About The Author

Mat has been an active property investor since 1993, for the most part whilst holding
down a career in the Royal Air Force. At first, due to an overseas posting, he became an
“accidental landlord” for a small property in the town of Reading in South East England.
When work required him to move, he could not sell the house and was in negative equity
so was forced to rent it out. He rented that property and bought more each time the
military posted him to a new location.
It started through necessity but it became quickly obvious that this business, which took
very little time, was making more money for his growing family than from his Royal Air
Force could ever do. Mat was in a position to give up his day job by 2003 but lacked
the confidence to make the leap until 2006 when, having accrued a portfolio of over 50
properties, he became a full-time investor and retired from the military. Enjoying his
new found freedom, Mat continues to grow his property portfolio, now standing at 170
properties across Europe and USA. Mat now helps other investors meet their goals,
whatever they are, through property. A small team of like-minded investors make up
the team “ProVenture” and love meeting new investors and helping where we can. Our
current area of work and example properties can be found at:

www.ProventureProperty.com

Fourth Edition
All prices and rates correct as of March 2011

Copyright © 2011 by Matthew Littlecott

All rights reserved

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 Contents

Introduction........................................................................................................................... 3

Chapter 1 - Why Property? ...................................................................................................5

Chapter 2 - Outcomes for Property – What Do You Want to Achieve?.................................9

Chapter 3 - The Location Hunter.........................................................................................14

Chapter 4 – Purchasing Well – Evaluating and Securing an Investment..............................20

Chapter 5 – What to Buy and From Whom.........................................................................31

Chapter 6 – People Not Bricks – The Secret to Success.......................................................40

Chapter 7 – The Management of Risks................................................................................45

Chapter 8 – You are a CEO...................................................................................................48

Chapter 9 – Finance and Currency - Getting bang for your buck . ......................................54

Chapter 10 – Location, Timing, Location – Bringing it all together . ...................................56

Chapter 11 – Selling Your Investment . ...............................................................................62

Appendix 1 – The German Property Market.......................................................................63

Appendix 2 – The UK Property Market ...............................................................................70

Appendix 3 - The US Property Market.................................................................................73

Appendix 4 – About ProVenture Property...........................................................................76

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 Introduction
What will you get out of reading this?
I pride myself in aiming to be the best landlord in the business, having bought the most
profitable properties on the market, after having undertaken the most comprehensive
research possible. Of course, there is always room to improve your performance in such a
fluid business but I am always striving to minimise risk and maximise profit from property in
the most professional and, dare I say, ethical, manner. If you are the sort of person who sees
potential in making money from property but is reluctant to take the ‘gambler’s’ approach in
the capital growth speculation game, then read on. I like hard, logical facts and figures but
like to keep things simple; I need steady, significant monthly income to feed my family and
keep my wife in shoes, and the capital growth comes as a pleasant addition, and my strategy
works. Let’s hope it will work for you.

Thank you for setting your valuable time aside to read this book. I intend to repay your
investment of your time by discussing in-depth every aspect of property investment. This
book has been written to investigate:

• What makes property special as an investment class.

• What kind of Investor you are and what you want to achieve.
• Techniques to locate great property that fits your objectives.
• The tools used to make sure an investment will make you money, now
and in the future.
• Why people are so important in a business involving bricks and mortar.
• Getting your finances and tax positions right to maximise your return.
• How to sell your property, eventually, for the maximum gain.
That’s a lot of subjects to cover, so I will get to the point very quickly in each chapter but
develop the ideas in a logical way. Of crucial importance are the exercises at the end of each
chapter. Please try to do this in full or at least consider the exercise in your mind before
moving onto the next chapter. In this way, you should arrive at a plan of action at the end of
the book to go forward into or continue your property career.

Why I Wrote This Book

In the last 10 years how many books and ebooks do you think have been published regarding
property investment? Quite a few! How many were written during the 10 years before that?
Very few, and I know because I was looking for books to read around 16 years ago on the topic
of property investment. Now why is that? Well across the world during the last 10 years we
have experienced an abundance of easily-accessible credit that just had to go somewhere.
Books on all aspects of property development and investment were written (and indeed
countless others on a range of subjects on how we could spend our hard-earned cash or
our unearned money from our property appreciating in value). Of the property investment
books issued in the last 10 years, most (not all) focused on building portfolios of property by
a system of re-financing current mortgages in order to take on new mortgages. They focused
on capitalising on the new freedom with which the banks had with the money which they
lent. I remember calling a mortgage broker in 2005 to apply for finance (on bended-knee)

3
for a property in Scotland. The response, on the telephone after 5 minutes, was:

Interesting times over the past

few years! Great times if you
bought things that went up in
value with the bank’s money,
not so good if the things you
bought has gone down.

The more recent tomes on property

investment, now this glut of “free
money” has dried up, focus on the
ability to buy “Below Market Value”
if there is such a thing. The story goes
that if you can buy from someone
stupid (or desperate) enough to sell
their home to you for up to 50% of what its worth, then you can present the property to a
bank, gain a mortgage, and not need to provide a deposit as you bought it so cheap. I am
not going to even get started on this topic which is questionable in logic and also in ethics. If
you make money in this area then I wish you luck.

So what’s this book going to do for you that all the others haven’t managed? Well, I will be
honest, possibly nothing. You may have built up experience in business and investment to a
point where you will find the ideas of this book of vague interest but perhaps not compelling
enough to change your own investment behaviour. In this case, I am sharing my stories and
ideas in business with you and I would love to hear yours. This is not a vague statement – I
mean it! There are people reading this book that know far more than me regarding property
investment, perhaps its just that I have the time and inclination to put finger to keyboard.
Well let me know your stories and ideas and the good ones will be included in the next
edition, with your permission.

For others however, this book will hopefully prove of value at your stage of your personal
and business life. If it hits you at the right time in your life then some of the ideas that I
have collected in this book could be of great value. And it is to you whom I am writing. I
am writing to the person I was 16 years ago who was looking for some guidance but found
very little available that I found relevant or that I could understand. I would like to collect
my experiences of the last 16 years (not all positive!), mix them with some of the very best
ideas and approaches to investment that are out there, and come up with some easy-to-read
chapters on the topic of property investment. The chapters are designed to be read in order,
with a logical story developing through each chapter. At the end are some case studies on
some markets around the world, taken in context of the ideas within this book. Hopefully,
if I get it right, the book will be of equal relevance to the person I was 16 years ago, to all
investors since this time and for all property investors in the future. The ideas therefore, do
not rely on particularly favourable market conditions but just sound principles that you will
hopefully find compelling enough to take with you in your investment future.

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 Chapter 1 - Why Property?
You will no doubt have your own ideas about why to choose property over other forms of
investment to generate a cash flow or to provide an asset you can use at some future point in
your life. You would not be reading this book otherwise I suspect. So what would be on your
list as to why to choose property? After all, property can rise and fall in value as dramatically
as the stock market (OK, perhaps at the speed of months not in minutes as on the Stock
Market on occasion.) Property can also be a hassle. Roofs leak, heating boilers stop working
(always at the weekend) and carpets need renewing. What about your beloved customer
– the rent-paying tenant of your property? Tenants can cause damage to your property
through neglect and sometimes wilful damage. And what about the mortgage? That can
rocket at a moment’s notice and leave you way out of pocket. So why are you choosing to
take the responsibility of property on at all? Why not join the growing band of carefree
tenants and kickback and let someone else have the hassle? Well, that just isn’t you is it? I
suspect our lists will look fairly similar, but there could be some new ideas:

1 There is No Opt-Out. It’s an obvious point but perhaps the most compelling
reason to choose property. After food and water, the provision of shelter is the most basic
of needs. People will live in property, as an owner or a tenant, or they will live in the park
under a newspaper. This gives a constant and steady demand for housing which other assets
don’t have. You can opt in or out of shares in Apple at a whim, for example. One bad decision
from the CEO or a change in the market, and the shares can be sold until they drop to zero.
There is no such opt-out with housing, and demand to live under a roof only really varies
with population levels and some social factors (such as levels of divorce creating more one-
parent households for example).

2 Property = Wealth. The ownership of land and property has historically made
the difference between those who live hand-to-mouth (tenants or tenant farmers) and the
lord of the land (Landlord) who uses the asset to his advantage, generating wealth from this
asset which can be used to support his life and then be passed on to future generations.
Most people on the Times Rich List made it through property and land. The other lucky ones
who had good business ideas and exploited those ideas to create fortunes have probably
exchanged or will exchange their new wealth into property and land in some way or another
as a method of retaining and building their wealth. The point of note here is that these
wealthy people often buy and hold land and property for generations and so do not rely on
the release of the capital value to support their lifestyle (although I am sure it helps their
credit rating!). Wealthy people clearly exploit the property or land by charging people to use
it and then give it back to them, in the same condition. It is this money, or rental yield that
provides for them and supports their lifestyle.

3 Property is just another Business. This is true and a useful idea. You as a
landlord will be the “CEO” if you like of your own business. This idea helps to think of other
landlords as competitive businesses and makes you good at what you do. Not all Landlords
think in this way and are actually very poor at what they do in my experience. However,
the big point here is that the business of property is fragmented like no other. There are
millions of property “businesses”. Most people in the property “business”, the private buyers
and sellers of houses don’t even consider themselves to be in business and quite right too.
They buy and sell their homes according to circumstance and sentiment. Without these

5
drivers, you as a property professional have a distinct advantage and can take opportunities
as they arise, not just when you need to move. Equally, the business of property rental
is hugely fragmented with no one player (other than the council or social rented sector).
Most Landlords have less than 5 properties and many only have one. You as a property
professional can exert your knowledge and motivation to create a competitive advantage
over these property “part-timers”, even if you only have one property yourself.

4 Use of Other People’s Money. It is often sighted as the most important aspect
of property investment. You can use other people’s money, usually a bank, to increase or
leverage the effect of your own wealth. It is common practice, when banking times are
stable, to be offered 80% of the price of an investment property by the bank and you as an
investor must find 20%. This increases by 5-fold the price of a property you can purchase.
This sets property apart from other assets where you would usually require the full purchase
price to buy a stock or bond. Sounds good? Well it is, particularly if you are reading this
book and do not have access to huge amounts of money but can prove to the bank that you
are solvent and a good risk. The typically conservative banks only make this exception with
property as it has been the route to the banks riches also over the centuries and is a safe bet.
The only point to make is that although your potential profits are greatly increased through
the use of someone else’s money, so is your exposure to making much bigger losses (there
had to be a downside!). Profits and losses are only generated when a property is bought and
sold and the timing of this will be discussed later in the book.

5 Property Goes Up in Value. Because of the scarcity of property and the reason
that it cannot be opted out of, property tends to increase in value at least in line with the
rise of incomes over time. This is certainly true in areas where the ability to build on new
land is limited and the population is stable or increasing (and the property is of good building
construction that will last). Over the last 30 years, property in UK for example has increased,
in real terms over inflation at around 2.5% per year1.

There are huge fluctuations of course in values as the graph shows, for example buyers
around 1988 needed to wait around 12 years before the real value of their house returned to
the original price they paid. Those who purchased in the summer of 2007 may have to wait
a similar period of time, just to break even. So purchasing purely for expected short term
rises in prices can be foolhardy
in the extreme. In this book
we will focus on the long-term
performance of property and
the monthly returns from rentals
that you will receive. MONTHLY
CASHFLOW IS KING. It is the ability
to time the (fairly transparent)
property market and treat it like
a business that will ensure you
minimise your exposure to the
downward market trends and
make a profit each month. This is
what this book will focus on.

1 Latest statistics for UK are produced at http://www.nationwide.co.uk/hpi/historical/

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Okay, so we get a list. We could add more reasons. The point is to look at the list, make
your own list, and then understand and exploit each point as far as you can. If these are the
reasons to choose property then taking each reason to the limit will maximise how good you
get at this business. Equally, making a list of reasons not to buy property, and then hedge
against them is an equally useful exercise. Let’s do an example:

Reason not to buy Property – unplanned property maintenance

One common unplanned maintenance task for all types of property is roof repairs. It is an
aspect of a property that is difficult to inspect and generally the first indication of problems
is a dripping noise. So how could you hedge yourself against this risk? You could suggest:

• Taking adequate insurance to cover all losses.

• Purchase only property with the best type of construction (ie not a flat roof).
• Purchase only property which has been recently re-roofed, or is a newly-built property.
• If part of a communal block, buy apartments below the top floor so if the roof leaks it
will not affect your tenant and you will not lose rent.
Again, the list could go on.

The final idea I will leave you with is one that I developed around 8 years ago to convince
myself I was doing the right thing by investing in property. It was around the time I was
considering leaving the comfort (and restrictions) of full-time employment and I was trying
to reconcile the associated risks with the move. As I saw it, property could go up and down
in value quite dramatically. I had seen that with my first property in Reading which slid into
negative-equity and stayed there for 5 years. How could I provide a sustainable income
from property if this was the case, never mind the costs of property ownership such as
maintenance and finance costs.

Is Property a Gamble?

