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Top Ten Buy to Let Mistakes

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Top Ten Buy to Let Mistakes Powered By Docstoc
					   How to build a Buy To Let portfolio and avoid the top ten
         common mistakes that others have made.


It is important to recognise that Buy To Let is a market, and as with all markets
they can rise as well as fall in value and or popularity.

Many people entering the Buy To Let market are doing so as a result of one or all
of the following:-

       Peer Pressure –                    Everybody else has got one so I must
                                          as well.
       Poor Investment performance -      My pensions have been failing for the
                                          last 5 years and the property market is
                                          booming.
       TV/Press reviews -                 Recent television programmes show
                                          that renovating and letting properties
                                          looks easy.
       Surplus Property-                  As a result of Divorces/separations etc

Having been advisers to people and businesses that are involved in the Buy To
Let market over many years we have close knowledge of both the downside and
upside of this market.

The next couple of pages are our views on why many people are not doing as well
as they could or in some cases even failing.


Mistake 1: Investors have no plan or direction when buying an
investment property - there is no end goal.

This has got to be the main shortcoming we have experienced over the years.
The majority of people do not even recognise that Buy To Let is an INVESTMENT
and needs to be approached as such and in our view should be treated as a
business.

You will notice that throughout this report we refer to individuals as INVESTORS
but the failings are made by those that consider themselves as a landlord or
someone that has additional properties.

Our favourite phrase, provided by a client many years ago, is that of Saturday
Afternoon landlord, what was meant by this was given in the following example
which is a true case:

A couple were shopping on a weekend in an area that they didn’t frequently visit.
After taking a wrong turn they turned into a street containing several estate
agents. As they were already in a shopping mode they continued down the street
looking in each estate agents window as they passed. Eventually they both looked
upon a tidy almost new 2 bedroom house within 2-3 miles of the estate agents
premises. The agent had a key and they viewed the property that afternoon.
They had got caught up in the overall Buy to Let frenzy that is all around us with
friends and colleagues owning property and constantly being in the press or on
TV. Before they knew it they were agreeing that it was a lovely house and they
KNEW they could “Rent it out” they had their offer accepted and had seen the
estate agents mortgage adviser and arranged a mortgage all in that afternoon. A



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fairly normal conveyancing period later they were the proud owners of a spare
property!

They had now become Saturday afternoon landlords! See how many of the other
top ten mistakes this couple and others people have made!

Recent research has estimated that as much as 40% of Buy to Let purchases are
made in this way with a further 30% made up by those that inherit a property
and think they can make money or they buy another property to live in whilst
they keep their current property as a Buy To Let.

All these people have missed the point that a business needs a plan; this is why
they are called business plans. A business plan for Buy To Let can simply be a set
of goals. Goal setting is a whole other area which further information can be
provided on request, however for the purposes of this report the following
thought provokers would be a start:-

   •   Do you want to build a surplus income per month or do you want to build
       a capital amount? For either of these points the question needs to be “How
       Much”? It is important to recognise that in general an income producing
       asset does not increase in value at the same rate as a capital producing
       asset. However the capital producing asset most likely will not generate
       enough income to cover all your costs!

   •   How many properties do you want to invest in? How much is enough? Not
       everyone will have the same answer and there is NO right or wrong
       answer it is purely what suits your needs.

   •   What type of property do you want to own? Small residential, Large
       Residential, Housing Association, Student accommodation, Commercial
       Premises (Shops & Offices)

   •   What is your exit strategy? When will you sell? Why sell? If you agree that
       the Buy To Let market is a long term investment why would you sell? A
       mistake made by many is to sell too soon; they have therefore missed out
       on the effects of compound growth.

       We should never confuse the UK with America, France or Germany and
       other countries. These countries have vast areas of land available for
       building development and in comparison we are extremely small. We are
       an island that is running out of land to develop; land is not being made
       any more so the developers and councils have to create new and
       imaginative ways of allowing new-builds to be made. Brown-field sites
       (commercial areas, old factory/mill sites etc) have been tried and have
       failed due to the high cost of clearing up any land contamination. Green-
       field sites are always opposed by the “Not in my back yard” objectors.
       1960’s high rise flats are being demolished to make way for new better
       built buildings but are still in the areas that most people do not want to
       invest in - they still have the social problems in that geographical area.
       On top of the lack of land we have another issue, the population is living
       longer and the population is growing MASSIVELY! New EU member
       immigrants are arriving in the UK in their thousands, they all want
       somewhere to live and most do not want to buy as they are sending their
       money back home. When all these factors are coupled together the supply
       and demand rules come into play and house prices will over the long term
       increase.




