Fatal Mistakes in Real Estate Investment

[VIPCLUB2004]

Fatal Mistake 1:
You Do Not Have a Clear Strategy and Get Easily Distracted

Too many investors buy because someone tells them the property will
go up in value or they will be given a perceived discount, and not
because it will help them achieve their goals.

Are you buying for yield?

Speculation on cap growth?

Or to add value?

Too many investors buy without having a clear strategy, or buy the
wrong type of investment for them ie they want income but buy an
off plan property that requires a 30% deposit and 10% buying costs,
tying up all of their savings - and do not realise until further
down the line. Or buy a buy to let and then realise do not like the
idea of being a landlord!

They can also have a perfectly reasonable strategy, which is
working for them ie buying buy to lets for around £60,000 in their
local area, and suddenly get distracted by a ***y new deal, buying
a very expensive villa in Dubai, or a discounted apartment in Spain
which does not fit into their overall strategy.

Or buying a renovation project without the skills or adequate funds
to complete.

It is vital that you plan out your strategy before start buying. Ie
how much time do you want to put into this, how much in terms of
funds, what skills do you have, what timescales are you working to?

Too many people go with too wide an investing strategy, for example
I know investors who have bought individual properties in 5-6
countries which I would think is too many. They may be good deals,
but can be difficult to manage all the legal/tax and finance issues
- I would aim to go with 2 or a maximum of 3 types of investments
at a time, as it is easier to keep an eye on the overall market
this way. It is better to become an expert in 2 or 3 markets than
spread yourself too thin over 5-6 markets, whether it is buy to
let/buy to sell/overseas.

Part of your strategy should also include looking at exit
strategies ie when do you plan on holding on until - what triggers
will make you want to hold or sell?

How soon will/may you want out, and how easy will it be to realise
your profits?

For example what may seem an excellent purchase when you buy may be
difficult to sell on, which would mean it is difficult to realise
your profits. For example purpose built hotels or student
accommodation, where you can buy a room may give a good rental
yield but not have a strong re-sale value. If you suddenly need to
sell up - will there be buyers ready to snap your property/room up?
Or many apartment blocks in UK and overseas are sold purely to
investors. This means all may have similar investment strategies ie
buy to rent or sell, and could be a large number trying to sell at
once. This again will affect the re-sale value, purely down to
supply and demand.

It is often best to target an area where is a good mix of local
owner occupiers and investors - so there will be a good mix of
strategies and you will not be competing with many others all with
the same strategy.

For this reason it can be better to target smaller developments, as
are less likely to attract the large numbers of investors, or
investment clubs that look for 30-50 apartments at a time.

Some areas will see an immediate increase in capital growth,
whereas some will be more of a case of hold for 3-10 years to see
the best levels of growth. You need to be aware of this before buy
and also be sure about how desperate you may be for the money you
have tied up. If you think there is a chance you may need to call
on this money sooner rather than later, you need to ensure there is
a strong exit strategy or you will become desperate to sell, and
therefore not be able to sell at such an attractive price.
So considering your strategy at the start is very important - you
should consider:

How much do you want to invest?

What are your goals? Over what time period?

How much time do you want to put into this?

What will your exit strategy be?

This should help you get off to an excellent start!

[VIPCLUB2004]

Fatal Mistake 2:
Forget importance of location, location, location

Yes prices may be rising in the latest hotspot at an average of 15%
p.a. but remember that is an average.

Within streets you will see huge price differences. Ie there may be
terraced 2 bedroom houses at an average price of £50k going up 10%
per annum, and 2 bed new build apartments at an average price of
£120k going up 3% per annum within 2-5 minutes walk. So in that
area the average across the 2 types of property would be 6.5% - but
is significant difference - which is magnified when you have
leveraged your investment.

Ie if borrow 85% on a buy to let mortgage on both:

On terraced property, deposit is £7500, and borrowing is £42500. If
house prices go up 10% in year 1, is now worth £55000. So you have
made £5000 in equity - therefore your initial £7500 is now worth
£12500 - this is a 66.7% increase.

On the new build apartment, deposit is £18000, and borrowing is
£102000. If house prices go up 3% in year 1, is now worth £123600.
So you have made £3600 in equity - therefore your initial £18000 is
now worth £21600 - this is a 20% increase.

(Clearly we have not taken any other costs in - and for simplicity
have not taken yields in to this example).

So there are big differences in the returns on your money, in an
area where average house price growth is 6.5% and big differences
in how much money you have tied up in each deal. You could be
getting 3 times greater a return just by investing in a better
investment within the same area.

