.

When mortgage products become more favourable, you will be sitting even more pretty.

We use a simple calculation to work out what borrowing the achievable rent will support. It goes like this:

Monthly rent x 12 divided by (product interest rate) divided by (product rental stress).

If your property has positive net cash flow from the rent, then it is a valid business proposition! In other words, if it funds its own mortgage and "running" costs, and pays you a few £££££'s above and beyond that, it is a viable deal. It's as simple as that.

You also need to put this in the context that the maximum LTV is now 75%, meaning that you are going to need to put in 25% deposits for the time being. In reality, this makes it easier to stack deals and achieve positive net cash flow.

Coming soon: 4walls TV.


As you know from our blogs, we have been spending a lot of time over in Cyprus of late, as we see far more opportunity over there in property than we do here at present. Cyprus is a wealthy island, the banks there never got involved in sub-prime lending, and lenders are cash rich. The economy and population is growing and it is the No. 1 tax haven in Europe! A very attractive package all round which will fuel business and investment.

According to the London Chambers of Commerce (who contacted us last week), Cyprus is the most popular re-location destination for businesses seeking a haven from the credit crunch! This year they have had 135,000 enquiries from individuals and businesses interested in relocating there! That tells us at 4 Walls that there is going to be a healthy demand for rental property in Cyprus in the future, in particular the Larnaca area, which is the international portal to the island, and its main business hub.

If you cannot make property investing work in the U.K., then it makes sense to look outside the U.K. Entry level deposits start from £6K in the Larnaca area of Cyprus for a one bed apartment which is significantly more affordable than anything you can find here in the U.K. Plus you have positive cash flow from holiday lets and a growing economy that will keep capital growth stable for the future.

While in Cyprus recently, we caught up with millionaire investor and international tax planning expert Jarl Moe to find out why he invests heavily in Cypriot property:

So all of the above is actually good news, but only for those investors who recognise that they need to change their strategy to reflect the current market conditions and limited availability of reasonable mortgage products. In the future, successful property investors will be those who adopt a business-like approach, build their portfolios on positive cash flow, recognise the value of education and networking, diversify their investments to minimise risk, and take a mid to long term view both here and abroad.

Welcome to Property 2.0!

Finally, we were interviewed on Love Property Radio last week. You can listen to our interview at www.loveproperty.org or on iTunes.

We currently have some Property 2.0-style cash-flow positive deals available in Poole, Dorset, Basingstoke, Hants, and in Larnaca, Cyprus. These hand-picked, limited, highly discounted deals are ones that we are investing in ourselves. We focus on quality houses in up-market areas as we believe these to be more recession-proof than cheaper areas of the U.K. If you would like further details, please get in touch.

To your continued success!

Kind regards,
Nick

Remember - you can never learn less!

P.s I have a very trustworthy collegue in ecademy that is running a seminar on how to build relationships with accountants, well worth the consideration - click here -

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Comments

Hi Nick,

Forgive the complete n00b question, but what does the term 'rental stress' mean? I've tried Googling it but only found stories about stressed-out renters!

I've only just started looking into property investing, but your approach of using rental comparables to determine the value of a property for investment purposes makes total sense to me. I'd want all my investments to be cashflow positive, be able to ride out any dips, and see capital appreciation as a bonus.

Anyway, great blog!

Rob

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