Make sure your Buy to Let Investments Stack Up!

One of the main benefits of investing in property is the significant capital gain you can make as your property rises in value over the long term. However, to benefit from the gain you need to make sure you can afford to hold the property in the meantime. Ideally you don’t want to have to support your property portfolio. Quite the opposite in fact! Your portfolio should support you financially. The rent you receive from your tenants should more than cover all the costs of ownership such that each month there is surplus cash profit left over for you to enjoy.

Investors who lose money are often the ones who get it wrong because of cash flow. They can’t afford to hold their property and so have to sell which depending on the market conditions means they themselves may become motivated sellers. The purpose of this chapter is to help you ensure you maximize the cash flow from your investment properties.

So let’s go back to fundamentals for a moment. As a property investor, one of the critical skills you need to develop is the ability to quickly assess a particular opportunity to decide if it is a good investment and suitable for you or not.

What makes a good investment?

Now let’s just remind ourselves of the first 3 of my 5 Golden rules of Investing.

1. Always buy below market value from motivated sellers.
2. Buy in an area with strong rental demand
3. Buy for cash flow

Of course you want to ethically pay as little as possible for the property but the discount alone is not the only factor to consider. There is no point buying a property even with a great discount if you cannot easily rent it out and make a positive cash flow.

To help you focus on only buying good cash flow properties you could buy “as if prices will never go up again” and so the only reason to buy would be for the great cash flow and return on investment.

When researching any potential investment there are two main factors we are concerned with. We want to determine:

A) The true market value of the property

B) The realistic market rent that could be achieved

This is the information that a mortgage company would want a chartered surveyor to collect on their behalf in order to assess whether to grant you a buy to let mortgage on a particular property. You need this information a long time before you even apply for the mortgage, to decide if it is the right kind of investment for you.

With these two pieces of information you can ascertain whether you are going to make a profit each month after covering all of the expenses.

The main expense you will incur on a monthly basis is the interest on your buy to let mortgage. I have a very simple rule of thumb which you can use to asses this monthly expense.

For every £20,000 you borrow, at an interest rate of 6%, you will pay £100 per calendar month (pcm) in interest. For example, if you were to borrow £80,000 it would cost you £400 pcm.

This is based on a 6% annual interest rate for two reasons: First of all it’s the average rate I’ve had over the last 15 years. Secondly, it keeps the numbers easy to calculate because every £20,000 you borrow cost just £100 pcm. I like to keep thing as simple as possible.

If the average cost of a mortgage is only 5% per annum then this rule of thumb is very conservative. This means that in reality £20k will not cost you as much as £100 pcm but by using this in your calculations you are being very cautions which is good because you don’t want to be too optimistic.

When working out the cash flow many investors are too optimistic on what the costs will be and they don’t get it right. It’s better to be pessimistic and have a nice surprise to make more money than expected.

Does the investment stack up?

The mortgage lender will then use a rent multiplier to make sure that the rent is going to be enough to cover the monthly interest and the other cost associated with the property.

This rent multiplier can vary from lender to lender but most will uses something like 125%. This means that the lender wants to check that the monthly rent is 125% of the monthly interest payment. (Rent > Monthly interest x 125%).

With a mortgage of £80,000 and a monthly interest charge of £400 your lender would generally want to see a monthly rental income of at least £500 pcm (£400 x 125%). The extra 25% over and above the interest payments is an approximation of the other monthly costs.

Using this rent multiplier will help you to very quickly asses if a property is going to make monthly cash flow for you. With a monthly interest cost of £400, if the monthly rent was just £500, it may only just about covers the costs. However, if the monthly rent was £550, then it means you would probably make some cash flow from this property each month. If the rent was just £450, you wouldn’t be making positive cash flow, in fact we know it’s going to cost you month each month. In reality the lender may not lend the full amount.

To summarise, you can quickly work out if a property stacks up as follows:

1. Work out how much is the mortgage going to cost you
2. Multiply the monthly interest by 125% to give the required rent
3. Check that the actual rent is more than the required rent

Having used this quick approximation, if the property does not stack up you can move on to the next one without wasting too much time. If however it looks like it does stack up well, it may be worth spending a little more time to properly work out the true cash flow to help decide if you want to purchase it.