The other area where people get caught out in average price rises,
is forgetting that this is not always the most relevant figure. Ie
if you are buying a buy to let, the rental yield in that location
is the most important. Is no point buying a very cheap property,
where is no rental demand, if want the rent to pay for the mortgage.

There are areas of Scotland for example where prices may be similar
for similar types of property - but one will have strong rental
demand and one will not.

There are areas of certain countries I will buy in and some I won't
- just as there are towns with area that are good for investing in
and areas not so good - always look at the specifics and not just
the generalisation of an area.

You must either know your areas very well, or have someone you can
rely on to check them out for you before committing to a specific
location.

[VIPCLUB2004]

Fatal Mistake 3:
Do Not Factor in Buying/Selling/Management Costs

Ie do you know the average buying costs to buy in different
countries?

You may expect capital growth to be 15-20% in country X but if
buying costs are 12% and selling costs are 7% it will take at least
2 years before you make any money - are there quicker ways to make
money? And may have to spend a few thousand on furniture - all this
must be taken into account.

If prices are flat for 2-4 years then this would not be a good
investment - as would be far easier ways to make money. I am
reluctant to recommend any deal where buying costs are this high.
For example, it may be better buying where buying costs are around
3%, and selling costs are around the same even if capital growth is
expected to be half what it is predicted to be in country X.

Do you know the different buying costs in UK, Spain, France,
Cyprus, Bulgaria, Estonia, USA?

In Spain is around 10-13%

UK is around 3%

Cyprus is around 6%

USA is around 5%

Estonia is around 3%

Bulgaria is around 4%

And management costs will vary significantly depending on the type
of investment ie holiday lets, corporate lets, student lets.

For instance in UK - can negotiate in some areas of the country a
10% flat rate for management of standard tenant. However management
for some eg student tenants can be as high as 20-25%. Clearly this
makes a huge difference to your net yield. The gross yield is less
relevant when comparing across different rental sectors.

For example: I have seen student buy to lets advertised as higher
gross yields than normal buy to lets eg 8% gross yield - but if
management costs are 25% this takes this yield down to around 6% net.

While a normal buy to let with 7% gross yield and 10% management
costs, would still give you a net yield of 6.3% ie higher.

It would also often have lower maintenance costs.

It can be the same overseas - short term lets will invariably give
higher gross yields, but will have higher ongoing costs - must
always factor this in.

So do not get distracted by headline figures giving potential
capital growth or gross yield.

And make sure you are aware of the total buying costs and
management costs before commit to buying.

[VIPCLUB2004]

Fatal Mistake 4:
Buy Buy to Lets with Negative Yields, Hoping for Capital Growth

I still can't believe people do this but all over the country I see
people marketing and selling unattractive BTL deals.

If your objective is to make a passive income do not buy an asset
that will cost you money each month! If you have a good healthy
salary, earning a net income may not be as crucial - but I would
still be hesitant to buy a rental property with a net deficit
unless was very confident on the economic situation and future
capital growth of the area ie new EU country or regeneration area.

You must also factor in management/maintenance costs, and any
potential interest rate rises ie in the UK recently the rises over
last 18 months, before the welcome 0.25% drop made significant
differences to many buy to let investors cashflows.

Do not just take selling agents word for this - and if buying off
plan try to see exactly what else is being built around it ie right
now rental demand may be high but within a year may be oversupplied
eg many city centres in UK.

Too many buy to lets are marketed on supposed discounts, and
potential capital growth with little mention of the rental
expected, or inflated rental figures quoted. But the most important
figure in any rental investment should be the rent expected - as if
there is no rental market, this will be a very unattractive
investment, and therefore little chance of capital growth unless
owner occupier demand.

If figures are not attractive - hold off and wait until improve, or
look to other property markets.

[VIPCLUB2004]

Fatal Mistake 5:
Do not Understand the Importance of Opportunity Cost

Understanding the Opportunity Cost of any decision you make is
critical - to ensure you make the best choices to maximise your
profits, and ultimately your long term earnings.

While most investors have got involved in property investing
because they understand the opportunities to make money - through
leverage and capital growth or high yields - I still see and hear
of many who do not fully understand opportunity cost and therefore
do not maximize their profits.

Remember anyone that gets into property is usually in it to
generate money or income - how many deals/properties you own is
insignificant - but I meet some investors who feel it is all about
buying as many properties as they can and never selling,
irrespective of performance or other opportunities.

So what does opportunity cost mean?