The conceptual idea I developed was that I, as a property investor, was living the life of a
professional gambler sitting in a high-class casino playing roulette. Just like the roulette
wheel stopping on red or black so property prices rise and fall and I am taking that risk.
Sure, in property there tend to be more uptimes than down, but still like roulette. Perhaps I
should stay in my job! But then I thought about the gambling stakes and who was providing
the “chips” for each spin of the wheel. It wasn’t me, it was my tenant. Every “spin of the
wheel” costs one mortgage payment but the rent my tenant paid bought me enough “chips”
for each spin of the wheel.
Indeed, when I got it right, the tenant paid
me much more than was required for “the
chips” and there was money left over to
buy “drinks at the casino bar”. I could now
afford to just keep spinning the roulette
wheel as the tenant was paying for the
table and also my drinks.

The risk of capital value increases and

decreases had therefore been removed

7
and, eventually, I was content to leave my job although I could have had the confidence to
do it years early if I had read a book like this. For those versed in investment, okay the above
is a long-winded metaphor for what a cash-positive investment looks like – sorry! Maybe
thinking of the principles in this abstract form rather than numbers on a spreadsheet can be
helpful though in focusing your energies, giving confidence or helping to explain your way of
life to others. We will pick up on the idea here throughout this book.

Activity 1

My suggestion at this point is for you to make a list of the advantages and disadvantages with
property ownership, to whatever level of detail you find useful. Then, consider what you
can do for each advantage to maximise you benefit from it and minimise your exposure to
all your listed disadvantages. I would then keep this list with you when property hunting. It
is very easy to get carried away when viewing a property but does it meet the fundamental
criteria you have? These should not be compromised.

Advantages Disadvantages

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 Chapter 2
Outcomes for Property – What Do You Want to Achieve?

Let’s stop talking about property for the moment and turn the attention to you. What do
you want to achieve and why?

When entering any business or venture, it is of course worthwhile to set out a plan for what
you would like to achieve and when you would like to achieve it. Property investment is
no different in this respect. Working backwards, setting out a clear objective (or set of
objectives) that you would like to achieve from property investment will be useful for the
following reasons:

• Determine the type of property that you purchase.

• Guide your decisions towards financing.
• Provide a measure of progress towards your objectives.
• Will provide feedback when you have reached your goal.

There are a huge variety of reasons investors cite for starting with property investment.
From the investors I have known and worked with, typical reasons have been:

1 To provide a passive income to supplement current income streams2 (i.e. wages).

2 To provide a passive income to replace current income streams.
3 To provide an income stream in retirement.
4 To provide capital to draw on in retirement.
5 To speculate on potential capital growth to provide a short term cash flow.
6 As a tax-efficient shelter for savings.
7 As a tax-efficient shelter against income.
8 To exploit low interest rates or favourable currency rates between locations.
9 As security to provide a home in times of uncertainty in resident country.
10 To provide an asset which can be passed-on to future generations.

Understandably, all the motivations are for financial reward or security in some regard. It still
surprises me that potential investors very rarely make mention of the core of the business
that they are about to enter, namely the provision of housing for people or premises for
business. Of course it would sound just a little unbelievable if an investor said:

“Yeah, I am getting into property so I can give people a decent roof over their heads”

But perhaps it is by doing exactly this, and doing it better than anyone else, that the real
financial rewards come. More of this in Chapter 5.

2 The ‘Rich Dad Poor Dad’ series explain this concept well: www.richdad.com
9
Taking the reasons for investment further, we can examine the effects this will have on your
likely investment strategy. In graphical form:

And making some attempt to position each of the motivations on the chart:

1- To provide a passive income to supplement current income streams3 (i.e. wages).

2- To provide a passive income to replace current income streams.
3- To provide an income stream in retirement.
3 The ‘Rich Dad Poor Dad’ series explain this concept well: http://www.richdad.com/
10
4- To provide capital to draw on in retirement.
5- To speculate on potential capital growth to provide a short term cash flow.
6- As a tax-efficient shelter for savings.
7- As a tax-efficient shelter against income.
8- To exploit low interest rates or favourable currency rates between locations.
9- As security to provide a home in times of uncertainty in resident country.
10- To provide an asset which can be passed-on to future generations.

Where do you think you fit best on the chart? Which number or combinations of numbers
best describes your investment motivation?

Most investors should be able to identify with one if not more of the investment motivations
listed.

So far, so good. We have an understanding of our motivations to invest and some thoughts
about the yields sought, the time taken to gain a return on our investment and the associated
risk. Most of you would already have this worked out in some form or another, perhaps this
just introduces you to a new way of expressing your intent. However, it is very surprising
to me how few investors have got an overall plan for how they will meet this intent, in real
terms.

So, What does a Plan Look Like?

Business Plan writing software is abundant and is extremely good at producing plans
running to at least 100 pages, with graphs, that will bamboozle any Bank Manager. For
some, producing a long and detailed plan may fit with how they approach the business
and the individual investments. Everything is captured and, hopefully, uncertainty modelled
sufficiently. Such a plan would include items such as:

• Executive Summary • Customer Segments

• Description of Business • Customer Demographics
• Product Summary • Sales Strategy
• Business strategy • Pricing Strategy
• Financial Summary • Marketing Plan
• Market Research • Advertising Plan
• Market Trends • Objectives & Plans
• External Research • Resource Allocation
• Market Estimates • Budget Allocation
• Business Location • Startup Budget
• Business Organisation • Forecast Profit & Loss
• SWOT Analysis • Forecast Balance Sheet
• Competitive Analysis • Forecast Cashflow

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And so the list goes on. Perhaps this is why people don’t tend to set out a plan for what they
want to achieve.

Beyond the need to set out a plan for the purposes of finance, I would argue that if a business
aim and strategy can be captured and distilled down as short as possible then a plan which
satisfies this can be correspondingly short, and certainly less than than a whole page.

Back in November 2002, it become clear to me that we had the opportunity to become full-
time property investors and give up full-time employment (so I am a reason 2 from the list).
We had built up a small portfolio of property and had it under successful management and
seemed to have the skills and discipline to run the businesses efficiently. It was time to scale
the operation. At the time, I had in the following overall concept in mind:

Aim: To create a passive income stream through property sufficient to service our
lifestyle.

Strategy: Purchase property that achieves 12% rental yield, or more4.

Based on the above, I arrived at the following plan (I still have it, on a small scrap of paper
in my desk):

Monthly Income Stream Required: £4,500 pcm

Number of Properties Required: 30
Net Income Per Property: £150 pcm
Typical Property: 1-bed for £30,000 (perhaps with some work to do in better areas)
Finance: 80% Loan-to-Value
Target Date: Nov 2006

There were a few sketches on my plan, which I am embarrassed to share, but other than
that the above captures what focused our activity for the next 3 years. It may seem over-
simplistic but the plan captured exactly which properties we should search for, how we
should finance them and gave feedback on when we had reached our objective. The plan
also highlighted to me the need to generate around £180,000 (plus costs) in cash over the
3 year project to finance the purchases. This was a huge sum of money to us then, around
3 years wages! It really focused our efforts and highlighted the need to keep working for
this period (and save, save, save!), buy, develop and sell some properties and flip some
properties “off plan” to raise the finance required over the 3 year project. Some flexibility
was required on our part towards then end of the project as purchasing 1-bed property for
£30k become increasingly difficult but other than that we stuck to the plan and achieved it a
few months earlier than the target.

Keeping my aim and plan very short and pithy enabled me to take the plan everywhere in my
head and even in my sleep for the 3 years on which it was executed. It was possible to judge
every action undertaken in those 3 years very easily against the plan and how it contributed
to it. Now, let’s be honest, I kept the plan in 2002 short because I was lazy. I was very lucky

4 Why 12%? See Chapter 4

12
I did though as it provided a constant focus that a 100-page multimedia epic business plan
would have failed to do. Of course, for some the more comprehensive plan on paper will
be the way forward as by going through the process confidence and knowledge of the plan
is built.

Activity 2

Think about what sort of investor you are and what your investment aim and strategy should
be. Make a plan (as long as you like!) to include:

• What type of property you will buy

• Prices and / or yield required
• When you are going to complete the plan

If you want to get the most from this book, it is wise to do this activity even if only in
a very draft form before proceeding. You can then develop the plan as you read the
rest of this book and refer to it in the future.

13
 Chapter 3
The Location Hunter

Once you have made the decision to consider property as an investment vehicle for your
future and you have a rough plan, the next step will be to conduct some research into the
areas which could fit your objectives. You are very much like a hunter at this stage, looking for
your own particular prey and using your own weapons. The more weapons in your armoury
(and the sharper they are) the more likely you are to be successful of course. Additionally, if
you select prey which have fewer hunters stalking them then you stand a chance of making
a kill. Perhaps this is why you are reading this e-book.

I would like to break down the hunt into two areas, first the broad location of the hunt
(which may yield a number of results) and second the detailed search, on the ground tree-
by-tree so to speak. Enough of the hunter metaphor? Sorry, I am enjoying it.

What to Hunt?

At this point, before the search, we should define what each of us is looking for in broad
terms. Different investors in different stages of life (with different cash positions or life goals)
could be looking for very different property. We will cover this subject in more detail in the
following chapter. However, at this stage, I am going to make the assumption that we are
all looking to make money from the investment, it just depends on how quickly we want to
make this money and how much risk we are prepared to take to make it.

Finding Where to Hunt

Unless you are fortunate enough to live on the doorstep of a rich hunting ground that fits
your objectives, then remote research via the internet and publications are likely to be your
first weapons. Indeed, I would argue that even if you are adamant that you are living in the
middle of a property hotspot that is waiting to explode, it would still be prudent to look
around you just to be sure you are seeing the “wood for the trees”. Communication links
coupled with cheap and accessible travel options mean hunting grounds further afield are
available.

So how far are you prepared to go? Some investors I have worked with say that the best
14
place to buy is on your doorstep as you know the detailed breakdown of an area and where
tenants are likely to choose as a preferred location. This is undoubtedly true. However,
each of the locations I have invested in were relatively new to me and if I had taken heed of
the “local knowledge” too much then I would never have invested a bean. Reputations and
legacy issues connected to an area or suburb may have been relevant years ago (and still in
the mind of locals) but are not relevant today. This will be obvious to anyone coming from
outside, new to an area and applying some general principles. One example of this from my
experience was when I was investing in the city of Aberdeen in north east Scotland in 2002.
The received wisdom of all letting agents and estate agents was to buy properties in the best
areas and avoid “like the plague” some less well-developed areas of the city. I followed this
advice for about 6 months and acquired 5 flats in good areas for around £30,000 which gave
a good yield of around 12%. Pretty good, but I found my limited funds drying up very quickly
and was still drawn to areas (Torry in particular, if you know the city) where properties where
around £15,000. To me, the properties looked the same and the rents were very similar, so
a yield above 20% was possible. Taking the advice of a very good contact and friend who
knew the city very well I decided to take the plunge in this more risky but lucrative area.

Over the next 2 years I was lucky enough to purchase another 20 flats at this lower level
and found the rents were sustainable, if well-managed. Looking back, it was these cheaper
properties that really allowed our business to take off as their capital values increased at a
far higher rate than the more established areas. At the peak of August 2007, the values of
the more established areas had increased by around 300% but the riskier investments had
actually increased by 500%. For me, at my early stage of investing, it made more sense to
take the higher perceived risk for the higher potential return which resulted, counter to the
advice that many locals were giving. So sticking to received wisdom may not always be the
best method, your investments must fit with your own personal objectives.

In terms of distance to research, I would consider your time available, your proximity to
transport links and costs of those links. As we will discuss in Chapter 5, it is likely that you
will want to visit your area of investment on a regular basis and it would be an advantage
to be able to do this quickly and cheaply if an emergency arose. For me, this is of great
importance. Even though I have a good control of time at my disposal, I do not want to
feel I cannot control my investment (and therefore business – see chapter 7) in an effective
manner if I am too remote or seen as too remote from those involved with my investment. So
for me, being based in Europe, I will [mainly] stick to investments that are available in Europe
as long as they are available. We are blessed with quick and cheap air travel across Europe
which means attending your investment from anywhere to anywhere can be achieved in one
day or with just one overnight stop. That’s not to say I have not been tempted to investment
further afield.

So having considered distance to travel, where should you start to look?

What about consulting the media or talking to other investors that have success stories
from locations you would never have considered? This approach will certainly broaden your
horizons and may open your mind to pastures new. Indeed, I will include some areas from
my research in the Appendices which will do just this. But a word of warning here. Are these
stories of a successful historic “hunt” a good indication that the hunting ground will remain
fertile in the future? Is there anything left for you, that fits your objectives? This is a really
tough and important point. Past stories of success (and sometimes failure!) are easy to find
and will come to you without effort, being printed in the media, displayed flamboyantly

15
at exhibitions or spoken about around tables at dinner parties. These stories are of great
interest to any hunter of course. How did they select the area? What methods of purchasing
and finance did they use? etc. But are there genuine reasons to copy the actions of the
hunter in the story in the same location or has time moved on? This is highly likely and
appears to be directly correlated to how loudly / often the story is told as the number of
successful “hunts” over time increases. In contrast to this, the pro-active 2 stage approach
we will lay out in this chapter involves some effort, be warned. By following this approach I
would say your chances of success are greatly increased.