This article is taken from the new 2010 edition of “Property Magic: How to buy property using other people’s time, money and experience.” Property Magic is an Amazon No 1 best seller and we highly recommend it. You can buy it here: www.amazon.co.uk

You can also do your Due Diligence in 15 minutes with this new eBook from Yvonne Emery –

http://www.justdoproperty.co.uk/due-diligence-in-15-minutes

If you would like to ask Simon a question click here

Whilst doing your research into buying overseas property you can’t have failed to have come across the term fractional ownership but to anyone outside of the overseas property industry this sounds very similar to timeshare. So what exactly is fractional ownership and why should you be considering it?

Fractional ownership allows a group of unconnected buyers to invest jointly in a property. There is strength in numbers, and the more buyers you purchase the property with, the less you need to pay. Fractional ownership is a very straightforward way of owning a property and paying less for the privilege.

So why should you be considering fractional ownership? In addition to the financial benefits, you only need to pay your share of any management or maintenance costs plus you needn’t worry about security whilst you’re not at the property. You get title ownership of a property for a fraction of the cost. Fractional ownership is all about worry-free hands-off property ownership, great for those of us that do not want to be consumed by the day to day tasks of owning and running a property abroad.

Fractional ownership is an established method of purchase. Buyers have been pooling their resources together to buy all manner of luxury items, including superyachts and air travel, since the 1990’s. It’s a tried and tested method of owning items, objects or property that might otherwise be too expensive for one buyer to purchase outright.

So is it like timeshare? No, the main difference between fractional ownership and timeshare, is that with fractional ownership you own part of a title as opposed to just time. You have a tangible asset that appreciates in value as does the property. When buying a fraction of a property, you will be allocated an amount of usage, usually split between high and low seasons. To keep things fair, your yearly allocation will rotate, so each property owner has the benefit of peak times such as school holidays or Christmas breaks. This is where the similarity with timeshare comes in, but the differences are clear.

For example, you can own 1/12^th of a property at the five star luxury resort of Halcyon Hills in Samos, Greece. For £22,000 you would own a fraction of a hotel suite, giving you four weeks usage a year. The Developer of this project offers added incentives including a guaranteed rental return of up to 8% of your purchase price, per annum, if you buy for investment reasons only and decide not to use your property. Or 5% guaranteed rental return if you decide to use only two weeks of your allocation.

Comparing the full ownership and fractional ownership purchase options from the above offer, you’d pay £22,000 as opposed to £120,000 for a hotel suite. You’d benefit from the same luxurious facilities including a world-class spa, 35 berth marina, restaurants, tennis courts and gym. Finance and guaranteed rental returns are available for both purchase options, as is the 150% buy-back offer (ending 1^st August 2010). The only disadvantage of buying a fractional property over a full property would be the limit on usage you’re permitted each year. However, few property owners actually spend more than four weeks in their overseas property each year.

Fractional ownership is really beginning to take hold in the UK, with more and more overseas developers realising that UK buyers want an easy ownership property, that requires minimal input but maximum gain.

Contact Barrasford & Bird Worldwide today for more information about buying fractional ownership properties abroad. Email info@justdoproperty.co.uk and quote Barrasford and Bird.

John Davies from Hedge Property Group gives some advice for anyone wanting to invest in property or just needs to grab a bargain

1. Plan your exit strategy – know what you’re going to do with the property

2. Visit the property with the valuer

3. Have the legal pack checked

4. Visit the local letting agent – Do your Due Diligence! (see http://www.justdoproperty.co.uk/due-diligence-in-15-minutes for more help with this)

5. Choose the auctions wisely – sometimes going to the quieter auctions pays off

6. Never, ever bid first

7. Be careful of ‘off the wall bids’

8. Bid when the auctioneer says “going once, going twice” – and watch other bidders, who’ve done their homework

9. When the auctioneer says “it’s in the room” that means its met the reserve price

10. Stick to your ceiling price

11. Make a note of all the lots that don’t get sold – unsold lots means – more motivated sellers!

“The recent budget cuts will undoubtedly have an effect on the amount of people made homeless. By capping the benefit people can receive, some landlords will only take professional people thus making the homeless situation worse. At the end of the day, landlords are in this game to make money, it’s a business and not a charity, so by capping benefits, the government is forcing the hand of many investors.

Another change in the HB system that hasn’t been thought through is to reduce people’s HB if they are on job seekers for more than 12 months. It currently stands that if you are on job seekers for 12 months, your housing benefit will be cut by 10% in month 13. This will only give rise to landlords asking for high top ups from tenants or simply evicting tenants adding further to the homeless problems. I’m all for getting people back into work but feel that the carrot should be better than the stick”.

