Can Property be a good Pension?

Buy to letI live in a part of the world where everyone seems to be a finacial adviser.

For me any financial adviser (IFA) is someone to be approached with extreme caution, for the following reasons.

Insurance companies make money for share holders not policy holders.
This is a personal view (so don’t take any legal action). Here’s how insurance companies work. They sell their pension products through intermediaries (IFA’s) to which their paid a commission. Whilst this is a lot small since the introduction of RDR insurance companies still make regular payments on every account an IFA brings them. That;s not just a one off, it’s every year a client has a pension with them.

Additionally, insurance companies have a sizeable shareholder following, who, in the case of the UK all expect to see regular dividends.

So if an insurance co. has to pay an out of date commission structure to people that did a little bit of work back in 1997, offer city sized bonuses to it’s management teams to they don’t go and work for an American bank and find enough profit to pay out shareholder who secure their business how can their possibly be any profit for policy holders?

IFA can’t benchmark
The stockmarket, in particular the FTSE 100 has done little over the last 10 years. The stockmarket is where the majority of UK based pension funds invest, so do the math. IFA’s still take their cut, shareholder take a divy and the management team will insist on a bonus that’s not quite big enough to attract the attention of any watch dog (who always seems to be asleep anyway). This is why an IFA in pensions will never be able to give you a performance benchmark. “I need to know what my annual yeild will be if I invest £100k in a pension” – go on ask them, listen to the reply you’ll get all sorts of stats about growth and performace of certain funds they’ve invested in – but you will not get a committed answer. That makes it a high risk investment in anyones book. In fact you’re better off being a dragon in the dragons den!

It’s only TAX efficient if it makes money.
The government is always trying to encourage people to save in pensions for their old age. there several reasons for this. Firstly the UK financial services industry produces more GDP that any other industry, in fact the industry in the UK claims to be at the centre of financial services in the world. This nets the treasurey a fair amount of wonga in corporation tax and employee income tax. Secondly, we have an increasingly aging population that are currently entitled to a state pension. If ongoing governments keep borrowing the way they are their just won’t be any state pension. Insurance companies have been quick to identify this and place pressure on politcians to offer tax releif for those that save.

All of this makes sense, and downright attractive if you’re trying to reduce your personal tax liability. But it’s only a good deal if you’re able to see growth. And this is where pension pots fail to offer any hope. If they offered a minimum guarenteed yeild, then you can understand the attraction. But most pensions accually loose money when they are first open because of the commission that need to get paid. In some cases this take years to retain – meaning that you could have just paid your tax and invested in say, a property that will guarentee an annual yeild, even after you pay you own income tax from it.

Why is property a better investment that the TAX efficient pension fund?
Now I’m not suggesting that you put all your money in property. And I’m not saying that all pension are a bad thing. I’m just saying they’re not the only way to create an income for your old age.

The UK property market over the last 30 years has outperformed the stockmarket by a considerable degree. Yes, there’s been a few crashes along the way but if you took the 30 year time frame it’s seen growth. Not only that but rental yeilds have also been growing. I average around 6% yeild on my rental property. Yes I pay tax, yes I have the cost of upkeep but when i combine the groth in capital and the rental yeild I’m much better off than someone who invested the last 20 years of their salary into a pension fund.

Buy to regret
Buy to let is not easy. The rental market is littered with rouge agents and tenants that will take avantage of any green property investor/ landlord. You need to do your homework and protect yourself from tenants that do not pay and ‘stitch up’ letting agent contracts. Do your sums. If a property cannot yield 5%+ you are better off investing in a pension fund. The property makret may crash but as long as you can secure 5% letting yeild you are outperfoming the IFA and your property capital will recover if you are prepared to keep it for the long term.

I’ve seen plenty of ‘green’ buy to let’ers go to the wall because they thought they could keep on borrowing. Times have changed (thank God) Now if you want a good finance deal you’ll need to stick down 40% deposit. This is making the Buy to let market alot slower and a lot more considered.

Using Equity In Your Home To Buy Your First Property Development.

Equity releaseThese are tough times for raising finance especially for the potentially risky business of property development. And let’s be honest, it’s not always possible to rasie enough finance through a traditional mortgage or home loan. Mortgage companies will want to take into account your salary and any other expenses you have such as other outstanding loans. All this could prevent you from buying your first development opportunity.