Let the Hunt Begin – Stage 1

Okay, you have selected a number of areas (perhaps countries or particular cities or regions)
in which you would like to carry out some detailed research. What next? As it is likely you do
not live in the location (or even if you do) it is time to sit down in front of the computer and
do some work. Here are some sources to use that are likely to yield some results:

Google – carry out a search with terms such as “property market in ...” or “property statistics
in....”. More detailed research with terms as “property for sale in..” will lead you direct to
selling agents but it would be good to keep things more general at the beginning. Of course,
like any search on Google, you will be presented with “natural listings” on the left hand side
of the page based on relevance and also paid for advertising links in the right hand side (and
perhaps at the very top of the left in a shaded section). Again, it may be best to stick to the
material in the natural search which Google has deemed most relevant at the start of your
research and use the whole of the results page as your research progresses.

General Area Research – To find out statistics on an area such as population trends, income
levels and housing trends. Good sites could be:

OECD: www.oecd.org
EU: europa.eu/index_en.htm
Governmental sites (city councils etc)
Buy Association (some good podcasts): www.buyassociation.co.uk
property.timesonline.co.uk/tol/life_and_style/property/overseas/article2227766.ece
Blogs and Forums - To get (hopefully unbiased) feedback from other investors in an area.
There are thousands of these. Here’s a couple that I have found useful:
www.propertycommunity.com
www.overseaspropertymall.com

Property Portals – A fantastic way to research and compare large areas or regions in a very
efficient manner. Portals are everywhere now and cover complete areas, regions, counties
and even global coverage. If you know an area, you will know which portals people of that
area use. If not, why don’t you find out? Blogs and relevant forums should help with this.
Here’s one that I have found useful in the past, there are many more:

www.themovechannel.com

16
Specific Area Research – Hopefully from unbiased sources which can give the low-down
on particular areas. The printed press have good on-line presence (ft.com for example) and
can be a useful, easy to search source of independent information.

Here’s a link I have found useful in this area:

Global Property Guide (very good!): www.globalpropertyguide.com/

Of course, not everything can be achieved on-line even at this early stage of the research.
Perhaps you would consider meeting other investors face-to-face at a property club or
seminar that is in your area. What about attending a property exhibition that has exhibitors
that are relevant to your area of research? As with the research conducted on-line, it is
always worth considering the level of bias in the opinion given and the person’s motivation
for giving the opinion.

Results So Far

The aim of the work so far has been to generate an area or a number of areas that merit
further research. Hopefully you have found somewhere that “ticks all your boxes”. Those
boxes may include:

• Proven rental income that fit your investment criteria.

• Investment objects in your price range, after gearing if applicable.
• Sustainable rental income due to such factors as inward investment, job creation and an
equilibrium (or shortage) of supply of rental housing vs demand for rental housing.
• Population trends which are favourable to the area (hopefully increasing).
• A robust local legal system to ensure and protect your property rights.
• Finance in place from local or international banks to the level of gearing you seek, if
applicable.
• An acceptable level for finance interest rates.
• A tax regime that you can live with (remember that paying tax means you are making
profit – a good thing!)
• Acceptable travel routes in terms of cost, time and frequency.

You will undoubtedly have some more boxes of your own which must be ticked as part of
this initial research.

Depending on your criteria and objectives this initial phase may have resulted in a number
of potential areas or no areas at all. If you cannot find any areas, do not be discouraged. If
your objectives are set correctly then you must take your time and develop your research
techniques. It took me 12 months to find my last area for investment before I began investing
and I consider myself to be quite spontaneous! If you find yourself searching endlessly with
no progress then maybe your objectives are set a little unrealistically or maybe that property
investment is not for you (in the areas which you would consider) at this time. Hope fully
the process has still been valuable and can be followed up at a later date, maybe when your
circumstances or the market conditions have changed in your favour. If you have found
some potential areas – lucky you! If you have found many potential areas then it maybe that
17
your objectives could be reviewed or the areas designated a priority order to enter the next
phase of research.

Finally, well done for doing this work. It is by applying the effort at this stage, before talking
to agents or others who will make money from your investment decisions, that will have the
greatest impact on the lifetime success of your investment and your success in this business.

Detailed Phase – Stage 2

Although some more detail can be carried out on the internet (by visiting property agents
sites for example), it is probably now the time to hit the ground in your area(s) of choice from
the early research phase. If practicable, on your first trip it would be best to do this with the
minimum of input from sources on the ground that have excess bias and will make money
from your investment. If this is not practicable, then using a number of sources should level
the bias out to some extent. The aim of this phase (which will involve a number of trips
perhaps) is to:

• Determine if the area confirms the results from your earlier research.
• Find out if the area is somewhere where you would like to do business.
• Evaluate different micro-locations for potential against your objectives.
• Decide if travel to the area is a realistic option.

This can be a lonely time if you travel by yourself, and are in a country or region that you
have never been to before. Be brave! When in this phase I like to stay in a variety of places
(and levels of comfort) to find out more about different areas and what levels and standards
locals expect. When travelling around I will prefer to use the public transport and watch
how well it is used, which areas are particularly busy and what kind of people are getting
on and off the transport. When walking the streets, I am looking at the type and number
of cars parked in the street as an indicator of relative wealth. I look for signs of optimism
in an area. This would include recent or ongoing new-build projects, active refurbishments
(skips and scaffolding) or sights designated for imminent future development. Another good
indicator at street level is the number and type of commercial outlets in an area. If it is a
region which has a large number of local stores (i.e. not dominated by out-of-town retail)
what do these stores sell and what level of the market are they servicing, compared to other
areas locally, not your home town. Other good indicators at the street level are outlets for
locals to spend their disposable income for example pubs and restaurants, theatres and the
like. Do these outlets match the kind of tenants you are seeking and is there a trend for new
outlets opening or are things on the decline?

Looking at potential investments in the area, do they match your expectations from your
searches on the internet? What is the typical condition and level of refurbishment of
buildings in the area? Do properties show signs of being comparatively well looked after by
owners and residents? The state of the communal areas of properties and the surrounding
land can be a good indication of this. On an individual property level, are the means of
access to the building (if multi-family) well-secured or can passers-by gain access easily?
This may sound trivial, but I would consider it to be a very telling signal of the attentiveness
of owners and residents. This is of particular issue if the property is located in an area that
is frequented during the evenings at pub, clubs and the like.
18
Once you have done this work, and you are content to proceed, you will need to engage
with local sources to take your work right down to potential investable objects. In doing so
you will:

• efine your knowledge down to the micro-location level.

R
• View example properties that meet your objectives.
• Determine what tenant sector(s) are serviced in your area of choice and the current
level of demand.
• Evaluate the typical demand for tenancies in the area and average void periods.
• Decide if the property can be effectively managed, particularly if you are remote from
the investment.
• Gain an indication as to your ability to finance the investment, if you seek finance locally.
• Determine the costs associated with the purchase and management of the investment.

At this stage you will be working with a number of people on the ground, all who hold the
keys to this final aspect of your search but will be making a charge for their services in some
way. More about this crucial people dimension in Chapter 5.

Let’s leave the idea of the property search there for now. We need to get some more tools
together before we can go into any further detail. Hopefully, already you have seen the kind
of work you as a property investor will be doing to make your investments and get ahead
of the pack. It is this work, before any purchase is made, that will determine if you are
successful to the greatest extent.

Activity 3

Carry out stage 1 of the location hunt. If you already have a location in mind, try to evaluate
the area from a fresh perspective using the ideas in this chapter. Try to come up with a
number of potential locations that you could take forward to stage 2 of the location hunt.
Now keep these locations in mind as you read on.

19
 Chapter 4
Purchasing Well – Evaluating and Securing an Investment

Continuing on from Chapter 2, the plan that you have drawn up should provide some
guidance as to what type of property you are to select. Chapter 3 hopefully provided some
thought for the location of such an object. We are now going to put these ideas together
and discuss how to secure the investments.

Timing the Purchase

I hear time and again from seasoned investors that the critical success factor in any property
always goes back to the purchase price paid. Pay too much and you will be either chasing
unrealistically high rents to cover finance payments or achieving rents that do not put you in
profit each month, after all costs. Get the property at a good price and the term of ownership
becomes a less stressful experience as the rents you need to make a good profit are easily
achieved in the market place. Indeed, you may be able to charge slightly lower than the
market rentals and therefore encourage longer residence time from tenants and so achieve
a “win-win”. OK, so far, so logical. But really what is a “good price” and how is it achieved?

Three Critical Factors - Yield, Yield and Yield

It is probably time we spoke about yield as

it is the critical ratio that investors use to
categorise and select investments, indeed it is
arguably to keystone upon which all the other
work is placed. Many other ratios have been
devised to describe investments and returns but
for my money, nothing beats simple yield.

What is Simple Yield?

I am not going to turn this into a maths lesson, I promise.

Simply stated, the yield on a property investment is:

Annual Rental Income Generated

Value of Property

The idea of yield is important when evaluating new investments

and also the investments already held in your portfolio. Come to think of it, if this is the
cornerstone of the property investment world, this is really simple! I will make it even
simpler in a moment.

20
For the time being, let’s look at the equation and examine what it says (and what it doesn’t).
First off, looking at annual rental income, there are a number of ways of expressing this. Do
you quote the gross or net figure here and what is the difference? For me, I like to capture
the expected annual rental income with any deductions which must be made to make the
investment work. So, for example, I would deduct the cost of any routine maintenance
(boiler, lift for example) and also the cost of employing a factor or managing agent if this
is applicable. I would also deduct the cost of insurance as this is unavoidable. I would not
include unplanned maintenance at this stage or indeed the cost of a letting agent. The
work of a letting could be conducted by yourself for certain properties so at this stage is not
included.

Secondly, the value of the property should be the current market value of a property you
intend to buy or hold in your portfolio. It is not a fantasy figure you have about what a
property could achieve, but what other similar properties are achieving in the prevailing
market.

Anyone who has met me knows that, within a few minutes and regardless of the situation, I
would have mentioned the word yield probably 5 times or more. This makes me extremely
dull company, I know. However, it is refreshing (for someone as dull as me anyway) to hear
more and more investors discussing yield and the resultant cash flow more frequently now
when discussing property. For some reason we forgot this in the years of booming capital
values5.

Every investment made has an associated risk (more in Chapter 6) and will also require
some work for which you should be rewarded as an investor. Property investment is no
different. Indeed, investing in property is very “hands-on” in terms of tenant and property
management and the investment is very illiquid. That is to say you cannot cash your chips
in on a profit as easily as you can, say on the stock market. So what should this reward be?
Well clearly, depending on the type of investor you are, the rewards you seek will be higher
the more that you require a monthly cash flow to support your lifestyle. It is therefore logical
that the higher rewards are made for the investor taking higher risk.

At the very lowest level of risk, large investors and funds purchase commercial property to
provide a level of return on their cash holdings. A widely-held approach is that the level of
reward here is around 2% above the prevailing 10-year bond rate issued by their government.
That is to say, as opposed to buying safe government bonds, commercial property of a good
standard is attractive once a 2% reward is in place to cover the more intensive and riskier
ownership of property. So, as I write this page, government bonds issued by the US, UK and
EU governments stand at around 3%. Therefore, an investor in commercial property could
take a position in a project when yields reach or exceed 5%. Commercial property of less
than premium quality would perhaps require a corresponding increased yield.

Due diligence into the project would reveal the risk level and the “fair value” reward required.

5 Actually, the reason is extremely well-laid out in ‘The Property Clock by Ajay Ahuja ‘ – a must
read.
21
So, in figures, a £1 Million AAA-quality commercial investment might stack up if:
Annual Rental Income Generated
Value of Property

£50,000
£ 1,000,000
Yield = 5%

What about residential investment? The cold view of the commercial investor is widely used
in some residential markets around the world where owner-occupation level is historically
low. However, it is has not been used so widely where competition exists from owner-
occupiers where the hunt for a home rather than a return on investment is the objective.

I would make an estimate as a Yield to Break-Even Point (YBEP) for residential investment,
funded by finance as follows:

Unfurnished Property = Finance pay rate +2%

Furnished Property = Finance pay rate +3%
Houses for sharers / students = Finance pay rate +4%

This loading makes account for void periods and costs associated with ownership (including
property tax and letting agent fees but not income tax).

The figures are based on the actual holding of my own in UK and Europe since 1993 and
the holding of fellow investors, to provide a guide. Current investors may work off slightly
different figures, as may holders of varying types of commercial property.