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       These are the factors that have influenced the housing market over the
       last decade and in fact to some degree over the last 60 years. Ask your
       parents and grand parents what price they paid for their first property –
       did they think it was expensive at the time and couldn’t see it going any
       higher?

       Warning: There will always be fluctuations and corrections in the market.
       What we don’t know will be when and by how much so if you are going to
       sell your investment property, picking the right time is vital.

   •   Finally - When do you want to achieve each goal?


Mistake 2: Those with a plan only plan for the short term.

In the context of this report a short term plan is considered as up to 2 years.
Many people mix Buy To Let with Trading. Trading or flipping is when a property
is bought at under its true value either because the vendor is desperate to off
load it or it needs renovating etc. (there are many other reasons why a property
may be bought under value) The property is then resold after works have been
carried out or marketed better or just a different time of year and sold to make a
profit. This is a business in itself and a very profitable one but should NEVER be
confused with Buy To Let!

Some investors are confusing these two and buying a property that they believe
they can flip and if they can’t they will rent it and then sell it later. The truth is
that for the first 6 months most people get away with this as currently we are in a
rising market and tenant demand is high because they cannot afford to buy.
However the 2nd rental period is often much harder. The cost of the money has
increased, management costs are not being covered by the rent and the property
is showing signs of wear and tear knocking down its resale value and the person
didn’t expect to be a landlord.

This is all as a result of a short term plan if any. Currently most Buy to Let
mortgage deals are very attractive for the first 2 years then the costs increase -
on some occasions by 2%. Then the deal doesn’t work or as some investors say
”wipe its face”. What happens in year 3? Yes you should consider refinancing to
obtain the best deal available at that time, but if you borrowed to the maximum
to purchase it you will need property prices to have increased in order to obtain a
like-for-like mortgage so that all the fees and costs can be taken into account.
Most of the low 2 year deals at the moment have either an overhang on the
penalty (that is to say you will have to pay a penalty possibly 6% of the mortgage
to move or stay with that lender on their higher standard variable rate for
another year or two) or as much as a 2% arrangement fee that was added to the
loan in the first place. These charges need to be covered either by the re-
mortgage or by your own income.

The danger of the short term plan is assuming that the growth in the property
market that we have enjoyed for the last 10 years or so will continue. This is a
MASSIVE assumption that simply cannot be made. Strong businesses will make
contingency plans for down times and weak economic periods etc. What if the
market changes, house prices start falling, the government imposes a second
property tax, Buy to Let mortgage criteria changes against you? All these points
and more need to be factored into the plan and your decision to invest.




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Just as an aside: - we can’t wait to see these property renovation programmes in
a declining market. The applicants so far have nearly always made money even
with the mistakes made (especially ignoring the professional advice provided) just
because the market is still buoyant. How many will end up with negative equity in
a slump?


Mistake 3: Setting the wrong type of goal so that there is no
measurement of progress or comparisons are made against the wrong
benchmark

Although we don’t want to go into goals here in any great detail it is important to
understand the basics. The goal setting must follow the S.M.A.R.T. acronym and
to work at its best should be written down and kept somewhere that you will see
it and read it on a daily basis.

   S.         Specific – Details will always give better guidelines and ultimately
              better results. The goal is for you, no one else will see it, write
              down as much detail as possible about your desire to succeed in
              the property market.
   M.         Measurable - Number of properties, types of properties, value of
              properties, amount of equity in properties
   A.         Achievable - It is possible to make offers on 1 property (or more)
              per week, it is not possible to complete on 1 property per week.
   R.         Realistic – Choose what is realistic for your goals, if you have
              enough deposit available it is realistic to buy 30 properties in a
              year, however if your goal is to own 3 properties these two parts
              will conflict with each other and the goal will become self defeating.
   T          Time bound - When will it be finished, completed. Put a date on it.

