Innovative guide to real property buying strategies for the UK
Have you thought about getting into Residential Market? If you are reading this you probably have an avid interest in real property. You may even own a second home that you rent out, you might even own two or are eyeing more properties to purchase.
Over the years Rick Otton, who is recognized throughout the industry for house buying strategies, regularly travels the world to share and teach his concepts.
With over twenty years of experience in the real property business, Rick's aim is to educate others to his novel house buying strategies which allow you to buy multiple houses and his teachings have helped many of his students skyrocket their income and become wealthy.
This guide is your first step into the property game. It gives you an idea of the differences between buying houses and flats, will get you started and help you avoid the pitfalls in the property market. It delves into a number of finance strategies, joint ventures, second mortgage carry backs and purchase options. Then `wraps-up? with some real life case studies so you can see how it's played out in the real world.
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As a strategic move to start earning big money, you need to decide on a few things. There are several decisions that you need to make and you should have these answers set-in-stone before you start house-hunting. If you do, it will make the buying and selling-on process easier and quicker.
Do you buy a house or flat?
Let us define the generic description: A house property is usually a single-family detached erected on lots or subdivisions while a flat property is a self-contained residence which is part of a series of similar residences often shortened to unit.
Here's a fact, in the residential market: houses will always increase in price before flats. Similarly, when the market turns for the worse, flats will always drop in price first and they will drop the furthest as a percentage of value because they have less land component.
So what does this mean? Well, when the market does turn and drop, flats will drop further than houses will. Currently, we are pretty much at the bottom of the housing market in terms of price but you'll find flats still have a fair drop to go.
So, depending on whether you've bought a house or you've bought a flat you've just got to know exactly where you are in the property cycle.
So once you have worked-out the property cycle, you then need to look into and plan how to finance the purchase.
Deciding how you can finance a property depends on what you plan to do with the property. Sounds simple but it's very important that you plan ahead.
Facts to consider when you're choosing what to buy.
It's all about knowing why you're purchasing in the first place and having an exit strategy to get out. Always make sure you have an option in the contract that simply says if I'm unable to do ?A? or ?B? to the house then the transaction becomes devoid, otherwise you are stuck with it.
If your business plan is to buy and hold property, make sure you can comfortably offset the costs and charges and the holding fees associated with it.
You can, on the other hand, just ?flip? (an expression that property-people use to describe a quick property-turn-around e.g. when you buy a property, renovate it, and then rent it out using a rent-to-own contract, all within six months.)
Flats
If you are buying a flat here's what you need to remember: You're limited. You do not have as many options as you might have with a house. For instance, if you bought a flat because you wanted to hold onto it so that eventually it will increase in value and make a profit, this strategy could be problematic.
There's not a lot you can do with a flat to substantially increase its value. So instead you can only really rely on the market and that's when you have to be careful.
When you buy a unit you also buy the possibility of problems because flats aren?t just bricks and mortar. Flats come with tenants, a body corporate and a whole host of people in one building that can really hurt your money-making potential. The unit may even have a body corporate that is usually made up of average ?moms and dads? and sometimes these individuals aren?t too sure what they're doing in terms of property strategy and they can get you in all sorts of special levy's and problems. That's when badly spent money can really upset the value of your flat.
If you're going to invest in a flat, you want to get as few as possible in any one building. The fewer you get the more value is aligned to each property and the more control it gives you in the building.
Houses
In the long term, houses have always appreciated much better in value than flats. Flats just don?t stand up as well over a long period of time. The reason being, flats have a much smaller percentage of land associated with them and it is the land that goes up in value not the actual structure of the property.
When you buy a house you've got a lot more options. You can renovate, you can get into subdivisions and you can even buy the place next door with a bigger piece of land and go into gaining planning permission and development council.
Making profits from houses is easy, you can either get a development application (DA) and then plan to do some sort of development or even just sell it as a developed property.
If you're planning this strategy, always know before you view and buy the house, what your actual plan is and ensure you do the necessary checks with the development application. Remember, don?t buy a property just based on what you think is going to happen as in my personal experience with the development application there are so many war stories.
You might decide on a plan and then after purchasing the property the council decides they can?t approve your plan and then you get stuck with an un-sellable property.
How will you finance the purchase?
After deciding what property you will purchase and if you haven?t got cash deposit to buy the property with, this will to some degree restrict you with what you can do. In this scenario all is not lost as you can always bring in a Private Lender who puts up 20 percent. Most chances are with a private lender, you won?t be able to turn the house into your long term home as the lender will want the house sold within a year to reap the profit and return on their investment.
The majority of private lenders prefer to turn property ventures into fast profits, a quick-buck, and therefore they want to be in and out of the deal very quickly which probably means you won?t be able to keep hold of the property in the long term.
Also with private lenders you will probably be paying pretty high interest on their loaned 20 percent. With this in mind, it's essential that you know your exit strategy before you purchase the property and understand why you're buying the house in the first place.