Well according to the encyclopedia,

"Opportunity cost is a term used in economics, to mean the cost of
something in terms of an opportunity foregone (and the benefits
that could be received from that opportunity), or the most valuable
foregone alternative. For example, if a city decides to build a
hospital on vacant land that it owns, the opportunity cost is some
other thing that might have been done with the land and
construction funds instead. In building the hospital, the city has
forgone the opportunity to build a sporting center on that land, or
a parking lot, or the ability to sell the land to reduce the city's
debt, and so on."

So in property investing terms, if an investor decides to invest
£50k in a property in for example Wales, the opportunity cost would
be what he could have made by investing in Spain, Ireland or Dubai.
Or similarly if an investor decides to keep equity of 50k in a
property, the opportunity cost is what he/she could alternatively
have invested this money in and the resultant value.

Now again this will depend on your specific strategy - and many
people are not too concerned about opportunity cost, they are just
keen to buy 1-2 properties that they can hold onto for 15-25 years
to use as a pension. That is fine if that is your strategy - but
for me that is too broad a strategy, carries risks and is not
maximising the opportunities available.

I have always had a philosophy, rightly or wrongly, that I should
always be working my money hard. What does this mean? Well as soon
as I feel my money has made a significant return and the returns
are likely to drop off, compared to other possibilities, then I
will look at realising my profits and investing elsewhere ie when I
feel the opportunity elsewhere is greater than the current
opportunity, after costs are taken into account.

The great thing with property is this does not necessarily mean
selling, as you can refinance, and invest money elsewhere.

This is no different to any other type of investing, such as buying
stocks and shares - you make/lose your money depending on what
price you paid, and what price you sold at - although clearly with
property there is a good opportunity to earn a regular income as
well. If you hold onto a property for 15-25 years you will make
money, but most likely there will be a few scares along the way, as
the market passes through several cycles!

To be a successful investor, you must know when to enter the
market, and leave the market. And the people that do best buy low,
and sell high!

I'll give you an example. By doing all my due diligence I bought a
property at the right price in the right location, but then sold on
within a year of completion as I felt that was the period I would
see the maximum returns in - and more importantly, the
opportunities would be greater elsewhere over the next 3 years.

So to go through the numbers, I have just sold a property 6 months
after completion, that I had bought off plan last year 12 months
before completion. I bought at a price that was already £15k below
market value based on my research in an area that had little buy to
let competition - and no it was not in any city centre in the UK!
This was secured with only a £5k deposit. On completion, I put
another £28k into the deposit - so tied up £33k of my own money.
There was no stamp duty in this area.
I then put the property on the market on completion - now even with
the market slowing down slightly in the area, I sold it for a £23k
profit. So I tied up £5k for 18 months, and a further £28k for 6
months, to get back £56k 6 months later.

Why did I sell? Did I consider refinancing?
My first choice would have been to refinance and let out, but the
rental would not have stacked up at the new valuation. So while the
rental would have stacked up at the price I paid for the property,
I felt that I would have had 56k in equity sat not doing very much
for me for the next 3 years in this property investment. And I felt
that there were better opportunities for my money both here in the
UK, in different regions, and in several overseas markets, which
would give stronger returns.

How can I tell this?

Clearly when we are looking into the future there is an element of
risk and speculation and there are no definite answers - so you are
having to forecast as well as you can with the data currently
available ie how you forecast interest rates, buying/selling costs,
supply and demand, employment, the overall economy and market
sentiment over the next time period in the markets/regions you are
investing/looking to invest in.

I do not forecast huge capital growth in the area over the next 3-5
years, for a range of reasons - the main reason being that the
prices are now pretty high compared to the average salary, and the
rentals are not as attractive for an investor at the price I sold
up at - around 5% gross yield.

As the yield was not attractive enough for me it was best for me to
release this equity and find another investment - ie I felt there
were better opportunities for me to spend my £56,000 on, to
generate more money.

Although opportunity cost can be hard to quantify, its effect is
universal and very real on the individual level. The principle
behind the economic concept of opportunity cost applies to all
decisions, not just economic ones, for example when Steven Gerrard
decided to stay with Liverpool this summer, his home club and where
he is captain, the opportunity cost was what he could have achieved
if he had moved to Chelsea or Real Madrid. In the end he felt the
rewards he could achieve at Liverpool would be greater than he
could achieve at Chelsea - but clearly this is an individual
decision depending on individual goals.