An original goal of becoming a millionaire in property could be achieved by buying
one big house in the south east but with a very big mortgage. This could be done
within say 2 months. However it doesn’t mean anything in real terms, what you
should be aiming for is a balanced portfolio with a million pounds worth of equity.
By setting the goals in the way shown above you can then plot your progress and
measure how well you are doing against your own plan and most importantly not
by somebody else’s plan or their portfolio.


Mistake 4: Investors fail to get the best advice and get the best Buy to
Let mortgage for their circumstances.

If you get this part wrong it can and will cost you THOUSANDS of pounds over the
mortgage term. The correct mortgage advice is as important as buying the
correct property for your portfolio.

At the time of writing there are over 50 lenders that will arrange Buy To Let
mortgages. The majority of these lenders are the specialist divisions of other
(possibly high street) lenders. These lenders then offer different schemes to
direct applications to those offered via third parties known as packagers. There
are more schemes available to mortgage brokers than are available direct to the
public.

People that we have had to help rectify their initial mistakes have been triggered
by headline hitting low rates. They haven’t examined the detail carefully and have
missed the large tie-in penalties or the upfront lender arrangement fees now as
high as 3% which are added to the loan and seem to be forgotten about.



                                                                                  4
A good broker will source the whole of the available market for you and make a
recommendation based upon a number of factors such as property type, tenant
type, rental income achievable, your own particular circumstances and your own
goals to be achieved etc. Broker fees vary dramatically, if you take notice of the
finance advertisements on television the small print will show fees due of
between 2% and 10% of the loan applied for. This fee needs to be factored in to
the whole equation. It is however a legitimate fee to deduct against any profits to
reduce your tax liability.

For the record All Things Financial charge a 1% fee on successful completion of
the mortgage. We do not charge a fee upfront and then disappear with you
wondering what is being done if anything. We believe that we should be paid on
our results. Our initial consultations with our clients and prospective clients will
quickly show if a case is feasible, from that point we are taking on the risk of the
work involved and time consumed in order to get paid at the end of the
transaction. As you are or will be running a business with your Buy to Lets so we
also are running a business.

We have found and proved many times in the past that by using All Things
Financial as your mortgage broker the fee has paid for itself several times over in
the savings made on both Buy to Let mortgages and our clients’ main residential
mortgages - not to mention all the help and advice that is provided.


Once the most suitable mortgage has been sourced how
and should do you repay it?

The two main mortgage types are Capital and Interest repayment (where the
debt reduces to zero over the full term) and Interest Only (the debt remains the
same throughout the term).

Depending on your goals for your portfolio there are pro’s and con’s for both
types.

Capital and Interest repayment mortgage:
Each payment consists of an amount of capital and an amount of interest being
repaid. At the beginning of the term it is mostly interest and a very small amount
of capital and latterly it is reversed so it is mainly capital with a small amount of
interest being repaid. The monthly payment amount itself does not change
(unless the interest rate charged alters).

This has the advantage of the investment property being eventually free from
mortgage after a particular length of time and the investor thinks that they can
then live off the rental income that the unencumbered property will then
generate.
Also if the investor has a cautious attitude to risk then having a mortgage paid
down will provide more equity for the investor.

The disadvantages are that as an amount of capital is included in the monthly
payment the monthly mortgage cost will be higher than the alternative interest-
only option. In the majority of cases these days with property prices as high as
they are, the mortgage will not be covered by the rent generated by the property.
The investor now may find him/herself in the position of having to “top up” the
rental income to cover the cost.
It may be possible to have the monthly mortgage amount at or near the rent if a
long (25 year) mortgage term is taken. This isn’t necessarily a problem if the



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investor is under the age of 40 and wants an income free from mortgage when
he/she retires at age 65. What happens if the investor is 50 plus? The rental
income free of mortgage won’t happen until age 75 and this is far too late for
most.
The next problem is that even if the rent does cover the mortgage payment the
investor can only reclaim the interest portion of the payment against tax! The
Inland Revenue in most cases prefers to use the Gross Profile method of interest
calculation. Effectively they even out the interest to be repaid over the full
mortgage term and you are told what interest element you can claim. If you only
end up keeping the repayment mortgage for a few years you have then been
outdone of a large amount of interest relief.