More than 750,000 people face homelessness under the government’s decision to cap housing benefits.
This is according to the National Housing Federation, which has estimated in London alone, around 425,000 people could lose their home.

Housing minister Grant Shapps announced last month that households can only now only claim a third of the average market rent of an area.

Rental rates in London are so high that many families could be forced to leave the area in search of work or struggle and fall into arrears.

The organisation has claimed that the rates of homelessness could be the highest in over 30 years.

It has called on the government to create a poverty commission to assess the impact of the cuts on the poorest in the country.

David Orr, chief executive of the Federation, said: “For many people, particularly those with disabilities, moving could be an enormous upheaval. It will also disrupt the education of thousands of children.

“The resulting impact on people’s lives would be huge  as would the cost to the taxpayer.”

He added that councils could face huge costs from temporarily re-housing families while others would be unable to support homeless families.

Posted by Luella Ravelin

He has been involved in UK property since 2005 and has built a residential buy-to-let portfolio located in the East Midlands and London as well as co-developing PS Investor Services and its associated information sites (see the organisations’ regularly updated blog here: http://www.psinvestors.co.uk/blog/).

Since 2008 – with a strong desire to travel and diversify his business objectives – he has been making regular trips to Brazil to explore property and land opportunities in what is one of the world’s fastest growing economies.  Investors interested in finding out more about this country can access his free information site with detailed guides, hints, tips, strategies, statistics and more: http://www.brazilinvestmentguide.com/.

Property and Land in Brazil – Pros and Cons of Investing in Latin America’s Largest Country

The effects of the economic downturn on the global housing industry have bought into light the importance of analysing investment destinations from a broader and more detailed perspective.  Despite the difficulties in marketplaces across the world, Brazil has continued to be publicised as a so-called ‘emerging’ country that offers investors solid and stable returns.  However, as with any developing economy, risks do occur – many of which are not mentioned in the glossy sales brochures and marketing hype.  So, is Brazil really the next global property hotspot?

The Economic and Political Growth of Brazil

Currency wise, the situation is very stable – the Brazilian real has, for a long time, been unpegged to the US dollar and the country has one of the highest international reserves in the world today; enabling it to be well placed in the face of worldwide debt issues and economic crises.  Indeed, Brazil emerged out of recession much quicker than most developed countries: the economy shrank to its lowest point of 3.4 percent in the last quarter of 2008 and, by mid-2009, climbed back to record a 1.9 percent positive growth rate (GDP estimates for 2010 range from between 5 to 8 percent).  Its economy has also become significantly more open to trade and investment (exports now account for 25-30% of Brazil’s national income, up from 15-20% in the 1990s).  According to the World Economic Forum in 2009, Brazil was also the number one country in upward evolution of competitiveness for the year – gaining eight positions, higher than Russia and closing the gap between China and India.

Business Monitor International statistics pointed to the fact that, despite global financial uncertainty and lower purchasing power, tourism continues to increase.  Brazil has the sixth largest number of world heritage sites of the 130 countries evaluated by the United Nations World Tourism Organization (UNWTO) as well as 7,490 miles of coastline, a largely warm climate and a vibrant culture.  The arrival of both the 2014 World Cup and the 2016 Olympic Games look certain to also boost the country’s tourism industry.

The growth of the country’s alternative energy industry, initiated in the 1960s and 70s, have bought unprecedented benefits to the country’s economy.  As post-Kyoto political pressure mounts on the need to protect the fragile global climate, it is highly likely that a premium will be placed on carbon-efficient energy sources and sequestration. Brazil remains in an excellent position to capitalize on this trend, particularly in bio-energy, wind and hydro-electricity, complemented by having vast reserves of freshwater and bio-diverse rainforests.  The discovery of over 50 billion barrels of offshore stockpiles near the southern coast has been publically stated as enough to make Brazil a global gas and oil leader.  However, as the government themselves have stated, the huge windfall that these findings will bring could end up being a curse as opposed to the country’s passport to the future.  In light of this, Brazil has been seen reforming its oil laws with the intention of diverting a significant portion of the country’s oil wealth towards improving education systems and combating poverty, such as through the ‘Jovem Aprendiz’ (an educational support programme sponsored by the nationally own petroleum company, Petrobras).

However – whilst the country is relatively self sufficient in terms of its natural resources – export growth is an ever-important driver in the future and it has had to deal with the consequential effects of the global downturn (including price falls of primary goods, decreases in money remittances, a reduction in foreign direct investment and a reduction in lending ability).  Due to its huge size, concern also remains as to the country’s ground transport network and ICT (information and communications technology) infrastructure – although a significant amount of investment is expected in the coming years for example via the ‘Programa de Aceleração do Crescimento’ (‘Growth Acceleration Programme’, a high profiled government sponsored initiative focused on energy distribution, transport, housing and sanitation improvements across the country).