With finance pay rates for investment finance averaging around 5% over the last 5 years this
would mean a YBEP for the respective properties:

Unfurnished Property = 7%
Furnished Property = 8%
Houses for sharers / students = 9%
Now, the above is only a guide but it has served me well as a basis for my investment
decisions in the last 5 or so years and will continue to do so. So, what does it mean to you
as an investor?
E V E RY T H I N G
Going back to chapter 2, we examined what kind of investor you were and what returns you
seek as a consequence. So, let’s look at that list with this in mind. For those that require
some level of income from the investment from rentals, the yields achieved will need a
margin above the YBEPs before. For those holding property for reasons other that creating
an income, the levels above may be sufficient and would generally result in the purchase of
less “risky” properties, other factors being equal. Lets look at couple of investor types:

22
Investor Type 1 – Supplementing Income

For an investor looking to merely supplement income, a margin of perhaps 2% may prove
sufficient over the respective YBEP. In figures, for a £100,000 unfurnished property, you
would require a yield of 9%.
Annual Rental Income Generated = Value of Property x Yield

In this case:

Annual Rental Income Generated = £100,000 x 0.09 (9% or 9/100)

Annual Rental Income Generated = £9,000

So, this investor would be seeking property generating £9,000 (or £750 pcm) in rent for
every £100,000 property they purchase. Their supplementary income would be the 2% or
£2,000 per annum. Let’s call this margin the “Yield Reward”. Not a king’s ransom in this
case, but positive income which can be scaled if further similar properties are in the market
and finance available.

Investor Type 2 – Replacing Current Income

For an investor seeking to replace their current income with a passive one generated through
property things, justifiably, get more challenging. Nothing is easy in life and if you are looking
to say goodbye to working for someone else, effort is required.
This is the category of investor that I fall into and the category of many of the investors my
company works with. There is some variability as to the level of return above the YBEP I seek
which depends mainly on the prospects the property offers in terms of sustainability of yield,
ability to finance and a view on future capital growth6. In general, I look for deals that will
reward me with 4% above the YBEP and offer stable yields without excessive maintenance
with good tenant demand. So, for a furnished property £100,000 this time, I want to
achieve a yield of 12%.

Annual Rental Income Generated = Value of Property x Yield

In this case:

Annual Rental Income Generated = £100,000 x 0.12 (12% or 12/100)

Annual Rental Income Generated = £12,000

So, I would be seeking property generating £12,000 (or £1000 pcm) in rent for every
£100,000 property I purchase. The supplementary income, or yield reward, would be the
4% or £4,000 per annum. It was investing in this way that I achieved the goal of generating
sufficient income in the 3 year project outlined in Chapter 2. Higher yields are of course
sometimes available – great, you may reach your goal that much quicker. But can the deals
be financed to the same level? Are these deals more management / maintenance intensive
or are longer void periods likely? What about the tenant sector? Are you relying on low-paid

6 Just like crystal ball gazing in its accuracy perhaps! Be warned of models relying on capital growth
23
or social tenants that may have more sporadic rental-payment attitudes? All factors to be
considered.

I will make a confession here. Didn’t the maths look a bit easy in the last example? Looking
for 12% deals is easy (well, easy to spot them when they are there). We needed £1,000
per month in rent to make the £100,000 property fit our objectives in this case. So, when
searching for property under these criteria, just remove the last 2 zeros from the purchase
price and you have a target monthly rent. This is easily done, in any currency, and can be
done by just glancing at an estate agent’s window (who offers both sales and lettings) and just
slowing down the walking pace a little as you pass. On a web-based search, entire websites
can be evaluated in seconds. And so the confession. My whole business has been built on
this idea. The only “clever” bits have been finding and then managing the investments and
I will share my thoughts on this throughout this book.

Hopefully, from the above you can identify the kind of investor you are and the type of
income or yield reward that you require. From this, we have everything, We now know what
kind of property to look for and how much finance we are going to need to be successful.

Please note that no regard has been made to projected capital growth in this
model. We have been discussing generating income from property. In truth,
the real rewards in property are the capital appreciation of the asset held over
time. However, this “paper profit” or indeed loss does not put food on the table.
However, when realised through selling or re-financing an appreciated property,
this growth can provide useful injections of cash to support lifestyle or finance
subsequent deals.

Finding the Deals

If you have spent any time looking for deals with yield to the higher levels discussed, you
will know that it is hard work. This is the work that determines the success you will make
as an investor. A quick search of your local market will probably provide an abundance of
potential investments, most of them around plus or minus 2% the prevailing finance rate. For
example, I have just been on the net this week and found an offer near to a property I own
in Grantham so I know the area well. It is a brand new 3-bed house with garage offered at
£109,000. It will rent for £500 pcm. I have been offered the property for £95,000 for a swift
completion, based on one phone call, such is the market. The same houses were £150,000
24 months ago so sounds like a good deal. Perhaps it is for long-term capital growth as you
could take a view that it must return, at some point to its 2007 price level. However, let’s
analyse it quickly in terms of rental income. Will it bring money into my pocket or remove it?

Annual Rental Income Generated

Value of Property
£6000
£109,000
Yield = 5.5%

24
Current finance rates, if you can get it, are around 5.5% on an investment product so the
YBEP for an unfurnished let would be 7.5%. This is typical of deals available in the market
when supply and demand is in equilibrium or supply exceeds demand. The YBEP is reached,
if that. This house will need to be £60,000, and ready finance in place, before it becomes
viable. This is unlikely to occur.

And this is the point. In a market that is in equilibrium or that has excess demand over
supply, it is unlikely we will find property that provides the “yield reward” we seek over the
YBEP. So when is the best time to buy? When supply exceeds demand, as in the Grantham
case above, we may get closer to YBEP and may even beat it but it is likely due to market
principles that capital values are falling. The capital losses, in the short term, will dwarf
rental income.

The time to arrive in the market therefore, with your superman cape on, is when a flat period
occurs over capital values have dropped and the rental incomes (due to wage increases)
have recovered to a point where the yield reward is in place. This condition does occur but
it lasts a relatively short period of time, particularly when banks recover their confidence to
lend again to a good level.

On the next page is a graph showing the yield reward first for a typical 2-bed unfurnished
rental property property in the south east of England and second for a 1-bed furnished
property in north east Scotland between 1990 – 2011 Q1. I have chosen these areas because
my investment history was in these areas and data is readily available from governmental
websites.

For me, this graph tells the whole story. Let me repeat that! This graph captures perhaps
all my thinking on property investment in terms of when and what to buy. There is nothing
else, that’s why I keep looking at this graph, or graphs based on other locations, nearly every
day. So what do we see? First for south east England, the results show that the purchaser
buying using the Yield Reward criteria would have been very busy around 1995-96 and
could have been tempted back into the market around 2002-2003, seeing rewards above
2% at these times. I remember back in 1996 that yields of 12% were quite common, even in
London which seems remarkable when considered today.

The market was quite different for Scotland with yield rewards above 3% (for a furnished
property) from 1996 – 2004, with spectacular rewards of around 7% between 2000 – 2004.
Buying at these times would have ensured a steady cash flow was achieved and is still being
achieved from the properties.

From a capital gain perspective, it is interesting to note that times good for the Yield Reward
investor these were also times when capital values saw steady increases or were just about to
experience strong growth. This is unsurprising when we consider the interest that investors
would have, regardless of owner-occupier sentiment, at the times of high Yield Reward. This
interest from investors when Yield Rewards are high (often at a time of low owner occupier
confidence in the market) provides a floor to values and provides an additional demand
element.

25
From my own perspective, I look at these 2 graphs with interest at my own investment
history. My first property I purchased (my own home) was in 1990 in SE England. These
were woeful times and I fell into negative equity, coinciding with the point on the graph
when yield reward was below zero. I became an accidental landlord in 1993 and after a year
or so found myself making money from the rental of that property all the way to when it
was sold in 2000. I enjoyed capital growth of around 100% during this period of high Yield
Reward. In Scotland, I was perhaps late to the “Yield Reward” party, entering in 2002. I
purchased using the idea of Yield Reward right up to 2006 when deals became harder to
find. Again, this was a time of high capital growth and the properties have all been cash flow
positive every month that they have been owned.

Looking at the graphs, it is also interesting to see what happened to investors buying at
times below the Yield Reward criteria. For example, 2006-2007 were years when the Yield
Rewards were near or below zero in both markets. The Yield Reward investor would have
missed out on some spectacular capital growth during these periods, as values soared by
owner-occupiers with ready finance taking the market to unbelievable levels. However, we
are now seeing a correction in this market with all these gains being lost. For the speculator,
timing is everything and money can be made when lady luck is on your side. For the Yield
Reward investor, a steady cashflow is ensured every month and the points when property
is purchased is rarely when values are about to collapse. These ideas can be applied to any
property market around the world when carrying out your analysis.

And now a very painful confession. I have strayed from the “Yield Reward” path only twice in
my investment history, both times when greed and expectation of capital growth took over.
The first time was in 2006 when a property in Berlin caught my eye. A 1 bedroom property in
the centre of a capital city for 30.000 Euro seemed too good to be true – surely it must go up
in value! Buying with a yield reward of only 1% was not so clever and the property has not
gone up in value significantly and taken money out of my pocket every month since I owned
it. The really embarrassing one was a purchase of a new build flat in August 2007, just before
Northern Rock collapsed and speculation was rife. Again, the Yield Reward was a whole 0%
and the property has gone down in value from the day I bought it, around £25,000 as we sit
26
here today in October 2010, if I could find a buyer at all. I will learn from these mistakes, I
hope. Why don’t you pick up the lesson for free?

We spoke in Chapter 3 about locating property. In the appendicies to this book, I will examine
particular markets to discover where in the world the yield rewards can be found for a range
of investors today.

One further method to analyse the market you are researching is to look at affordability, either
from a buyer or tenant perspective. Should the rent levels be cheap compared to wages
then this is a possible indicator that rents have some upward pressure, other factors being
equal. Different marketplaces and tenants will bear a higher proportion of their take home
pay going towards their housing costs than others. For example, tenants in London can pay up
to 50% of their take-home-pay towards their rent and associated costs. In Berlin, 25% is more
typical. But it is the comparison of this figure over time that will reveal any latent upward [or
indeed downward] pressure in rents. A similar affordability index can be researched for owner
occupiers, ie how much does their housing costs soak up of their net income. An interesting
feature will be if you discover that owning a property is far cheaper than renting, as this reveals
latent demand for owner occupation [just another way of stating yield reward].

Finally, a measure to reveal any potential pressure in capital values is to look at the House
price to Earnings ratio. Below is a graph showing this index over the past 30 years.

It is clear, from the graph above showing average house values, that purchasing at any point
when the index was far below trend was not such a bad idea.

27
Closing the Deals

Just a short note here, on the topic of

negotiation. There are lots of good books
that cover this topic to a far greater level
than I could dare. However, I am going to
look at a particular aspect of negotiating in
a “hotspot” for a yield investor.

Let’s say we have found an area abundant

in property that meets our objectives. It
is likely that, particularly for the higher
yield deals, you are early in the market
and fully welcomed by estate agents and
sellers alike. As the market develops, other
investors (and owner-occupiers) will join you and demand increase. So, what should your
approach to negotiation be?

My experience with many investors is that “a deal must must done” i.e. some mark off the
asking price must be achieved, regardless of conditions. The approach in a Moroccan Bazaar
if you like. This could be a valuable approach, particularly if you are truly alone in a market
or seeking only a limited amount of property. But as demand increases, this approach may
have a disastrous effect.

So a story:

When I was purchasing in Aberdeen, Scotland I was fairly lonely in the market with the only
real competition from owner-occupiers in the better residential areas. Prices for the 1-bed
flats we sought ranged £20,000-£30,000. Our early deals were closed very successfully and
we achieved a few thousand off the asking price in each case, applying ‘Moroccan Principles’.
It felt good, even though purchasing at the asking price we still generated in excess of the
12% yield we sought. But after 6 months we started losing deals and this lost us time in the
developing market. Quickly, we changed tack to paying what the owner wanted or even
slightly more to secure the deal. To the owner, it was great as they still remembered the bad
times of the last 5 years of falling or stagnant prices. To us we still achieved 12% yield and
were growing. To the estate agents, well they loved us as they knew we were good for the
money and paid ‘top dollar’.

Now the point is, I knew a band of investors that came in and were doing just the same
as I was and who can blame them. However, they seemed to be fixated on “doing a deal”
and shaving a few pounds off where they could. The result is that I beat them nearly every
time in securing property in the developing market and grew very quickly at a rate of one
purchase every 3-4 weeks, my maximum really as I had a full-time job at the time. They, on
the over hand had a very frustrating time losing deal after deal to me or owner-occupiers
and picked up only the poorest quality property that no-one wanted.

I sometimes pull the sales expose which I keep out of my filing cabinet to look back at what
happened. At the peak of activity, a typical deal for £30,000 I may have paid £32,000 (rent
for £325 so don’t cry). Fellow investors found this to be foolhardy at the time. However, with

28
the benefit of perspective, these properties peaked in value in 2007/08 at around £105,000.
The deciding success factor was not if you could save a few pounds at the point of purchase
but how many properties you could secure while the market fitted the yield objective. The
investors I consider to have lost ended up with poor-quality properties which are hard to fill
and they continued to purchase as the market moved up and away from them and overpaid.
A useful lesson if you are looking to purchase multiple properties over a time frame that
includes an increase in market activity.

Activity 4
Determining Yield Reward is an interesting exercise to carry out for a market you know well
(perhaps in your area) or a market you are researching. You need to know finance rates,
rent levels and property prices for a given year, that’s all. If this data is not to hand, the
data for property in today’s market is easy to find and should help you make investment
decisions. So, find out some typical Yield Rewards in your area over a given time and some
Yield Rewards (today) for an area you are researching. The results could be surprising.