What is Equity?Equity is the difference between the value of your home and what you own. So if your home is worth £300,000 and your mortgage is £100,000 you have £200,000 equity.

Why use your home Equity?
As I mentioned before, raising finance has not been easy for many so the opportunity to increase borrowing on your existing property will offer any potential lender greater security and enable you to become, in effect, a cash buyer. This will enable you to move quickly should you see a worthy opportunity, this might also put you in a favourable position as a potential buyer.

What are the risks of releasing equity from my Home?
Before you embark on any finance to purchase a property you should seek independant advice. Raising finance on your home will increase repayments and the debt you eventually need to pay back. You need to be comfortable with this before you move forward, so a conversation with an independent advisor will highlight the risks that relate to your personal situation. You could loos your home if you fail to repay the loan, so please make sure you do your sums and if anything look too tight or too risky in terms of repayments don’t do it you could lose everything and gain nothing.

Most developers I know started by raising finance on their home. It’s not ideal but to secure any property you need to be well financed. Since the financial meltdown in 2007 lenders have been far more restrictive in re mortgage products. Only a few years ago it was possible to get a 100% mortgage based on the value of your home. Today the best product I’ve seen is for 75% so shop around, use brokers and take into account the overall loan including fee’s, which in recent years have gone through the roof. Lenders will always tempt you to put any fees onto the loan but you’ll be paying back in the long term.

How do I go about releasing equity from my home?
Releasing equity is, in effect, re mortgaging your home. You’re finding another mortgage product based on an up to date valuation. To this end you need to find a product on the internet or (better still) find a product through a broker.

There are 2 sorts of mortgage brokers. Independent – those that have no tie to mortgage products and can search the entire marketplace on your behalf. These guy’s charge for the advice they dispence; typically this is done at an agreed fixed price or an hourly rate or a percentage of the loan required. The other type of motgage broker are ‘commission tied’ brokers. These guy’s are’tied’ to a limited number of mortgage products so there’s no guarentee that you’re getting a the deal. However, thay do not charge as their fee is 100% commission from the lender. I’m not sure what value these guy’s add over any online comparison site but they seem to still get business. Since 2013 many advisors can only offer advise on a fee basis due to impending changes in the way financial products can be sold in the UK. For more information or to find a mortgage adviser visit unbiased.co.uk.

 

 

Introduction to Property Developing

Property developing

Property developing can provide you financial freedom – but be prepared to bolster your knowledge.

Like most things in life, you only get out of property developing what you’re able to put in. To this end, you’re only ever going to be able to succeed in property if you have a natural love of all things property.

Now I’m not suggesting you need to be a builder or surveyor or have a trade but a basic knowledge of how things are put together can really help you to make better buying decisions. One of the best ways to gain this knowledge is to ‘ jump in’ and try and develop a property yourself. This is what I did (I had no building expereince at all , just a collins DIY manual!). There’s pro’s and cons to this. The pro’s being you get to learn quickly and the cons being ‘if you make a mistake, you have to do it again and this cost money’.

If you’re serious about property developing you should consider taking a basis course in construction. This will give you a clear understanding of how a property is constructed.

Secondly, I would recommend reading a few books on freehold/ leasehold law and conveyancing. A bit of background knowledge can help you identify a bargain and a red herring.

Property developing requires some key skills that you can learn or acquire through experience.

Basic knowledge of construction – You need to know how things are put together. Tell the difference between a stud partition and a load bearing wall. When plaster is ‘Live’, Basic plumbing and electrics. Signs of subsidence. A basic knowledge will protect you and enable you to cost modernisation costs.

An idea of tradesmen rates - You need to know what things cost and how long they take. I’ve seen plenty of bored housewives get ripped off by tradesmen charging £300 per day. For great people I always pay more but basic labour in London it’s around £80 – £120 per day. Know your costs.

Do your maths - I am no Mathematician, but I know what things cost. And here’s the key word “Everything”. Any property developer needs to take into account all their coasts including professional fees, Stamp duty on completion and sale, agent fee’s, Personal tax as well as any development costs and finance cost over the period of the development. I also add in my own time as a cost ( I hate working for free in the hope I’ll get some reward at the end). Do your maths accurately before you even consider making an offer.