Another concern of some investors refers back to the hyper-inflationary period that severely stalled the countries growth in the 1980s and 1990s – this was caused inefficient macro-economic management combined with excessive public spending.  As a result of adopting a variety of counter reaction strategies, a ‘back-to-basics’ economic approach was the one that proved to work.  Despite some recent worries with regards to an over-heated economy, inflation has broadly remained under control to date (more recently as a result of monetary tightening).

The country’s banking system was commended for its high regulatory standards at the 2009 ‘Financial Stability Forum’ in Basel. The minimum Basel Ratio of the Brazilian banking system is 11 percent, 3 percent higher than what is suggested in the Basel Accord.  Most banks, in reality, operate much higher than this level (at over 17.5 percent) with low leverage ratios (at over six times their capital holdings).  In turn, credit rating agencies have therefore increased their ratings of the Brazilian economy: in September 2009, Moody’s gave the country it’s BAA3 rating citing the country’s ‘strong economic and financial resilience’ whilst, a year before, both Fitch and Standards & Poor awarded higher ratings.

Politically, Brazil’s role on the global stage has also increased considerably – in the last 5 years over 300 additional diplomats have been bought into the government (with the same amount to be expected over the next 4 years).  The country is a member of a number of world organisations including Mercosul, the G8+5, the G20, SACN and the Cairns Group (and is likely to gain seats at the OECD, OPEC and the UN Security Council in the near future) and it has continued to reinforce its ties with its fellow BRIC nations (Russia, India and China) in the form various favourable trade agreements and regular meetings to discuss collective growth strategies.  Whilst some international commentators have accused the government of overly ‘pushing its weight’ – particularly with regards to its controversial relationships with Iran and Venezuela – such landmark events are particularly important to note with regards to the future of the nation.

The Housing Market

The real estate industry – on a general level – is comparatively immature and there is estimated to be a 7.9 million housing deficit (a figure that continues to rise).  The majority of the Brazilian population has very little debt; saving is encouraged in the form competitive rates via the mainstream banks and the leverage ratio of the mortgage market is comparatively low (secured lending represents only 3% of the country’s GDP compared to 68% in the US, 11% in Mexico, 20% in Chile and 45% in Spain).  Additionally, government schemes such as the ‘Bolsa Família’ (a programme of cash transfers to the poor) and the ‘Minha Casa, Minha Vida’ housing initiative (grants and financing for lower-income communities) as well as an ever-rising middle class are serving to bolster the housing markets’ growth.

Nevertheless, Brazilian real estate finance is evidently dominated by public controlled banks (who currently own 73% of outstanding loans) and there is a concern that the mortgage market’s ability to grow in line with the economy will be impeded with the weight of government legislation and barriers to entry for private banks.  At the present time it is also difficult for a foreign investor to leverage the purchase of real estate through mortgage finance largely due to the fact that the loans market itself is so underdeveloped (payment plans offered by real estate developers are the most common option currently being used).  A further issue facing investors is the lack of public access to concrete sold housing data (there is no official property and land registry) meaning that reliance needs to be made on agents and sales personnel whose pricing estimates may be questionable.  Investors should also be prepared for the detailed yet often complex legal system and bureaucratic procedures when doing business in the country (the World Bank’s 2010 ‘Doing Business’ report placed Brazil 129^th out of 183 countries).

Due to its vast size, it would come as no surprise that a number of microcosmic real estate markets exist within the country. Whilst it is ever-important to monitor the wider housing market, investors should be aware that some parts of the country are over-saturated and inflated – naturally, detailed due diligence is required upon looking at any property or piece of land.

Conclusions

Brazil undoubtedly offers genuine opportunity for the real estate and land investor – yet, as a country witnessing never seen before changes, risks are materialising that need to be monitored closely.  As one of the largest nations in the world, it should be appreciated that there is no uniform strategy and time should be spent understanding the Brazilian housing industry and the complex legal system that supports it as well as general factors such as the economic, political, cultural and attitude shifts that occur as the country continues to grow.