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 Chapter 5
What to Buy and From Whom
In previous chapters we have looked at your reasons for investment, locations to support
your investment and timing in your entry into the market, based on yield criteria. We now
turn to what types of property are available that can produce an income and the pros and
cons with each type.

A general list of property that could fall into the income-producing category are:

• Long term rentals, individual flats or houses or apartment blocks.

• Commercial rentals – letting to businesses.
• Short term accommodation – letting property on a nightly to monthly basis.
• Leaseback schemes.
• Fractional ownership.
• Purchase of land.
• Purchase of development property.

Let’s look at each type of investment now, and discuss how each may fit into your investment
strategy.

Long term Rentals

The most common type of investment, servicing the area of greatest demand. Typically,
your tenants in this sector will be based and employed near your investment and have
expectation to occupy the property for 6 months or more. The variability due to local market
conditions tends to centre around if property is typically offered on a furnished [a more
migrant population] or unfurnished basis and the typical residence times for each tenant.
Both factors demand close inspection as they will affect your cashflow and also the stability
of the investment. Let’s take a few examples.

Long Term Tenant in UK

The tenant market in the UK, much like markets in most of the developed world, service
tenants that for whatever reason are unable to purchase property. The purchase of property
and the general appetite for owner-occupation in this market is high and is often achieved
by those in work and a stable location. Therefore, typical tenants will be students, young
professionals, migrant workers and people “between” houses due to a job move, divorce
and the like. Whilst owner-occupation is on the decline in UK and has been for 5 years or
so, these tenants are the mainstay of the market and will continue to be so. Consequences
of this are that the average residence time is between 7-13 months in the UK, depending on
location and many units are offered on a furnished basis. So what does this mean for the
investor? Well, in terms of cashflow, any units offered on a furnished basis clearly take more

30
time and effort to get right. A 10% allowance on the gross rental is made by the taxman for
running such investments, and it is likely to cost around this in reality. Therefore, as pointed
out in Chapter 4, the rental income needs to be reduced as a consequence. Additionally,
the shorter residence time will inevitably lead to some unplanned voids albeit these may be
short in active tenant markets. Finding new tenants and to move previous tenants out also
comes with a cost. All in all, around 1-2 months’ rent should be expected to be lost each
time through vacancy and management input required to find new tenants and conduct the
move. With residence times perhaps just short of 1 year, this reduces the effective yield
further by 10-20% per year. You will have your own figures to work with here, but make sure
you apply them, and don’t gloss over.

Nuances within this market could be letting of property to sharers [so called Higher Multiple
Occupancy or HMO in UK] and rentals to tenants within houses. The HMO structure has been
a real growth area in the UK, and where tenant demand dictates, it can be a very successful
model. The watchword here is effective management. The property will inevitably take
increased wear and tear through the tenancy, dispute can occur between tenants and it can
be difficult to keep control of the occupants as they come and go. I have 2 HMO properties
in UK and have found them to be higher yielding than a standard let, perhaps by 3-4%. The
increased workload and maintenance has in truth eradicated most of this uplift, so are they
worth it? If you are able to manage the units without undue stress, I would say a resounding
“yes”. Getting the rents to a much higher level makes the properties more attractive to
investors and so increases their capital values when they are eventually unloaded. Just don’t
underestimate the work!

Finally within this section, there is the rental to tenants in houses, typically families. This
can be a very lucrative market, if the purchase prices are right in the first place. At one end
of the market, you could be renting a 2 or 3 bed terrace to a family that are unable to access
the mortgage market. If well-referenced, they could be very good tenants and their stability
gives a stable return. On top of this, the longer occupation time should, though not always,
result in the tenants really looking after your home. Some of the best rental stories I have
heard fall into this category. The tenants and landlords have a great working relationship,
and often managers in between become unnecessary. At the other end of the market,
affluent migrant workers who do not want the bother of going through a house purchase
can be found when the location is right. These tenants could be paying £2,000 or more each
month, and expect a quality property in return. Tenancies in affluent parts of UK have this
feature, but it is so often the case that the purchase price of a property in the area results in
a paltry yield of 3-5%. In addition, the demands of the high-paying tenants can be high, and
this can reduce the apparent yield yet further. It is hard to get this end of the market into
cashflow positive territory, although extensive research could unearth what is perhaps the
best find in the industry. Let me explain. In Aberdeen, as you know from previous chapters, I
was looking for property that yielded around 12%. This usually meant me hunting in the less-
favoured areas of town and taking lower-paying tenants to make it work. In 2005, I stumbled
across something of a sweet-spot in the market, but ignored it as it was “off brief”. What
an idiot. The properties in question were newly-built 4 bedroom, 3 story town houses in an
increasingly popular part of town. Demand was below supply at the time and prices had
been reduced from £250,000 and could be had if you bought 3 houses together at a price of
£200,000. The really interesting bit is that wages are very high in the area and characterised
by a high proportion of wealthy migrant workers servicing the oil sector. Rents of £2,000
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pcm where achievable. The holy grail of 12% being achieved in a very low maintenance unit.
So why did I not buy? My consideration was that this part of the market was fragile and
dependant heavily on one part of the economy. If I lost a tenant, my yield turned to zero and
I had a big mortgage to service. It was too risky in my mind, from a cashflow perspective.
Do I regret not buying? Yes I do. Properties of this sort really must come up very rarely, as a
series of circumstances needs to be in place for it to occur. I feel in retrospect I was correct in
assuming the voids were an issue and cash flow may not have been as good as the tried and
tested 1 bedroom flat market. But from a capital gain perspective, these units by their very
nature are a ticking time bomb for growth. 5 years on, after the biggest crash in prices in the
UK for a generation, the units are prices at £420,000 even today. The lack of a few months’
rent due to voids along the way seems and is irrelevant for once. Hindsight you might say.
But it is a trick that will work time and again should the yields and purchase price be in place
anywhere again. I will learn from this mistake.

Long term Tenancy – German market

Most markets in the developed world bear close resemblance to the UK story outlined above,
but I will introduce the features of the German market as these are sufficiently different.

Due to lower rates of owner occupation across the country, typically between 15-45%, the
tenant market is turned on its head compared to that of the UK and many countries across
the world. What we find in Germany, and some other markets around the world of low owner
occupation rates, are longer length of the typical tenancy, tenants covering the spectrum of
the population and a market typified by institutional investors purchasing on bulk. So what
does a typical tenancy in this market look like? As a contrast to the shorter tenancy periods
in the UK, tenants in this market can be students, migrant workers, professionals, families
and even retired workers. The average tenancy is more like 5 years, with some tenants
staying for 30 years or more not being uncommon. Now that is stable! Tenants consequently
treat the rental as their home and unfurnished property, even down to the provision of
kitchen and other fixtures down to the tenant. In addition, depending on the part of the
country in question and the state of market, units can be bought as a multiple so the whole
apartment block or a number of apartment blocks. Investments are bought on a far more
commercial basis and priced for investors, based on yield. When I first entered this market
in 2005/ 2006, I found it all a little too good to be true. Not only were the features above in
place, and management of a complete block of 20 apartments more straightforward than
the management of a single apartment in UK, the ancillary costs of running the property
were calculated in a far more transparent way. Effectively, all the side costs associated with
the running of the investment such as: House management, buildings insurance, ground tax,
boiler and lift maintenance, etc were effectively paid outwith the rental yield of the property
by the tenant, directly to the management company. There really are few deductions being
the collection of rent [around 5% of net rent] which need to be factored in. Still all sounds
too good to be true? Well, it is not a gift. The useful due diligence in terms of property
condition and location as in previous chapters needs to be conducted, as well as effective
management in the next chapter. I have met many investors who have entered the German
market based on low capital values alone and who have either lost their shirt or at best
temporarily misplaced it. I remember well the meeting with an investor from the UK who
came to our offices in Leipzig with a Lidl carried bag full of keys from a “development” in a
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small town in East Germany. He had bought 120 units for around 5,000 Euros each at an
auction in London. There of course was a reason the seller needed to take the property to
auction in another country! There were around 10 units rented when he bought them, and
the costs needed to get the others in a rentable condition was around 30,000 Euro per unit.
He was cashflow negative from day 1 and there was no way out for him, apart from take his
Lidl carrier bag back to London and see if he could “pass the parcel” with the problem. A sad
case. But overall, the German market offers a real opportunity for an investor to access the
market quickly, invest in a significant number of units and get managed in a truly arms-length
manner. With yields of 8-12% not untypical, it is a marker which demands further research.

Commercial Tenancy

From the outset here, I will confess to a limited experience in this market. Having invested in
only a few smaller units myself and only having introduced a limited number of investors to
such property. This is perhaps a blindspot, due to the huge sector which it represents. The
reason behind my lack of exposure to commercial property probably lies to the significant
difference in this kind of asset and the manner in which it is purchased and managed.
Commercial property ranges from a small shop or office unit below a residential block right
the way through to supermarket complexes and large industrial spaces. What they all have
in common is that the risk of the investment lays not only in the occupied state of the unit
but also in the ongoing success and viability of the business that occupies it. Determining
this risk is clearly a crucial part of the due diligence process that residential investment does
not involve, with macro-economics being more the factor there. That said, commercial
investments can be a very transparent offer and come with long-standing tenants in place.
Additionally, it is typical for contracts running between 5-20 years to be in place, giving some
security of tenure with maintenance issues being taken care for by the tenant. Much like the
economy itself, the appetite for commercial investments can be very volatile, and property
suffer greater falls [and experience faster increases] than residential property. For example,
commercial property in most of the developed world has recently seen drops of around 40%
or more, whilst the economy is is decline. Purchasing commercial property therefore in the
current phase of the cycle could prove very rewarding if the tenant in place remains viable.
Yields in strong markets can be around 6%, whilst more risky investments can bring 10-12%
net yield. Against the current backdrop of low interest rates, and knowing that the running
costs of a commercial investment can be very low, it could be a tempting market to enter.
From my limited experience, I would tackle such an investment based on the viability of the
incumbent tenant’s balance sheet and attempt to buy a type of premise in a location that
would support a swift re-tenancy should the incumbent leave for whatever reason.

Short Term Accommodation

Okay, back to an area I have more experience in, so hopefully I can provide a few more
thoughts for you.

Have you ever watched “A Place in the Sun” or flicked through a property magazine in a
dentist’s waiting room and found the allure of owning a second home almost irresistible?

33
Seems a great way of using some of that spare cash you have and putting it to good use,
not doing much in the bank after all. And the promised cherry on the cake is letting the
property out when you are not using it for your own short breaks. The fag-packet calculation
reveals that you could buy the property and rent it to guests who will essentially pay for the
mortgage [if you take one] and all the running costs. Hey presto, a free holiday house. You
pat yourself on the back for being so clever, go into the dentist’s chair and think on it some
more. On reflection, it seems too good to be true. Why doesn’t everyone get up to this
wheeze? Let’s take a look at the fag packet in more detail, using the usual boring metrics
our regulars will be used to.

Location

As usual, the daddy when it comes to criteria in evaluating the viability of a purchase of
any property, in this case a second home purchase. But rather than using the usual tools to
determine demand from long-term tenants, we are looking for the short term market [let’s
agree that to be 3 months or less]. Different ways of tackling this one. Here’s some ideas, all
internet-based so you can keep your buttocks firmly where they are right now:

• Research a number of travel sites to determine where people are going for short
breaks. This will give some ideas mainly about the leisure market.
• Look at fast growing regions where the employment base could be very transient [and
therefore unwilling to go for long-term accommodation]. This could include sectors
such as off-shore energy [short stays onshore], near film studios where only temporary
accommodation is sought or more typical seasonally-based activity.
• Try and find areas where business people come and go a lot. These could be near
convention centres, universities or research areas and just an area undergoing a lot of
development.

The internet really can save so much time in research. When I was researching the viability of
a UK short term property, I found the Travelodge website very useful for example. Travelodge
operate all over the UK, and have small hotels which service short stays for the range of
clients. What was very useful was to see which Travelodge’s were the cheapest [check
out Grantham or Dundee, for example] and where the dearest were [London, Edinburgh,
Aberdeen rank high]. In fact, the Travelodge in Aberdeen really stood out. Due to the oil
industry, and a thriving economy, rooms were fully booked right out to 3 months, and then
the maximum £70 per night for the rest of the year. Dundee, only 60 miles south, had rooms
available year-round for £19 or so. This really was a good first indicator of the viability
of short term accommodation. Closer investigation on the ground showed that Aberdeen
didn’t have enough beds in the city, but property prices were on a par with nearby Dundee.
Short term accommodation really took off in the city a few years ago, local property owners
eventually catching on.

And really, this is what this section is all about. Any fool can tell you that the capital cities
such as London, Paris and Berlin have a lot of demand for short-term accommodation. But
how much do you have to pay for the property in the first place? This is clearly key. Property
in London or Paris is often around 5,000 – 10,000 Euro per sqm. In Berlin, central property

34
can be had for 1.000 Eur – 2.000 Eur per sqm. That’s a bit different! And whilst long term
rents usually have some correlation to the price of a property [the rental yield], the price
paid by a short-termer is often more closely related to the price of hotels in the city. Now
that is interesting....