Find motivated sellers - Property developing is all about profit. That means buying at below the market rate and selling above. You do this by finding tired property and developing it to a standard that will get people spending more. Just because a property requires work doesn’t mean you can buy it cheap. Find motivated sellers, always ask the question ” what is the vendors position”, “why are they selling”,”do they want a quick sell”????. Only take the motivated sellers seriously.

Sort your finance out – I know this sounds obvious but property developing doesn’t happen without finance. At any time there are 1000′s of finance products on the market, so before you go shopping it’s important to know how you are going to finance your deal and whether you can get the financing in place. I alway use the internet sites to get a general idea of what rates and fess are on offer. But I always buy through a broker, they are able to calculate the overall cost and compare wholesale product not available via retails services like moneysupermarket. Most lenders will want to see your income as a way of guarenteeing any finance. If your self employed then this may make finanicing a little more difficult but not impossible. Talk to your broker after understanding what rates and fee’s would be competitive. I wrote more on this subject a while ago.

Understand the law - Over the course of my 25 years in property development I’ve read a number of books on conveyancing and I’ve read even more deed titles and leaseholds. But I am not an expert. My basic knowledge gives me enough power to ask my conveyancer questions that any normal buyer would not identify with. There are so many potential restrictions in the deeds of a freehold and potentially even more in a leasehold so I would always recommend using the services of an expereinced conveyancer, especially if you intend to make a purchase at auction, where many lots carry some potentially difficult leaseholds such as short lease, new lease, restrictions on lease (e.g. no sub letting restricting letting potential).

Never take your legal representatives word for it, always read any legal documentation associated with your purchase. Title deeds are available at the land registry and can be downloaded for £4. Read them before handing over to your conveyancer with any questions you have. This will demostrate you are focused on the details and they need to be too and it should reduce your fee.

Act Quick - Property developing is not about taking your time. If you want to see a profit you need to act with speed and accurate judgement. This means doing your research early and planning ahead so your development can be done to plan.

For further reading check out these other posts

 

Can you make money on Repossessed Property?

Property DeveloperOK, repossessions come with bad karma, but I’ve heard plenty of stories of developers making money out of buying repossessed property. The temptation of buying a repo is led by the thought of a bank seeking a quick sale and a property that is tired and requiring modernisation.

The truth is there are some repo properties that fall into this category and some developers are lucky enough to buy at below market value. But for the vast majority of repo’s (and certainly in my expereince) it’s hard to find a bargain with a repo. Here’s why.

Once a property become vaccant it is normaly ‘given’ to a mangement company who has the job of looking after the property and the overall responsibily of getting the best price for the bank (thier client). The management compnay will secure the property and instruct an estate agent to act on their behalf to sell the property. All well and good.

So, the agent rings around their list of developers and on day 2 the property recieves 10 viewings. And on day 3 there is an offer; it’s reasonable enough and the buyers in a good position so the agent puts the offer forward to the management company. Then, surprise, surprise, the offer is rejected.

Here’s what’s going on. The management has the responsibily for getting the highest price possible for the property. This is fair enough. What people don’t know is the management compnay (who you’ll never come into contact with) are paid a retainer to management property. This is normally done on a weekly or monthly basis. So tell me, why would any management company want to sell a property quickly, even if it was a great offer?

The problem with repro buyis is just this. Management companies don’t always, in my opinion, act in the interests of their clients but the interestes of themselves.

The other problem with repro buying is that they tend to be very heavily marketed. Even when an offer is made the agent has to publicly advertise the offer before accepting it. This makes it easy for other interested buyer to counter offer leaving both agent and buyers with a potential line of guzzumpt offers as well as line of peed off buyers.

Whilst I’ve never been able to buy a repro at a price that was right for me, I do know people that have. The trick, they say, is to work with the estate agent. Most expereinced agents know the situation with management companies, so they’re reluctant to put offers forward too early. By working with an agent they will save their time and expense and you get to put in the offer at the right time. A time when the management company is expecting the property to sell.

Of course, many repos go straight to auction which may be a better sales route for both buyer and the bank. So if you still think you can get a bargain from a repro try the auctions first. You’ll avoid the management agents and the counter offers and it could be a far better route.