How to turn your purchased properties profitable?
One of the reasons why you might be buying a property is because you want to ?flip it?. Alternatively, you might buy a place and then sell it on to a partner for a fast profit. Whatever you decide, you need to know your strategy and know what you are going to do with the property before you buy.
I often hear people say ?I just want a cash flow property? but you need to ask yourself why?
If you're going to keep the property for its cash flow revenue (a cash flow property), then make the decision as to where the accrued money is going to go. What will the surplus funds control? What will this cash flow property pay for or provide?
Maybe the reason you want a cash flow property is to control something else. For example you might have bought a couple of flats that are cash flow flats and know that they will never go up in value but you understand this and have built this into your plan so you always have a reason why you bought them.
Selling Flats
If you have bought a lot of flats over the years, using a buy and hold strategy, you will probably know beforehand that it was going to be hard to sell (selling) them, especially if you bought them very cheaply.
If it's looking as if you can?t make a profit you could always sell them on using a rent-to-own strategy or a contract-sales approach. But bear in mind, most of these are long term strategies that could stretch over 10 to 15 years.
It's always good to bear in mind when purchasing flats that they are normally harder to sell than houses.
Furthermore, the average unit lease holder is somewhat more transient. You're going to get a much higher percentage of single women and single guys who may not be as financially responsible as married people are.
Some of these ?people-issues? make it difficult to get them ?financed-out?, a term used to describe the exact moment when your seller financed buyers have finally become good credit citizens and are able to acquire a mortgage with a traditional lender or bank enabling you to receive your final payout as you are ?financed-out?.
However the reality of the average unit lease holder is that they don?t have stability of employment or they simply aren?t living in one place long enough to become potential seller financing clients.
So it's best to realize before hand, flats can provide great yields but you need to accept the fact that they are more difficult to sell.
With this in mind make sure you only use a small cash deposit to purchase flats.
Some reasons why flats are so cheap are mainly because there is a very large percentage of property-investor occupancy. Lenders like to give mortgages on flats that are in a block containing a high percentage of home-owners as opposed to high percentage which are investment owned.
When you have a building which has a high percentage of investment owned flats and very few homeowners, lenders are less happy to lend.
A building that is mainly investor-owned is a little bit more difficult to get lenders to lend and when they do it will probably be on a lower ratio.
The lenders know that investors won?t look after the properties as well as homeowners do. So target buildings with a higher percentage of home-owners and you will be better off.
Some of us bought into a lot of buildings where there is a high percentage of investor-owned flats and it's not easy to ?finance-out? or sell these flats as they seem to come with strings attached such as lower ratios on lending. We then had to hold onto them for a long, long time to gain any profit.
Another problem with flats is that there's not much you can do to a unit in terms of renovation to increase its value. You can paint it, you can change the kitchen but there's not a great deal you can do to greatly increase the final asking price so you might have to hold onto it for ten years and wait for the market to move up to secure a profit of equity.
Ensure when buying flats that you purchase using very little cash. As long as you don?t have a lot of cash tied up in the purchase then flats are a safe buy. But if you don?t know this beforehand it could be detrimental to your plans.
When buying flats there are two prices, there's a developer price and the market price. The developer's price has always got to be higher than the market price in order for the developer to make a profit and therefore to bother developing in the first place.
In a rising market you'll find that the market price will increase and catch-up to the developer's price which is only about 20 percent above the market price.
When the market stops rising, which is what has happened recently, and prices drop back that's when you will see a lot of developers funding their properties with 20 percent less than what they paid for them as they are paying the developer's price and not the market price.
If you're going to buy and hold a flat, you must understand it won?t appreciate in value as well as a house. Unless, of course, it has fantastic water views, is totally unique or it's in one of the up and coming ?yuppie? inner-city suburbs.
Selling Houses
With a unit it's very easy for people to estimate what something is worth. With a house, it is much harder for buyers to figure out what a house is really worth.
If you go into a house that's worth ?300,000 it's easy to see how people would pay ?322,000 or ?355,000. It's harder to tell the real value of a house.
What you're going to find is it's easier to flip houses rather than flats, as it's easier to setup financing for houses. You can always create some sort of vendor-financing deal on houses and there are a number of ways you can vendor finance these types of properties. You've also got a little bit more flexibility with a house. If the house doesn?t create the cash flow you were anticipating, simple improvements to a house can quickly improve its value, considerably more so than with a flat. When you improve a house and get it revalued it's much easier for those values to come in where you want them e.g. higher.
Unfortunately the same can?t be said for flats. If you have made some improvements to a unit, maybe to the interior decoration, it will still value-up probably the same as the other 90 flats in the building as it's primarily based on room and balcony size which is very difficult to improve on.
With houses, as they are all different shapes and sizes it gives you a bit more flexibility to negotiate on appraisals.
And remember, whenever valuations don?t come in where you want them to, always challenge that valuation, it's your right and you?d be quite surprised how often the valuer will correct their final figure.
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