So, in conclusion, what does this mean for a property investor?
Well, I would say always be looking at your equity/investments and
looking at how well they are performing. If you have money tied up
in a property that you think will go up in value over 15 years -
but may not go up for the next 5 years, is this the best place for
your money?

It is no different to the stock market, you must keep an eye on
market movements and other opportunities.

By working your money hard, and maximizing potential leverage, you
can maximize the opportunities out there.

[VIPCLUB2004]

Fatal Mistake 6:
Get Distracted by Supposed Discounts Offered by Developers, or put
off by Surveyors' Valuations.

I was checking over some properties last week, and the first thing
the agent I met said was, "How much discount would you be looking
for?"

Now what does this mean?!

Discount from what?

An already inflated price?

A surveyor's value?

Or current market value?

All 3 will generally be different.

When you see off plans being marketed at 15-20% discounts, remember
this is marketing. All this generally means is the prices were too
high in the first place, and have had to reduce to sell, or are
trying to attract business with a promotion. No different to a shop
that cannot shift its stock, and has to have 20% off sales, or even
half price sales. Because the Brits love a bargain they often buy
at these "discounted" prices - but just because you have got a
discount, this does not mean you have bought below market value!
Even the large supermarkets have been accused of putting the prices
up one week, and then discounting them the following - is simply a
marketing method.

You have bought at market value, as that is what investors were
willing to pay.

Yes - occasionally a discount can be negotiated, but often this
will be at the start of development, if the developer wants to sell
the first phase quickly. I prefer to see developments where the
prices go up during the development as get a truer feel for the
values.

I then hear people say - well it must be below market value because
a surveyor has valued it at £20,000 more than I paid. In fact about
a week ago, I received an email offering some completed new builds
in Nottingham, which I have driven past several times. It had
copies of the surveyors valuation done, and were offering these
properties at around 15% below this valuation.


But clearly although you could buy at 15% below the surveyor's
valuation, this is totally different from market valuation. The
market valuation is what someone is willing to pay. Perhaps if
there is just 1-2 units left, but not when are 10-20. I'd be very
concerned at buying a property 15% above the market valuation,
which in effect is what you are doing as the 15% discount is being
used as a deposit. Why would anyone pay a finders fee for that?!
Especially at around 5% yield. This tells me these properties are
too expensive for first time buyers, and not attractive for
investors, so prices will only go one way as supply will outweigh
demand. Remember the value a surveyor gives a property will often
be different to the value a buy to let investor, who is more
interested in yield, gives a property. I have seen some horrendous
examples recently where investors are buying buy to lets solely
because they think they have received an attractive discount.
Unfortunately 6 months later the valuation is even less than this
supposedly discounted value that was given and they are struggling
to get anywhere near the rental figures quoted. This can be very
dangerous, as can find yourself in negative equity very quickly as
have paid too much in first place, even with a supposed discount.

I'll give another example of the differences in different markets.
As most of you will know I target areas in UK where yields are
still strong and capital growth is still strong - although is
getting very competitive. Currently properties that say are being
valued by a surveyor at £40,000 are selling on the open market for
nearer £50,000. Why is this? Well because yields are so strong, and
demand is higher than supply. So again, you have not paid above
market value, you have paid market valuation. This is often the
case in a fast growing market, where surveyors look at historic
data and do not grasp fully the value to buy to let investors, in
this country and overseas.

I know I'd rather be buying in a market where market valuation is
10-15% above the surveyed valuation, rather than 10-15% below it,
as this is a very good indicator of future prices and values.

These discounts should not be confused with genuine distress sales,
where one offs will come up, where the seller is desperate for a
quick sale and will sell for below the market value.

So I would say take any discount with a pinch of salt - always look
at the actual figures paid, the yields, and the comparable prices
in the area when making a decision.

[VIPCLUB2004]

Fatal Mistake 7:
Forget Importance of Cashflow

"Cash is the oxygen that enables a business to survive and prosper,
and is the primary indicator of business health. While a business
can survive for a short time without sales or profits, without cash
it will die."

I spoke to an investor 6 months ago who told me he was asset rich
but cash poor.

What did he mean? He had bought several investments off plan, and
several low yielding deals which he hoped would have good capital
growth. Therefore while he had several good assets on paper, these
assets were actually costing him money each month, meaning he had a
negative cashflow.

This can be ok, if some areas of your life, or investments, are
making a positive cashflow to balance this. However this investor
did not have this, and he ended up being forced to go back to work,
and selling a couple of these low yielding assets for a loss - as
he was put in the position of being a desperate seller - that is,
desperate for cash.