Finally, and it goes without saying really, repos come with a history. An evicted family who lost their family home or just someone who bit off more than they could chew. Whilst you might see your purchase as business transaction any new neighbours might not. Any repro purchanse needs to be handled with sensitivity and diplomancy from the outset.

 

 

Property developer Style Negotiation

Property DeveloperI’m often writing about how being a property developer is not a “Get rich quick” route, but in this post I’d like to point out how some good negociation techniques can help deliver you a life changing porperty deal that could set you up for life.

Let me explain. 5 years ago I was developing flats in South West London. I was given the opportunity to by a detached 3 bed house. It was a munter. It had been on the market for over 12 months and every agent in the area couldn’t shift it. I had just sold a flat and was looking for another to develop. The house had caught my eye in the local paper some 10 months ago so I was surprised to see it again online. I called the agent to understand what was going on. They told me that there had been a number of buyer fall through and the seller was now desperate to move on. The asking price was well in excess of what I could afford, but the economic climate was against everyone in 2008, so I thought I’d put in a really low offer to see what reaction I got.

I thought the agent would call me back with an out right “No” but to my surprise he tried to negotiate with me. Now here’s my first tip in the art of negotiation. When you have nothing to loose (i.e. nothing to sell) you are in the winning position and you have to use it. Stand your ground whenever an agent tries to necotiate the price up. Remember there is always more development opportunities around the corner, don’t get blinded by this one opportunity, their will be others.

Back to my story. When I refused to move from my original offer price (30% below the asking) I was expecting things to go silent. 2 days later I got a call…

“Are you sitting down” said the agent. “my client would like to accept your offer”.

I had managed to buy a 3 bed detached house for the price of the 2 bed flat. This was a life changing deal and it was all because I knew the vendors position and how long the property had been on the market. Proof that sometimes you need to stand your ground when you know you are in a winning position. Proof that you should always make a note of propoerty that struggle to sell and deliver highly motivated sellers. Proof that you can make life changing deals even when the property market is in the toilet.

Most of the time being a property developer is pretty hard work. Finding development, raising finance, construction, and then the same again but every now and again you get given (by chance mostly) a life changing opportunity that can truely change things around.

London Property Developers

London Property DeveloperLondon stands alone as a property market in the UK. A transient Place where people from all over the world come to work, study and live. This gives the London Property Market a unique status as one of the world most expensive places to live. An average house prices is nearly £500k and a 1 bed flat is close to £200k, compare that to the national average house price of £240k and you can see why London can be an expensive place to live.

Continue reading

Find Property for Development

Find Property DevelopmentLooking for property for development? Dont know where to start? New to property development? You’ve probably been tempted by a few companies promissing to offer a list of reprossession and pre auction properties for a ‘small fee’ from a Google search. I know, I was in the same boat. Some years ago I didn’t know where to start. The estate agents all seemed to want so much and I understood it was their job to get the best price they possibly could for the properties they wanted to sell.

I needed a way of buying property cheap.
Continue reading

Property Development Insurance

BuildersIf you’re a regular visitor to this blog you would know by now that Property development is not a quick way to make guaranteed profits from your time and investment. The property developers path is full of risks. It’s why so many developers get insurance cover for any construction work they undertake. Now there’s a few specific Insurance areas of cover I’d like to outline below:

Continue reading

Buying from an Estate Agent

Property DeveloperLet’s be honest, no one likes estate agents. For outsiders they can seem intimidating places, full of aggressive sales people looking to sell you something you don’t want.

But before you judge them too hard here something to remember. Estate agents work on commission, they get paid on the sales they make. They also work on behalf of the vendor to get the best sale price for their commission. This is perhap why they’re often seen in such a negative light. Trying to push up prices and sell small cramped studio flats as ‘pier d’teir’!!

Continue reading

Property Development Finance

cashI’ve heard a lot of complaining from my close Property Developer friends about a lack of mortgage products in the market for developers. Borrowing money on assets that are worth less than the market rate isn’t something banks like to do, so there’s nothing new here. However if you are struggling to get the finance you need and you’ve tried independent advice to no avail then you could try these sources. Just keep in mind I’m not offering financial advise here, just some good sources of info for your own due diligence.

Continue reading