However the major disadvantage is if you are going to keep your properties long
term and then remortgage them as the values increase to release equity to use
as another Buy to Let deposit. Why struggle to make a much larger payment each
month than is necessary and not reduce the capital amount by any significant
amount only to re-borrow against the property in the next couple of years?

Interest only mortgage:
Each monthly payment is only the interest owed to the lender for that month. If
the interest rate remains unaltered the payment will stay the same and at the
end of the mortgage term you will be required to make a one off lump sum
payment to clear the debt. In this case you are effectively renting from a financial
institution! The difference here is that any property value increase is owned by
you and not the finance company.
If you took this type of mortgage on your main residence the lender would
require you or expect you to have some investment vehicle to repay the
outstanding balance on maturity: NOT SO on a Buy to Let mortgage!

The disadvantages to this type are that some investors believe they need to own
the property in order to make money and with this method they will never own it.
If property prices fall dramatically in the future you will find yourself in a position
of negative equity. To balance that part of the argument out, in the property
crash of the 1990’s the market fell so dramatically even those on repayment
mortgages found themselves in negative equity!

Remember what happens in a crash? Homeowners lose faith in the value of their
home; they panic sell believing that only then will they achieve the best price for
their home. Once sold they don’t want to buy as they will be buying as prices are
crashing. They believe they will make the wrong decision so they become
tenants. As more and more tenants appear, supply and demand rules kick in and
the rental incomes increase. Your pool of prospective tenants increases giving the
professional landlord/investor plenty of choice.

The advantage of Interest Only mortgages is that the monthly payment is
considerably cheaper. This means the property can then become self-paying or
even produce an income from the beginning. The taxman allows the investor to
claim all the interest paid against the rental received so dramatically reducing the
investor’s tax liability.

A valid question might be what happens at the end of the mortgage term be it
15, 20 or 25 years away. Well firstly, if you follow the plan to build a portfolio it
will be highly unlikely that you will still have the same mortgage at the end of
that term as you will have refinanced several times during the property’s lifetime.
But let us follow this argument through. In 20 years time you might be retired
and have no salary to back you up. Is the lender going to ask you to repay the
loan? Probably not is the truthful answer. Buy to Let is still an emerging market.



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At the time of writing it accounts for approximately 15% of the mortgage market
as a whole. In the early days there wasn’t even a Buy to Let mortgage, we had to
negotiate bank loans for our clients or raise the money solely on their own home.
You needed a salary often in excess of £30,000 and had to have your own
mortgage fully paid and up to date and it had to be fully repaid by age 65. Now
none of these are true! The lenders have realised that when someone reaches the
age of 65 and repays their loan they aren’t any better off, they have just lost a
customer! They have to perform for their shareholders and so are coming up with
innovative methods all the time to continue lending now and in the future. It is
our best guess that the existing lender will simply offer you new terms. In any
case we now have access to lenders that do not require a repayment date on Buy
to Let mortgages, they simply need a term to enter on the contract documents.


Mistake 5: Investors get too personal with the choice of properties

Many would-be investor’s judge the properties that they are looking at buying
against the property that they already live in or the next property that they would
like to live in! It is inherent in our nature that we want to improve upon our own
position and as a result people preclude potentially great income earners because
they wouldn’t live there!

Well here is some news for you, YOU WILL NOT BE LIVING THERE!

Too many people end up with the more expensive property types that will
generally produce a lower return or be harder to let and also need a larger
deposit to fund the purchase to make the rental calculation to mortgage fit.
They do this at the expense of passing up smaller more manageable properties
that could produce higher returns and always be in demand.

It is also worth while pointing out here about the interior and décor of the
proposed purchase.

Please do not pre-judge what your tenant will or will not like. At the initial stages
unless you have already sourced a tenant you will not know why they want to be
a tenant. It can be for a myriad of reasons - unable to obtain credit for a
mortgage, unable to save quickly enough for a deposit, type of employment and
or job means they are relocated frequently, divorce, separation, bad financial
experiences with a previous mortgage or immigrants sending most of their money
home.