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The ‘Brazil Real Estate and Land Investment Guide’ provides objective and detailed information for those exploring one of the world’s fastest growing economies.  We offer an entirely FREE support system based on fundamental investment principles and not speculation.  Please head straight to the website and sign up for reports, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more: http://www.brazilinvestmentguide.com/

Ruban Selvanayagam, Property Investor / Developer (UK & Brazil)

Linked In Profile: http://br.linkedin.com/in/rubanselva

New landlords who are waiting out the property market by renting out their homes should make sure they have the appropriate insurance.

This is according to one comparison site, which notes that landlord insurance can be bought for under £100 from Simple insurance.

Moneysupermarket.com warns landlords coming into the private rented sector for the first time that they must first ensure they are protected against arrears.

The rise in new landlords is attributed to growing tenant demand, landlords planning to expand their portfolios and increased availability of buy-to-let financing in the market.

In addition, including cover for other contingencies can also save more trouble in the long-term.

Julie Owens, head of insurance at the site, said: “Landlord insurance which includes Rent Guarantee cover or legal expenses can be more expensive, however if things go wrong between a landlord and tenant legal proceedings can involve a hefty cost.

“It is important to have a good contract in place to know where each party stands should the tenant and landlord relationship fall sour.”

Posted by Luella Ravelin

Get a cheap buy-to-let property insurance quote today from Simple Landlords Insurance.

The Council of Mortgage Lenders (CML) has reported that new homeowners in May only spent 9.5 per cent of their income on interest payments.

In May 2009, mortgages accounted for around 11.4 per cent of income for the average homeowner.

In addition, lending has risen for the 11th month in a row, with total lending at around £4.2 billion in May.

This is an increase from £4.1 billion in April.

Despite the increased activity, the CML forecasts that lending will come down in next six months because of the impact of tax rises and budget cuts.

Commenting on the new figures, the organisation’s general director Michael Coogan said: “Activity picked up in the second half of 2009 due to the stamp duty holiday but with the government’s austerity drive picking up momentum we are unlikely to see a repeat of those buoyant numbers this year.

“Our forecast for gross lending in 2010 may now be looking a little optimistic.”

Posted by Luella Ravelin

As we run property networking events all around the UK, I thought it may be useful to give you some tips on how to get the most of attending network events.

Here are 3 steps to maximise your networking experience;

1. Before you go to the event: Work out what you want to achieve by attending. Maybe you want to find someone who can recommend a good handyman or letting agent in your area, or you want an investor to put some money into a joint venture. Whatever it is, write down a clear intention so that when you meet people at the event you can clearly explain what you are looking for. Also think about any other investors who you know who might be interested in attending such an event and invite them to come along with you. Finally make sure you have some business cards to take with you for when people want your contact details. They don’t have to be fancy or expensive cards just something with all your details on. You can get some free business cards from people like www.VistaPrint.co.uk

1. At the event: Plan to arrive early and leave late. Speak to as many people as you can. Of course you should say hello to the people you already know but make sure you also speak to people who you don’t know. When you meet someone ask them what their name is, where they are from, what they want to get out of the meeting and how you can help them. Be interested in them first rather than telling all about you. Look for how you can help the people you meet. Also think about people you already know who may like to meet them. Make sure you also collect cards from all the people you meet. You may also like to write a little note on the card to remind you what they were interested in and how you might be able to help.

1. After the event: When you get home go through all of the business cards you have collected. Send a follow up email or text to everyone you met. Reconnect with them and send them any information and contact details you promised to give them. It is best to do this follow up the day after the event so that people remember you and the conversation. Keep in touch with them and build your personal contact list. There is no doubt the more people you know the more successful you will be because you will have a number of people you can call or email for advice and help.

If you would like to attend any of our property networking events you can find full details at www.pinmeeting.co.uk

Kind regards,

Simon Zutshi

Founder, property investors network

The Bank of England’s decision to keep interest rates at 0.5 per cent will mean that repayments on buy-to-let will remain low.

Landlords are reportedly more positive about the economic climate, despite the slowing market.

A recent survey from Upad.com found that six in ten landlords polled planned to expand their portfolios in the coming year, because of optimism about the future.

Commenting on prospects for landlords, Property Hawk’s editor Chris Horne said: “The finance market and the mortgage markets have recovered from the lows of last year, so there are more mortgage products.

“It looks like low interest rates are here to stay this year and probably early next year, so from that point of view finance is stable and relatively affordable.”

He added that rental yields were expected to get higher over the coming year, signalling further good news for landlords who saw values go down during the recession.

Posted by Luella Ravelin

Get a buy-to-let property insurance quote today from Simple Landlords Insurance.