Finally, a bit of competitor analysis in the market could be useful. Is there someone else in
the area you are looking at doing just what you want to do? Perhaps they will chat things
over with you. If not, their availability calendar on their website [check it for a few weeks]
will show demand fairly well.

Property Type

There will be different property types in different locations and markets in which you are
researching that will be the “golden ones”. In a holiday resort, proximity to beach and such
amenities are often crucial to avoid long void periods. In a city servicing tourism [like Berlin
or London], proximity to tourist attractions and transport will be valued by clients. Whilst
long-term tenants may be more particular over which floor the apartment is on [ground
floor being a no-no perhaps] or does it face south, short termers will pay less regard usually.
For city lets, can the property be configured to allow a maximum number of guests for the
given space. For example, does the property have a large lounge that could accommodate
a bed-settee for example and push the potential occupancy up by 2? Clearly a lot of your
research into location will feed in to this part of your work.

One tip I will share on location is perhaps most pertinent to short term lets for business
people, but could apply anywhere really. The point is that your competition a lot of the time
will be purpose built accommodation for short termers such as hotels or apartment-suites.
These often come with additional benefits to travellers such as meeting rooms, dining and
leisure facilities such as gym and swimming pool. But here’s a good one. Why not ensure
your short term apartment or house is located right near one of the great hotels in the
area. You can often negotiate some level of collaboration between you and the hotel, where
the guests use the hotel facilities as part of your cost, or as an additional package. If you
negotiate well with the hotel, you may even be able to piggy-back off their reception and
have keys collected and deposited there. You can then give the added perceived value of
staying in a hotel to your guests [and market this] whilst having the space and convenience
of an apartments. A real win for all.

Maintenance and Running

The property will of course take more of a pounding from short-termers. That’s just a fact.
You will also have to provide everything within the apartment or house, as appropriate to
the market. This will often mean towels, toiletries, IT and internet etc etc. Lots of overheads
you don’t get with long-termers, but of course you will make some use of all these lovely
facilities when you stay at the property.

In terms of running of the property, the level of client expectation [usually related to what

35
they are paying!] needs to be considered. Obviously, you are going to present the property
spotlessly clean and having a good cleaning team on board that will work when you are not
in town. But how are your guests going to access the property, especially out of hours. Will
a key box suffice outside the property, or should clients be met? Things to consider. How will
the clients expect to pay? Do you offer credit card payment [expensive] or are your guests
happy paying cash, or better in advance by PayPal?

And what about marketing? Of course the internet will be the most useful way for you to
start, before you build a word-of-mouth following. Research will tell you if the market is
competitive enough to need to market through portals [such as Expedia] or you are in a
niche location that you can service well from your own internet site, perhaps with links from
local service providers such as exhibition halls and the like. A whole article is needed on the
marketing of the property really, but suffice to say it is here that the investment, if bought in
the right location, will live or die.

Fractional Ownership

We should cover this type of property, not so much because it is a sector that can produce
income but because it is often sold as such. Quite simply, fractional ownership means you
buy a share in the use in a property either by a fractional entry on the deeds or by some
agreement under a lease. It sounds a lot like timeshare, and in practice it bears a close
resemblance. The advantage of fractional ownership is that the cost of entry are that much
lower and can be achievable without the need to take up finance. You can therefore assert
that fractional ownership only becomes popular towards the end of a property cycle when
capital values are out of the reach of buyers and banks have pulled back on lending levels.
Perhaps it is a good indicator that it really is not time to buy into the market.

Where the scheme could work, is in achieving the

purchase, albeit shared of a size of property that
you could not otherwise afford. Your level of share
will obviously dictate the amount of usage you
are permitted. Ok, so as an alternative to renting
a holiday villa there could be something to say for
the scheme. As an income-producing venture,
the topic of this little book, it is unlikely to meet
even the loosest of business plans. Just weigh the
realistic income that can be produced during your
permitted time against the high running costs and
maintenance that will be required. It would be
good to see some records of similar property in the
area and the cashflow actually produced. Once you
have a handle on the actual cashflow, put this into
context with the total cash you are putting in and
come up with a rental yield. If it stacks up, then perhaps look into the scheme further. It
is unlikely you will find reliable rental yields in this sector, and the chance of offloading the
property to others at a profit is a real gamble.

36
Property for Development

As opposed to making profit on the

regular income from a property
rental, the basis of this book, profit
can of course be made through
developing property and selling
at an uplifted value. Countless TV
programmes and newspaper articles
have been dedicated to this topic
in the boom decade of 1997-2007,
covering a topic that was once the
preserve of professional builders.

So is there any sense to enter this market right now, post-property boom in most markets?
Well, it is a risk unlike the income model we have covered so far. How can you be sure you
can achieve an uplift in value and find a ready buyer in good time? Is finance availability for
such projects in place? What skills, over and above competitor professionals, do you bring
to the party?

Despite the difficult markets currently, it is possible that you do have an advantage over the
bigger builders. Your local knowledge may put you at an advantage, perhaps you know of a
forthcoming infrastructure development in the area that has not hit the press as yet. Maybe
you know the seller on a personal level and can negotiate a price without presenting it to the
market. So perhaps there are angles you can take. Some basic pointers to give you the best
chance of making in a profit in an assumed flat marketplace:

• Can you add value to the property in an easy way some how? This could be in a number
of ways. For example, can the land that comes with the property be sold off separately
and reduce the risk of the main project? Are you acquiring the property with a
restriction on the lease for example that can be lifted post-purchase and can therefore
add value? That could be a great way to make money without doing the work, if you
are well-versed in local legals and planning rules.
• Can you extend the property in a cost-effective manner? Perhaps the property is a
bungalow that can be readily extended in the attic. Maybe there is land sufficient to
support a one or two story extension? I suppose the point here to make is that laying
a brick in a poor part of town costs the same as laying a brick in the best part of town.
The value of that laid brick could vary up 3 times or more in many locations. So the
location of the site, as ever, is paramount.
• Are there some local infrastructure improvements to be made in the area, and will
that benefit be obvious at the time you come to sell the property? You may have
heard a rumour of a new train station or new school, but the trouble with rumours is
that everyone else has probably heard it and it may come to nothing by the time your
development is finished.

37
• Can the use of the property be easily converted towards a sector that values the property
higher? For example, can an old commercial building be converted into residential
use? If so, what are the difference in value per sqm for each sector in the area and is
there enough of a margin to take the risk you will get permission. Alternatively, can a
residential property be converted into smaller units, and sold at a higher level? Does
the micro-location support this?

So, this route, particularly in a favourable sellers’ market, could be a way of turning profit in
a much quicker way than the alternative income model. But the risks and stakes are much
higher. Really do your research, before turning up to what really is a casino-type wager. The
more research you do, the more the odds will be in your favour.

Purchase of land for development or subsequent sale

The final sector we shall briefly look at is the purchase of land, without property on it. There
is a lot of commonality between the approach here of course with that of development
of property. Perhaps the big difference is the longer timescale it can take to realise the
investment, land being very illiquid. The types of land that may be of interest to an investor
could be:
• Land for farming, in a country that has low land values and good crop yields.
• Land that could have the use of it changed, such as approval for residential building.
• Land that could be leased to a high-paying tenant, such as a mobile phone aerial or TV.
• Land that can be leased as a commercial area whilst approval for a change of use is
granted. A favourite one is buying a city centre patch of land, and renting out for long
term car parking space to local residents or businesses. The yield can be higher than
that of other property types, there is little maintenance and you could be sitting on a
gold mine should permission to build be given.

Timing of land purchase is critical, even more so than built property. The fluctuation in price
is far greater and aligned [albeit usually with a lag] to the general state of the economy.

Where to buy Property

The choices of where to search for property will depend on the market conditions and the
prevailing culture in the marketplace. In a buoyant market, distressed sales will be few and
far between and most sales will come direct from sellers via an agent. In more difficult
markets, property will be offered by sellers, banks holding the finance which may be in
default or institutional sellers who hold banks of these “non-performing” loans.

In most markets, the easiest route to delivery will be through an estate agent or realtor.
These agents will generally have good presence both on the high street and also on the
internet, perhaps having lisitings amalgamated under national or regional portals. There’s
not much to add from me here. You will no doubt be accustomed to the agent process.

38
Perhaps the only tip would be, especially in a fast-moving market, to try and establish good
links to an agent or a select number of agents. Good deals that do come up, maybe needing
a quick sale, are the ones to go for and you want to be sure you are sent these first! Not only
should you seek to strike a good working relationship with the agent, but also demonstrate
to them that you are in a good position to move quickly on any deals. This will convince
them that you will maximise the chances of closure and perhaps minimise the work they
have to do in terms of marketing.

In more difficult markets, the options are more varied. It maybe that auctions are a viable
place to search or getting near to the institutional sellers of non-performing loans outwith
auction is possible.

Auctions
Again, a complete book could be written on this topic and a search of Amazon will prove this to
be the case. I will add only my own experiences of auctions, having bought only 3 properties
in such a way. What can be said for auctions which are concluded in a competitive manner
[ie more than 1 person bidding] is that the true market value is being paid for the object. In a
difficult market, the supply of property to auction may well exceed buyer demand and prices
paid can be a lot lower than listed through agents. This relies on realistic reserve prices
being set. Buying at auction in a buoyant market can result in paying over what is available in
the open market, with buyers placing additional value on assured delivery. Not a good place
to be! As a general rule of thumb, if bidding is competitive and closing prices continually
reaching above the guide price, then perhaps you have wasted a day, and you should keep
your hands in your pocket. On the other hand, an empty auction house, particularly near
the end of the day can be a great place to pick up units as long as you have done basic due
diligence on the object and have ready finance to close the deal.

Buying From Institutional Sellers

Unless you have a lot of money to spend, it will be difficult to get direct access to the best
deals that institutional sellers offload. It is more typical that a specialist agent will be able
to give you access, as they have a good working relationship with the seller and deal with
them on a bulk basis.

Some real bargains exist here, and it is where I have bought a lot of property and will continue
to do so. The “no free lunch” is the poor delivery of such objects and the wasted time chasing
down 5-10 deals to achieve only 1 sale. Perhaps this is fine for property professionals who
have the time and tools to undertake such a delivery route, but more difficult for private
investors who have the burden of a day job.

Our company, ProVenture, assist clients to purchase such property and there are others
in the various markets around the world. The point to discuss as an opening conversation
with such agents is to gain facts on the delivery success they have enjoyed over the last 12
months or so, and to get a realistic picture of what to expect of delivery and price. Once you
have this clear in your mind, then you will know if this is a route to market for you.

39
 Chapter 6
People Not Bricks – The Secret to Success

Indulge me as I climb on my soapbox and describe what I think is the area in which many
investors make their biggest mistakes. Clearly, the business of property investment has at
its cornerstone (pardon the pun) the acquisition of bricks and mortar to build value and
cash flow. However, I am going to argue that it is the people who you interact with in the
acquisition and ownership of those bricks that are the key success factor.

Looking at the people surrounding the business, I would arrange them as follows:

I have used a model with concentric circles

to explain, in my mind, where I see the
greatest importance in relationship
building with the various parties.
So let’s start at the middle, the
area of greatest importance.

1. The Tenant
It really surprises me how little
regard some property investors
and landlords pay to this most
critical relationship. This is clearly
where all cash flow and profit are
generated, the key (and only!) customer
of your product. When I talk with fellow
investors regarding tenants, we invariably
end up talking in short time about “tenants from
hell” and what a nightmare they can cause us lords of the
land. Frequently, the conclusion of such conversation seems to be that the business would
be very easy if it wasn’t for the tenant!

Like any relationship, there are responsibilities on each side to ensure harmony exists.
So what should be done in the case of this relationship to avoid the “tenant from hell”
approach? Well this depends on if you have a letting agent or other third party managing
the tenancy on your behalf to some extent. We will talk more about the relationship with
these people shortly. However, regardless of who manages the tenants, the relationship
should involve the following:

• A clear outline and what is and what is not expected from both sides at the start of
the tenancy. This will usually be drawn up in a written contract, but in all honesty who
reads contracts from top to bottom? Far better would be to discuss the agreement
face-to-face, particularly if the tenant does not speak the local language as the mother
tongue, to ensure no misunderstandings exist before the outset. This also gives the
tenant an opportunity to voice what they expect from the landlord and / or letting
agent. It may be that their expectation differs to yours, perhaps due to different

40
 cultural backgrounds, and these differences can be addressed at the start. Any special
conditions for the tenant can also be discussed and agreed.

• Regular communication, not just communication in response to necessity. This

communication should be planned and respect the privacy of the tenant. The intent
of this communication should be to ensure the tenancy is progressing well and no
problems are building up. Circumstances change in everyone’s lives and it is best to
know about these changes for your tenant as soon as possible. Are maintenance tasks
up-to-date for example? Is the tenant expecting any financial issues that may affect
rental payment? Is the tenant looking after the property? Do they wish to stay in the
property for a longer period than signed for? This communication is probably best
to be conducted at a planned meeting at the property, although communication at
short notice can be conducted well by telephone. Email, and all its
impersonal effects, should best be left to include detail as a follow up
to a phone call or inspection visit.