Unless you are aiming for the executive Buy to Let market all of these tenants will
put up with or not be bothered with a yellow or avocado pear bathroom suite or
floral wall paper. The secret is IT MUST BE CLEAN. In our experience over the
years the overriding factor has been clean, warm and safe. Bear this in mind
when sourcing your properties and remember your goals: are you looking for Buy
To Let or Flipping a property? This is where the differences start to show.


Mistake 6: Investors fail to carry out “due diligence”; this means they fail
to research the area where tenants want to be.

Due Diligence is the commercial phrase for saying, taking great care and being
thorough in your research for a suitable property.

Where do you start?




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Firstly what is in demand in the area where you wish to create your portfolio?
Scour the local papers; search the property to let adverts. What do they have too
much off? What is in short supply? Contact letting agents firstly as a prospective
tenant. See how they treat you as a tenant. (You may wish to use their services
later) Later go back as a prospective landlord and see how they treat you now.
Do the 2 sides of the service match up.

We have clients that place small classified adverts in the local paper for properties
to let, (with or without rental prices) and then wait to see what enquiries come in.
Based on the replies they will then go out and source properties to suit the
demand they have found exists.

What is in the local area? Good schools, shops, bus route, employment prospects
or good transport links to other towns/cities?

A mistake frequently made by people is to ask an estate agent what properties
they have that will rent well! NEVER, NEVER ask an estate agent that question.
Why? They are sellers of houses and work for the vendor (person selling) and if
you buy from them and then can’t let it you have no comeback as it is nothing to
do with them!

Currently first time buyers are struggling to get on the property ladder. Property
prices are increasing faster than they can save for a deposit and income multiples
necessary to obtain a mortgage or up to 5 times income. New affordability
calculations by lenders to overcome this problem will actually lend up to 11 times
the applicants gross salary in some cases.

So if a First time Buyer is struggling and they still have to live somewhere why
not buy a first time buyer type property. At the time of writing in the South West
2 bed new build properties are flying off the shelves to Buy to Let investors. This
can be a winning combination with an abundant supply of tenants who will be
available for your new purchase and can almost eliminate void periods.

However a low level ladder rung 2 bed house will not increase in value as much
as a mid rung or even higher rung executive house. Now you might think this is
going against the advice given earlier but the portfolio of properties needs to be
balanced. More about this later!


Mistake 7: Investors tend to underestimate the costs associated with an
investment property

At the beginning of all consultations with new investor landlords we discuss the
anticipated returns that will be made from their new property purchase. It is
always a big discussion point as we find that people expect to keep far too much
of the rent generated.

Remember, as mentioned earlier, you are or will be/should be running it as a
business and as such will have business related costs. These costs are typically as
follows (but not limited to these):

   •   Buy to Let interest rates are slightly dearer than normal residential
       mortgages, the margin has reduced dramatically in recent times but never
       the less they can be more expensive.
   •   Arrangement fees by the lender are increasing and can now be as much as
       2-3% of the loan.




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   •   Letting agents will charge generally between 10-15% of the rental income,
       reductions can be achieved if you give the agent more properties to look
       after.
   •   Landlords Building and Contents insurance is a specialist insurance,
       normal household insurance will not do the job. If your property suffers a
       catastrophe such as fire, flood or vandalism YOU have to put up the tenant
       until the property is fit to live in.
   •   Legal insurance although not mandatory we believe it is a must. You don’t
       want to lose all that profit that you have made to a disgruntled tenant just
       to prove your innocence.
   •   The property must be maintained to a specific standard, it must have
       annual gas and electricity checks with certificates of safety produced.
   •   Void periods, you are responsible for making the mortgage payments even
       if your tenant doesn’t. Void periods (spells of no income) can arrive for a
       number of reasons such as tenant change over times, one tenant leaves
       but you can’t find another tenant to move in for another month or two.
       Tenants off sick/redundant; in our experience tenants will have little or no
       insurance protection in place to continue making payments for their rent.
       Bad tenants that refuse to pay. Or a bad letting agent that fails to pass on
       the rent received either in a timely manner or even at all in some
       circumstances. It is important to ask around and check out the letting
       agent as well as the tenant, see if they are members of ARLA, the letting
       agent association, if you suffer from a bad agent they may well be able to
       apply pressure for poor service etc.

All this comes at a cost and needs to be factored in to the whole financing deal.