It is crucial to always be aware of how important cash is when
running a business - which property investing is.

The reality is that without cash, you won't last very long. This
may seem obvious, however it is very easy to buy assets, and then
realize you do not have enough money coming in each month - which
can leave you in a very difficult position.

Property investors must try and plan and prepare for all potential
future events and market changes. This can include interest rate
changes, economic changes or market sentiment changing, as well as
changes in your personal life which you may not immediately
associate with your property investing - such as promotion at work,
or worse, being made redundant, or having children which can all
make big changes to your cashflow as a whole.

So I would suggest, the most important aspect of planning, for a
property investor, is not expected capital growth, historic data,
cost of borrowing, or yields but is effective cash flow management.

Failure to properly plan cash flow is one of the leading causes for
failure. I know how tempting it can be to overstretch yourself and
put all your liquid cash into assets - and then due to an
unexpected, or more likely unplanned for, poorly performing asset,
find yourself over budget and desperate for cash short term. You
then are looking to borrow cash, either through loans, or
overdrafts at less acceptable interest rates.

However if this runs out you can be left with difficult decisions
that are forced onto you by poor planning. This usually involves
selling an asset, at a price below its value, as you are desperate
for cash short term to support your property investing business
overall.

Cash flow serves several purposes.

Firstly it is used for meeting normal cash obligations such as
paying mortgages, buying costs, development costs and covering
voids.

Secondly, it is held as a precautionary measure for unanticipated
problems. This is the area that usually is forgotten by investors.
A cash reserve should be available for these unforeseen problems -
this can be actual cash, or a flexible mortgage or overdraft, but
must be available.

Thirdly it is held for potential investment purposes. The term
"cash" refers to those assets that are liquid and have immediate
cash redemption value.

There is not a problem with buying a property or land that costs
money in the short term ie a plot of land to develop on, or a
property off plan, indeed this can be very profitable - but it is
clear that this will not generate cash in the short term - and
therefore you must make sure this is properly planned into your
overall strategy.

I always think it is important to have a good level of cash
generating assets - ie generating more money than the costs
involved with borrowing and maintaining the asset.

This gives you a positive cashflow which can help balance out less
well performing assets, or can be held in reserve for emergencies
or future investments.

The other attraction of holding cash positive assets is that if you
are ever forced to sell an asset due to an unexpected change in
your professional or personal life, there should always be demand
for cash positive assets, and therefore you should be able to sell
this on relatively easily.

For example, if a property development you are carrying out goes
wrong or over budget, and you need extra cash - if you own a buy to
let in the UK which is generating a gross yield of over 8% - or a
net yield, ie after all costs, in any country of at least 2% - then
this should be attractive to other investors and you should find a
buyer relatively easily or be able to refinance this asset, which
should generate cash quickly.

It is no surprise that when you go to the banks requesting more
money, they want to know your monthly cashflow - they need to see
from your projected monthly cash flow if you will have the capacity
to repay the loans or mortgages.

So when you are forming your property investing strategy - ask
yourself the following questions,

How much cash will my assets generate? How much cash is required
each month? How much cash do other areas of my life require? And
how much do they generate?

Ie. if you have a high paid job which you enjoy, which generates a
high positive cash flow, or you already have assets generating
extra cash on a monthly basis - you may be able to buy assets that
will not generate money in the short term, as you can cover any
short term costs, or unforeseen circumstances. You may therefore
want to look at a longer timescale, and may go into property
development, buy into a property fund, buy a plot of land - where
you are comfortable tying up this money for a period of time,
confident that it will rise in value, and you will have no short
term need for this asset which could compromise the value.

If on the other hand you are pretty stretched already for cash on a
monthly basis ie say cashflow neutral, you may well want to buy an
asset that immediately will generate cash, or at least as soon as
the mortgage, borrowing costs start ie a more traditional buy to
let.

There are many ways to make money as a property investor - but
financial planning is always key to ensure your cashflow stays
positive to allow you to grow your property investment business.

[jc]

Thank you for sharing. May i know did u write all these yourself or did u quote from somewhere. If it is the later, may i know where is the source of info. Tks bro :)

[Property_Owner]

Thank you for sharing. May i know did u write all these yourself or did u quote from somewhere. If it is the later, may i know where is the source of info. Tks bro :)

It's stated '£'50k.

[VIPCLUB2004]

Thank you for sharing. May i know did u write all these yourself or did u quote from somewhere. If it is the later, may i know where is the source of info. Tks bro :)


Of course not by me la :D

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