• Regular review of rent levels. This is not to say that rents should
be increased at every opportunity. However, it is valuable to keep
the tenant regularly up-to-date with market rental levels for their
type of property. It may be that you will reward tenants that stay
longer in a property with below market rental levels, but it is still
worthwhile making point of this as a demonstration of your goodwill
and recognition of their responsible approach.

In summary, it is not necessary to be “best friends” with your tenants

and this could actually be counter-productive (when serious issues need
to be faced and over-familiarity can cause problems). However, regular
communication, from yourself as landlord and / or your letting agent, will
ensure that this most crucial of relationships is effective and serves the
business need.

Letting Agent

It maybe that your property investments are located near to your place of residence and
their number is not too great that the task of finding and managing tenants can be carried
out yourself. This clearly will reduce the overheads as typical fees amount to around
10% of gross rentals if entrusted with a professional letting agent. The task, if carried out
properly, should not be under-estimated however and can be time consuming and reactive
to problems which can occur at any time. If the task if outsourced to an agent then this is a
key relationship, providing the “face” of your business to the tenant as outlined above.

Striking a good relationship should bring the following benefits:

• The letting agent keeps you abreast of current market rental levels and achieves this,
where appropriate, across your portfolio.You are kept up-to-date with routine planned
and unplanned maintenance tasks and ensure the property remains in a good condition
for continued rental.

• Your agent could advise on the best properties to renovate, to maximise returns,

41
 or indeed advise on properties which could be considered to be sold at the most
advantageous point.

• Your properties are favoured when showing prospective new tenants a selection of
properties.

Clearly, this relationship is key to ongoing profitability of your business and it should be
considered how the relationship can be fostered in the best way. It will always be a good
idea to remain pro-active as a landlord and react to maintenance issues in a timely manner.
This will ensure that the letting agent’s job is easier as they will be managing less-problematic
properties. Regular communication with the agent will ensure that your properties are
always in their mind when looking for new tenants and this is key, particularly in a soft rental
market. And finally, regular visits to the Letting Agent will always be useful in building of
rapport in particular in the first 1-2 years of your relationship.

Selling Agent

Another key relationship, if you are buying multiple investments in a given area over a period
of time. The selling agent can provide an invaluable insight to the market and often be
passed deals which do not appear on the market, and pass them to you first if you are a
good contact.

Depending on the market conditions, the selling agent will be more or less motivated to
work closely with you. In a buoyant market, the agent can sell his property easily and will
be more likely to be working closer to the buyer as they are bringing a scarce commodity,
good property for sale, to the market. In a slower market, you will not find it difficult to
become the agent’s best contact and you will both benefit from the activity and transactions
you bring. A consideration on this point is how many agents you will use. Using multiple
agents may be perfectly acceptable (and usual) in some markets, but may provide a conflict
of interest in markets where good property is rare and offered to a variety of agents.

A selling agent in this case who discovers you have employed a number of other agents, who
all find the same or similar property, will be less motivated to work on your behalf for the
obvious reasons. However, if you select one agent and motivate them well to find property
to fit your investment criteria, this will usually serve everyone well as you build trust and
understanding and above all else create a history of successful purchasing. Like all of us, the
agent will be motivated by completing successful sales with minimum fuss as this maximises
their return. Therefore, the ultimate sales price offered by you becomes less relevant as the
volume of sales you bring delivers regular commission. In the best case, regardless of market
conditions, you can be offered property that fits your objectives well before it is presented
to the market and place offers that may be below that would be achieved if offered to the
open market.

Legals & Banks

Whilst achieving a good relationship with professionals in this area is unlikely to bring big cost
savings, the service you receive could really benefit. A good relationship with your bank for
example will serve to build trust in your business and the viability of the properties you are
attempting to finance. For me, as I tend to finance properties to a high level where possible,

42
this is crucial. The advantages of building a good relationship with your legal contacts is that
a timely service can be delivered and deals go through at a good speed, minimising the risk
of losing deals due to time spent getting through to the exchange of contract stage.

In building relationships with these bodies, it can be very good if you can deal with one point
of contact within the bank or legal firm. These firms maybe very large in size but by building
a relationship with one member of staff, hopefully at a high level within the organisation,
service can be very good and improve over time as successful deals mount up.

Builders
Oh boy, is this bit tricky! We all have stories of dealing with builders either at investment
properties or on our own homes. Most of these stories fit neatly under the “nightmare”
column. This has been my experience in a number of different countries so why is it so and
what control over the situation can we expect to achieve?

Well perhaps unlike the relationships discussed thus far, relationships with tradesmen can
often be of a less professional nature and an enduring relationship is not always sought by
both parties. Good builders have frantic work schedules and this means that work can be
carried out in a sporadic fashion (going between different jobs as they progress) and the need
to find repeat business is low on the builders “to do list”. So how can a positive relationship
be fostered that will benefit all? Well, like in the previous cases, proving yourself as a good
client and paying promptly with minimum fuss will differentiate yourself as a good client
to some extent. Perhaps equally important is providing the builder with clear guidance at
the outset of any project and visiting the site (without being too intrusive) can work well in
building a professional relationship of mutual respect. However, even when all these things
are done, builders can often abuse this relationship and see you as a source of ready money.
You do pay promptly after all! Quotations and costs for materials find themselves going
steadily upwards. This is not always the case and I am sure you have some good examples to
the contrary, but all too often it happens to investors I work with or the letting agents who
employ the tradesmen.

Perhaps one good approach, particularly if you are not an expert in every aspect of
construction, is to appoint and pay an intermediary to work on your behalf. This intermediary
should have a greater knowledge of the building trade than yourself and offer credibility and
to some extent power. For small routine maintenance tasks (say up to changing boilers etc)
perhaps your letting agent if you use one will be a useful intermediary. If they are an agent of
reasonable size, they will have a good handle on the going rate for typical routine tasks and
how long they should take. The agent has a vested interest in getting the work completed
and also offers a lot of potential work to the tradesman through the size of properties they
hold under management. Under a fully-managed contract, a letting agent will often conduct
these tasks as part of the contract.

For more involved projects (kitchen / bathroom replacements, changes of layout etc) a
project manager could be employed to ensure the relationship between you and the builder
is the most productive. A project manager could be a professional, an architect used on
the project or a key tradesman involved in the project. The project manager could even be
your letting agent where appropriate skills and time exist. The point is that the function of a
project manager is highly valuable work and should be rewarded. Do not expect your letting
agent to oversee a complete refurbishment of a property for example, without additional

43
payment, and expect things to go swimmingly. This is not their core business and you have
not paid for this service. In the best case, the letting agent will attempt to recover costs by
overcharging for elements of the building work and in the worst case the work will not be
completed to a satisfactory standard as a result of insufficient oversight.

Finally, Feedback
As in any relationship, you should seek and provide feedback as your relationship develops
to ensure you grow stronger together. There are simple ways of doing this, through regular
face-to-face meetings for example. Perhaps in some cases a simple feedback form could be
appropriate, thinking here of feedback sought from you by your tenant for example. You
may not know the tenant that well or use a letting agent so face-to-face contact may not be
possible. I always seek feedback, particularly from letting agents that I use. I work with a
number of letting agents and have always told them:

“I want to be the best landlord on your books.

Please, tell me when I am not.”

I apply this mentality to my approach to tenants. I want to be the best landlord they have
ever experienced. I would do this by actions, surprising them in the care and speed I give to
rectifying maintenance issues for example.

And finally, when appropriate, remembering to give honest feedback yourself (although it
is rarely requested!) can be useful. If a tenant has proved to be one of the best on your
books, paying regularly and sorting problems on their own initiative, tell them they are the
best. Reward them is appropriate in some way. Conversely, if a tenant falls short of what is
expected, tell them before the point when legal action is required.

Activity 5

List the relationships you see as important in growing your property investment business.
How are you going to develop these relationships and what do you expect from your
relationship.

Relationships:

….....................................................................................…........................................................
….....................................................................................…........................................................
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….....................................................................................…........................................................

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 Chapter 7
The Management of Risks
In common with any other form of investment, property has risk associated with it. Clearly,
rises or falls in capital value occur and if an investor seeks capital growth to generate profit
then a whole list of risks could be listed, based on micro and macro economic and political
factors. Remembering the example of the roulette wheel in Chapter 1 with the gambling
stakes being paid by the tenant, the rise and fall in capital values is very well hedged against,
as long as the investment is held.

In keeping with the rest of this book, we will focus on the profit generated through monthly
cash flow from rental payment. There are 3 primary risk factors posed to this income stream
and are as follows.

Risk 1 - The Property Lays Empty

This is the one that really keeps me awake at night! It really is not the idea to purchase
property and let it stand empty for any extensive period. Not only does the income stream
stop completely but also security of the property, maintenance and validity of building
insurance become questions. So what can be done to mitigate this risk?

Prior to purchase, the critical factor will be to determine the level of rental demand in a
particular area location and in the type of building being considered. This is a critical piece of
work that can reveal an apparently suitable property in terms of yield reward to be an overly
risky investment. Discussions with letting agents on the ground and research from the web
will be the key. Some questions to be answered at this stage:

• What’s the typical population in the area? Are they tenants or owner-occupiers?
• Is the population growing, shrinking or stable in the area (key question)?
• How many properties have been let successfully in the last 6 months? How long did it
take to let the properties?
• Do tenants stay longer or shorter than the average in the particular location?

Hopefully, by asking questions such as those above, you will choose a good location in
terms of rental demand in which to invest. Post-investment, keeping your property let and
producing income relies heavily on the relationships you have built-up as we discussed in
Chapter 5. Having a good relationship with your letting agent and / or tenant will ensure
that communication is regular and friendly and each of your interactions are a “positive”
experience for all. Enjoying these relationships will tend to improve how quickly a letting
agent will let your property and also how long a tenant may stay at your property.

In addition, the level of rent set can effect the length of time your properties stay voided.
Setting levels at the market rate but offering some incentives such as a parking space or 1st
month rent half price can be very effective in a competitive rental market. Additionally,
setting rental levels just below the market rent (say 5%) can be an effective method to attract
a long-list of prospective tenants in a area or sector where price sensitivity is high.

45
Risk 2 - The Property Falls Down

Well, that would be very dramatic! This section deals with non-routine maintenance tasks
and costs. Clearly a lot of work can be completed prior to purchase to offset some of this
risk. Activities such as:

• Instruct a comprehensive survey to highlight any significant faults. Price these faults
into your offer price or walk way.

• Determine the construction type used. Is it a building structure that should be durable
against time? Does it have any particular features (i.e. flat roofing or non-standard
building construction) that make it vulnerable? Do any of the major items require
imminent replacement (heating, windows for example)?

• If buying a part of a building with common parts for other users, how well are these
common parts maintained and looked after?

Once purchased, during the course of ownership only general routine and corrective
maintenance should be required if the property is well-managed. It is worth making a list
of these activities and when they should be carried out (and what time of year, for example
external work should be carried out when the weather is favourable of course). You may
employ someone to carry these tasks out but make sure they are completed by regular
inspections to the property yourself. This is always a good use of your time and can highlight
any other issues at the building that you were not aware of (or potential properties for sale
near yours!). In terms of planned maintenance, a building of typical construction in good
management should cost around 1.5% of its value each year to keep in a good standard.
Some years will cost more and some less, depending on the tasks undertaken in that year.
Finally, insurance can be taken at various levels against varying risks. You should consider
your attitude towards risk, and your cash holdings held against these risks, when deciding
which insurance cover to take.

Risk 3 - Financial Risks

The biggest single outgoing for many investors will be the monthly payments required to
service their loans. The good news is that there are many ways to reduce your risks in this
area.

Type of Mortgage – At the most flexible (but also most risky) end of the standard mortgage
range is to be placed on the bank’s variable rate. This does what it says and varies with the
prevailing market conditions, often from month to month. For an experienced investor this
could be a good choice as the variable products often offer full flexibility to over pay and pay
off the loan or lock into another product when the conditions are deemed advantageous. At
the other end of the spectrum can be found long-term fixed rate mortgages with terms up to
30 years. A longer fix often suits less experienced or more risk-adverse investors as they are
able to plan with more certainty what their cash flow is likely to be for a long period. These
products are clearly less flexible and can be costly if redeemed though sale or equity release.

46
Between these 2 products lie a million and one other type of finance deals which are fixed,
variable or somewhere in between (capped / collar). It is wise to take proper financial advice
in this matter but worth considering before you do what kind of investor you are and what
level of risk you are prepared to take with fluctuating repayments.

Additionally, the method of mortgage repayment can be set at the outset of the agreement
to suit your needs. The first type (interest-only) involves paying only the interest of the loan
each month and leaving the capital borrowed to be repaid by another vehicle or eventual
sale of the property. A repayment mortgage will ensure that the capital element is repaid
by the end of the term of the mortgage. Sometimes the repayment element is constant
through the term of the mortgage or it can start very low and increase as time goes on (and
your rental returns increase).

