Depending on what and where you read, there are numerous rumours afoot that the property crash is over and recovery is on the way. Whether you believe this or not will largely depend on where you are, what you bought and ultimately how big (or non-existent as the case may be) the pile of equity/cash is that you are sitting on.
Whilst an old adage states “Mistakes are to be learned from”, we take a look at 8 lessons worth learning from the recent property market turmoil.
1. Do your research!
Something overlooked by many in the run up to the peak of the boom. A large number of investors from all walks of life bought into property as an investment purely because other people were, without doing any research themselves.
2. Do you want to make money from property?
Decide and define. Are you buying as an investor or a second home/holiday home? Many “investors” defined themselves as such purely because they were buying a second home in another country. Whilst a “holiday home” that is occasionally rented out or lent to friends and so on is a long term investment in the bigger picture, the decision to purchase a property as an investment should be exactly that, not based upon the colour of the carpets and the location of it in relation to your favourite bar. A purchase that involves personal taste is a purchase, not technically an investment. Remember, your taste will be different to other peoples. Making your property “quirky” or “unique” with pink and purple velour wallpaper might not make it all that appealing to the everyday rental client!
3. Prices don’t always rise!
Despite the saying “safe as houses” property will not always rise in value all the time. Granted over the long term, if you have the time to hold for as long as it takes, prices will go up. The reality is, most didn’t and don’t. Think about it, theoretically the croupier in a casino only has a 2.7 percent advantage with a single zero roulette wheel, if this was strictly the case and a pure constant, no one would ever lose more than 2.7 percent. The reality is these odds are worked out over infinity. Over the fullness of time, house prices will go up, whether you can afford to be invested for that long is something you need to consider. The exact same applies in the casino, if you played roulette forever on the same bet, you would only lose 2.7 percent.
4. Mortgage rates.
Mortgage rates can and do fluctuate considerably, sometimes to the good side, and frequently to the bad side. Can you afford to keep paying the mortgage if the rate goes up?
5. Mortgage availability.
Some investors relied upon remortgaging existing properties to buy subsequent properties. Others bought with cash and saved the equity until later. Many have been caught out finding that they cannot continue with their investment or renovation due to the lending criteria changing. If your investment relies upon future borrowing to succeed, have you calculated the worst case scenario? What is available to you now on a credit line could well change in a few short months.
6. Balance the books.
Even after mortgage variables are taken into account, there are still other costs to consider, especially in the Buy to Let sector. Can you afford to keep up if they change, or new regulation comes into play turning your well thought out profit into a loss?
7. Exit strategy.
Just because the salesman/tv presenter/newspaper says there is “vast profit to be made
” doesn’t make it so. Take the time to work out how and when you are actually going to make your profit. Not the theoretical paper profit based on “ifs” and “whens”, the actual hard cash profit. An enormous number of property investors were caught in a spiraling money pit after being told they could place deposits on 3 properties, flip 2 at completion and pay the balance on the remainder with the profit. This actually happened for only a handful of people, mainly for those in the right place at the right time. If it was all that simple we would all have retired long ago. As much as the saying goes “if it sounds too good to be true, it probably is” the same applies to the process. If it sounds too easy, then the likelihood it is too easy. There are of course some exceptions, and these will be discovered if you have learnt lesson 1!
8. Put your plan to the test in principle.
This might sound a bit odd, but apply it to any investment strategy
and it will help you avoid some obvious mistakes. Write down the investment process as you see it in your head. Once you read it back in the cold light of day you will see any glaring problems. For example, if your plan contains phrases similar to any of the following,
“If mortgage rates remain the same….”
“Providing property prices rise within…..”
“Hopefully this country will join the European Union…”
“If I can get a tenant….”
“With any luck…..”
In a nutshell, any plan with too many “ifs”, “hopefully’s”, “providing’s”, “maybe’s” and “with any luck’s” really should be avoided!
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- Monday 05 April 2010