If the figures don’t add up then that is not the property for you, if you already
own the property and it isn’t providing the required cash flow first look into
refinancing the property if it still doesn’t work then that is a valid reason to cut
your losses and sell and then source a more suitable property.


Mistake 8: Investors overestimate how easy it is to set up a Buy To Let
portfolio and overestimate the rental income received on a property.

This mistake is linked with the previous mistake.

Firstly let’s clear up the myth about how easy it is to set up a Buy To Let
portfolio. Well as we mention in the next mistake anybody can do it and it seems
that anybody is doing it, but are they doing it right? We believe that they are not
doing it right for all the reasons discussed above.

The question should be: is it easy to set up a business, trade legally and
profitably and manage a self sustainable business for the next 10, 15, 20 years or
longer? The answer has to be NO!

But don’t let that put you off, if it was easy then everybody would be running
their own businesses (not just property businesses) and be millionaires.

It is however a lot easier to follow a plan, someone else’s plan. This in business
terms is a franchise. There are many franchises around us such as Macdonald,
Burger King, KFC, Cartridge World, OMO etc. These all survive because a business
has been set up previously and traded well and if the principles are copied the
next one set up will be similarly successful.




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Please don’t misunderstand us here, we are not selling a property franchise but
explaining that if you follow a plan such as the basics that you have here your
portfolio will turn into what you want it to be but it will have a much greater
chance of success that someone just buying properties at random.

The trick is to measure your plans progress and keep reviewing your position and
the market place as you progress, keep adding to your knowledge to ensure that
you keep abreast with new developments and legislation.

Rental estimations are sometimes way off. People start with a figure for £100,000
house and then multiply it by 3 for a £300,000 house. This simply isn’t the case.
The guess work needs to be removed and we go back to a previous mistake not
carrying out due diligence to obtain a true figure. The £300,000 house may look
more impressive and indeed probably will increase more in value than the
£100,000 house but that is no consolation if the property cannot be let and you
have to fund the mortgage from your own income.

The last thing you want to do is impair your own credit rating because of
defaulting on your Buy to Let mortgages.


Mistake 9: Too many investors rely on others to build a portfolio instead
of getting involved themselves leading to Lack of portfolio balancing

Property Clubs: There are a great many new organisations that have sprung up
over the last few years offering to build a property portfolio for you for a tidy
sum. Others offer to make you a property millionaire within a year and still more
will offer you properties with a built in discount or ready made equity.

What’s wrong with that? Well we believe several things are flawed with this
arrangement.

Firstly and possibly the most important is linked with the first mistake. They do
not have YOUR plan, goal or vision of YOUR future. They will be offering you
properties that they need to shift - not necessarily what you want to buy. People
get caught up in the hype about guaranteed or built-in equity or no deposits
required and they miss the first big mistake of correct goal planning for your own
requirements.

Next they are selling properties, so by implication they are representing the
vendor and not you! They will be getting paid by the vendor and they will be
charging you a fee to so-called ‘find’ this property. We believe that this is a
conflict of interest and can and will only lead to trouble.


Next it is fair to say the fast majority (though not all) of the properties sourced by
these organisations are flats/apartments. Nothing wrong in that you might say,
but we disagree. You will be one prospective purchaser out of 100’s on the
organisations lists.

Imagine this scenario: they release 20 properties from one of their developments
that needs no money down, provides a positive monthly income of £100 and has
built-in equity of 15%. They are all brand new so no work needs doing to them.
Act fast! Only 20 available! Investors waiting to buy! Call now with your credit
card to reserve your plot! - Away you go!

This is typical of offers being made at the current time. But here is the problem:



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desperate not to lose out, the firm’s applicants will be calling up to reserve. All 20
go in that one day to say 15 landlords (some will buy more than 1 plot). After
normally a 4 week completion (they rush it through to avoid anyone changing
their minds) you then have a buy to let property that needs a tenant.

You place an advert or instruct a letting agent only to find that they already know
about the development and have half a dozen properties already to let on their
books. Supply is now high and so unfortunately demand is spread between the 20
properties and 15 landlords that you know have just purchased but what about
the private individuals that negotiated their own deals they too are also trying to
let at the same time?

The advert says that they are brand new. They are all the same. Is this a plus
point in this case? We are not sure. There are now at least 20 boxes available to
let so why will a tenant choose yours over the next one? You will have to make
yours different in some way to gain the advantage. We know investors that will
pay for cleaners and gardeners, Sky TV and in some places in London a maid
service just to get the edge.

Do you reduce your rent just to get someone in there? Can you afford to do this?
Were the firm’s figures about rental to be achieved accurate? Did any of you carry
out due diligence?

What if someone else reduces the rent to get a tenant? Do you now have to
reduce your asking rent just to compete?

Don’t worry, you say, I have all that equity built in - I will just sell it and get
some free money. What if the others are thinking that? You are now competing
on a sale price against everybody else not a rental price. What will happen to the
property values in that area if everybody sells? They will go down, maybe
temporarily but they will go down.

Valuers for mortgages have to carry out comparables with other similar sold
properties. They will be comparing against your sale prices and so they will see
evidence that the expected prices cannot be obtained and so they will start down-
valuing. What if you are the one that hasn’t yet sold or you may have other units
in the same area, your portfolio value is now falling!

Whilst all this is going on the firm has now released another batch of 20
properties! The problems continue.

We have been on some of these seminars and in one case acted for 2 firms that
did this. However that came to an end when we found out that the attendees
were being told exaggerated truths and we had to put them straight! We have
also worked for a national builder and have had close associations with 2 other
national builders.

The property organisations will try to convince you (although they don’t need to
try to hard - greed does the hard work) that the developer (builder) needs to sell
quickly to release money to build more properties. This is not true. They need to
sell to satisfy their shareholders. They can borrow from their banks on the
properties that have exchanged (not even built) so shortfall of cash is not the
answer.

The 15% equity- we would be cautious about this figure. They cannot blatantly lie
and the developers to our knowledge don’t. They will be able to prove a property
has sold at a particular price in the past and that is the point: how long ago in the



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past? Has the market slowed since then? Has a major employer in the area laid
workers off? Have interest rates increased since then?

If they were worth that money the developer would be selling them at that
money. They have targets to hit and if they can shift a large number in one hit
then yes it makes sense to provide a discount. The moral is please be aware of
discounts.

Finally, the negative that we cannot provide an answer too and have never heard
a reasonable answer provided for by any of these clubs is: if the deal as shown in
the scenario above is so great why would they ever sell the property to anyone
else? Surely they would keep the property for themselves! Properties can be
bought in sole names and partnerships and Limited company names so lack of
funding cannot be the reason.

The only explanation we can assume is that it doesn’t fit with their firms’ goals of
property ownership. This could be a valid reason, so what could their goal be? To
make as quick a profit as possible by selling seminars that increase in cost the
longer they go on for and so say divulge more secrets about property portfolio
building to as many people as possible who are too lazy to build a property
business themselves! We don’t know - you decide.

OK that’s the down side - is there a plus side? Well yes there can be genuine
firms out there that are providing a service for you if you are too busy or lazy or
lack confidence to do it yourself.

Flats and apartments can be good to hold onto but there are other costs to take
into account such as a management charge. Some of these management charges
can wipe out all the positive cash flow that you were expecting to receive and
more so beware.

On a personal note we do not prefer flats and apartments for the simple reason
we am not in control of the maintenance of the building. For example the top
floor flat may require work doing to the roof to prevent water leakage. Obviously
a problem to that owner/tenant. However if All Things Financial own the ground
floor flat it doesn’t affect us but we have to share the cost and if there isn’t
enough funds in the management account All Things Financial as owner/tenant
will have to share the remaining bill. What happens if we haven’t got access to
that amount of funding at that time?

By sticking to houses (or buying all the flats in the block) we remain in control of
when expenses are paid. But that is just us!


Mistake 10: Investors fail to invest in improving their knowledge

We live in a Nanny state; the government (no matter who gets in) can’t help but
interfere in what we do, what we try to do and how we do it. For this reason
alone it is vital that the true property investors’ knowledge is continually updated.

Crossing legislation can cause you serious financial implications. You owe it to
yourself to keep abreast of current trends, changes to the regulations and laws.

This is not a cost it is an investment in your own business rather like a metal
working plant invests in new machinery; your machinery will be knowledge!




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Description: Top Ten Buy to Let Mistakes