Finally, it will be wise (crucial!) to hold some cash reserves against the level of your
investment to ensure you can sustain a cash flow in the business. The cash flow will be
affected if you suffer void periods or significant unplanned maintenance tasks. The amount
of cash you hold will depend on your attitude to risk, the type of your investments and their
rental history. It is important to keep some of your holdings in cash as equity in assets, in
particular property, can be illiquid (difficult to get hold of) and can depreciate in value just
when you need the reserve. As a rule of thumb, I like to keep between 4-8 month’s gross
rent from across our portfolio in cash at any one time. Even though our borrowings are big,
this financial cushion enables me to sleep very well at night.

Activity 6

What are the main risks you see in growing a property business? How risk adverse an
investor do you think you will be? List the measures will you take to offset your risks, based
on your risk profile.

….....................................................................................…........................................................
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.….....................................................................................….......................................................
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.….....................................................................................….......................................................
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.….....................................................................................….......................................................
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47
 Chapter 8
You are a CEO

There is a danger, especially if property

investment is embarked upon as a
supplementary form of income or for capital
appreciation only that it can be approached
in a less than business-like manner. That is
to say, less regard can be paid to the income
flows inwards and outwards than would be
paid to any ordinary profit-making business.
This is a mistake and an approach that many
smaller investors make in this very fragmented
market. Adopting the persona as the CEO of the business and making plans and decisions
in a business-like manner can only increase the profitability and long-term success of the
venture, So what would make the difference between an investment venture run as a hobby
as that of a business?

Paying Regard to Competition

One of the key activities of CEOs in successful companies is to keep a key eye on competition.
What are others doing well or not so well? What are your competitors charging? Where are
they buying or selling? In the market of property investment, the marketplace can be very
fragmented with no clear market leader or player with huge market share (other than social
housing provided by the government). This is true to more or less of an extent depending
on factors such as owner-occupation levels. Typically, the lower the owner-occupation levels
resulting in the presence of larger investment institutions. Perhaps surprisingly, it is very
infrequent for a “brand” to exist in the market that clients (tenants) are aware of and are
drawn towards. This provides the obvious advantages of ease of entering the market as a
small player, perhaps investing in just one studio flat and making a profit. Just imagine trying
to break a market such as the soft drinks industry and compete with market leaders such as
Coca Cola. Huge capital and risk is required. Notwithstanding this feature, it surprises me
the lack of business approach that is adopted by property investors, even the so called “big
boys” who I have seen make huge mistakes (by having just a broad overview of a market and
investing in perhaps a lazy fashion). The big boys can be beaten by very small investors that
employ more competitive tactics and strategies. Equally, smaller players looking merely to
“provide a pension pot” or some other vague notion based on capital appreciation display
a very loose attitude towards monthly cash flows and growth strategies (perhaps they are
busy people!), providing the business-focused investor huge opportunities for competitive
advantage.

Analysing the competition will reveal an abundance of factors that can be used to align
your business approach. For example, what are your competitors charging for their rentals?
Have they kept rent levels static for years and fallen behind the market rent (a common
mistake) or is your competition attempting to achieve unrealistically high rents based more
on the return they seek than the market will bear. This is a common mistake of investors
that have paid at the peak of a property cycle and attempt (badly) to cover the costs of a
doomed investment. Analysis of pricing, available from letting agents and the media, will

48
guide you to price your property at a level which is competitive and achieve a successful
letting. Perhaps inventive pricing structures can be implemented, beyond the flat monthly
payment to induce potential tenants and keep them. Not seen often, offering low monthly
costs at the beginning of a tenancy and providing incentives to stay (including managing
their property well!) could pay dividends. This process is of course ongoing as the market
develops. So that’s the income side.

What about costs? Again, careful analysis of your costs versus typical costs of your
competitors will increase profitability. Statistics are more difficult to reveal, your competitors
are less open and willing to show your their balance sheets. Perhaps a good approach is to
make good relationships with the suppliers of your services and attempt to achieve low
costs (perhaps as low as the big boys do through their scale) by “win win” negotiation or by
teaming up with other investors to present a stronger front. Typical costs in the business will
include:

• Property management fees

• Property buildings insurance
• Finance
• Routine property maintenance
• Non-routine maintenance
• Furnishings and fittings

Maximising Cash Flow

The positive flow of cash in any business is key to its ongoing success and your property
business is no different. Hopefully you will achieve good purchases at high yields to ensure
a good cash flow exists. By making efficiency measures as detailed above, your expenditure
should be reduced to a minimum and so should the periods that your property stands empty.
It is a good idea, once a property has “settled down” after a few months of ownership to
capture the cashflow it brings and what this contributes to your overall cashflow across your
growing portfolio.

By listing individual properties against monthly income and outgoings, each property can be
analysed for its benefit to the portfolio and highlight potential “stars” or “dogs” within your
portfolio. It is inevitable that some properties will out perform others in a given month, but
is this a continuing trend? Tracking such flows of cash will help make decisions such as taking
streamlining measures or making further acquisitions of a certain property type / location or
disposing of under-performing property.

Planning for Acquisitions and Disposals

In growing a portfolio, regular decisions should be taken to whether to acquire or dispose

of particular property or types of property as time passes. Analysis of cashflow as outlined
above will provide a clue to which properties you should consider to add or reduce from a
income perspective. Additionally, the trends of capital growth of properties in your portfolio
and property on your “watch list” should be researched on an on-going basis to help make
crucial decision regarding timing of buying and selling.

49
Thinking “like a CEO” will encourage you to use the data you build on your portfolio and the
market conditions to make decisions, just like at a monthly board meeting (perhaps just with
yourself!). It maybe for example that a particular property in your portfolio was purchased
some time ago and was purchased at a good yield-level, a fact you are proud of. Over the
length of ownership, the property has performed well and produced a regular positive
monthly cashflow. However, by regular analysis of the market, it is revealed its capital value
has increased and the yield on present value is now much lower. A decision should be
taken by the active CEO. Should this capital be released through sale of the property or re-
finance to invest in other markets that are performing well? It is very easy when less actively
managing a portfolio to miss these crucial buy and sell triggers and it could hold you back in
growing your portfolio to a size that will achieve your overall financial objectives.

Financial Planning

The most significant aspect to most property businesses in terms of financial planning is
the conditions under which you raise mortgages to acquire and support your investments.
Again, this could be an “agenda item” at your regular board meetings. Properties held with
finance should be examined regularly for their payments and terms of the finance. Aspects
such as incentive periods when rates are kept low may expire and rates revert to a higher
“standard variable rate” may occur. This should be regularly reviewed and action taken as
appropriate within a few months of the product reverting to the higher rate. Additionally,
the mortgage market should be regularly analysed to discover any changes in lending terms
or rates and thereby keep you one step ahead of the game. Decisions should be taken about
which lender to use for new purchases based on their loan-to-value levels, arrangement
fees and product types available. Finally, a view should be taken on when to opt for a
particular product in the financial cycle. Is it best to go for a tracker, suspecting rates will
trend downwards over your product term or has the market flattened out and a long-term
fixed rate becomes more attractive. A key eye on national bank rates, inflation and predicted
GDP growth or contraction rates will give some guidance in informing these decisions. I use
the following rough guide to determine which way rates go:

Bank Base Rate Level (tends towards):

GDP growth(or contraction) rate + current inflation rate

So, for example, in Q1 of 2008 the UK:

Bank Base Rate Level (tends towards): a GDP of 2% + 4.5% inflation = 6.5%

At the time base rates were 5% and increased to 5.5% during this time. The view could be
taken that bank rates were set to increase, GDP and inflation figures remaining as they were.
If fix rates were available at around 5% (which they were) this could have been a good bet.

Taking the current position in the UK in Q1 of 2009:

Bank Base Rate Level (tends towards): a GDP of -1.5% + inflation 3% = 1.5%

Indeed the current bank base rate was 1.5%.

50
The bank rate maybe 0.5% currently but investment mortgage pay rates are still usually above
5% for investment finance. So should a fix rate be more suitable or a tracker / variable rate?
Well looking once more at the equation, with the 6 month forecasts for GDP and inflation,
we would get (October 2009):
Bank Base Rate Level (tends towards) – GDP of 0.2% + inflation 1.6% = 1.8%

We live in strange times, but the current bank rate is unlikely to drop below 0.5%, if the
above is followed, and should drift upwards as long as GDP and inflation predictions hold.
When the margin that banks charge over base rate reduces, perhaps a fix in the medium
term at these historical lower rates would be prudent.

It is a judgement call of course, but by using this guide provides a system to inform the
decisions which are made. I have used this system and currently have 60% of my finance
arranged on a tracker basis as we speak. These products were mainly set up in 2007 when
deals that tracked below the bank rate (between 0.25 – 0.75%) were not uncommon.
My current payrate across my UK portfolio is now around 2.3% as a consequence which
allows for a substantial monthly cashflow, even as voids have now started to creep in as the
economy worsens.

Tax Planning
A crucial aspect to your planning of your property investment business right from the outset.
Four aspects of the local tax system should be considered for you to be efficient in retaining
profit generated.

Purchase Tax
Tax rates made at the point of purchase (sometimes to referred to as Stamp Duty) can vary
wildly both between countries and within a countries tax system. If a flat tax across the piece
is applied, there are very few decisions to be taken – you will end up paying it regardless.
However, if you are analysing different countries in which to invest then if all other factors are
equal this could be a critical factor if the purchase tax rates differ greatly. The purchase tax
must be paid for by you, at the point of purchase, out of your cash holdings. Therefore, the
payment of this tax reduces your working capital and potential to make further acquisitions.

It is very common for purchase tax rates to vary between locations within a country and
depending on the purchase price paid. Governments do this to encourage the purchase
of particular types of property or property in a particular location which usually could
benefit from the inward investment. This research is easily carried out on a country’s tax
website or by taking advice from a tax consultant. It maybe that your research shows that
buying a number of smaller properties rather than one large property ensures that you stay
beneath the tax threshold and therefore pay zero purchase tax. Nice. Or you may find that
a particular city or part of the city is designated for lower purchase tax rates for a limited
period. Again, you can take good advantage of this, as long as the investment stacks-up in
every other regard.

Income Tax
Strangely, although the least popular of taxes for the poor old employees who are taxed
direct from their payslip each month, this tax need not affect the property investor unduly.
Why? Most countries with developed tax regimes allow many deductions to be taken from

51
the gross income to reduce the income tax liability. Firstly, these allowances broadly cover
any expenditure you make in running your property business, such as:

• Property maintenance (including items replaced on a like for like basis)

• Travel connected with the property
• Professional expenses (such as letting agent)
• Finance interest payment (not including capital repayments)
• Property insurance
• Provision of furnishings

In fact the list goes on and on. To restate, in the usual case any expenditure related wholly to
the property business can be offset against the income received. Of perhaps greatest impact
is the offsetting of finance interest payments. The finance payable to service a loan can be
considerable in relation to gross rent and so offsetting this element can reduce your tax
liability considerably. Of course, it affects your cash flow in an equal measure! However, this
point should be considered carefully if you are in a position to either buy a property with cash
or raise finance against the property. Buying with cash will clearly give you a better net cash
flow on the individual investment but your income tax liability will be high. Taking finance
will reduce this liability and leave you with more working capital with which to make more
acquisitions, if that is the plan. It is important to remember that the repayment element of
the finance (if a repayment mortgage is taken) is not allowable against income. Perhaps for
this reason, around 90% of investment finance in UK is taken out on an interest-only basis.

Additionally, some tax regimes will allow for further deductions against income such as:

• Depreciation of the building, at a notional annual level.

• Cost of re-finance if funds used solely in the property business.
• An annual percentage of the income is exempt from tax.

Tax regimes differ considerably and change regularly so research should be conducted at the
very outset of your venture.

Capital Gains Tax (CGT)

Although difficult to predict and therefore plan for with any real precision, the capital gains
are likely to dwarf the monthly net income from property ownership. Therefore, the tax take
on this potential profit should be considered. Questions posed should include:
• What are the CGT levels?
• Are capital gains levels the same of individuals and companies or do they differ greatly?
• Does CGT reduce over the time a property is held? This is the usual case.

Double-Taxation – the rule of residence

Double Taxation treaties exist between all major economies to ensure that tax is only levied
once, unless the taxation made in the country of your investment is lower than your country
of residence. For example, if a income tax rate of 30% exists in your country of investment

52
and 20% in your country of residence, only tax will be payable in the country of your
investment. In the usual case, this higher level of tax must be paid and cannot be offset in
your country of residence. Conversely, if a zero rate of capital gains tax exists in your country
of investment and say 20% in your country of residence, you will be liable for the 20% tax in
your country of residence.

Finally, a word on the structure of your business. Another common feature amongst
developed countries are the various structures of business and how these affect all types of
tax discussed. These structures generally include:
• Individual or Partnership – property is purchased and held under an individual or partners
name.
• Limited Liability – a company is formed with shareholders and appointed directors. The
persons within the company have limited liability to defaults for example.

In the general case, to encourage the establishment of business enterprises, tax regimes
often favour the formation of a company and charge a lower rate of tax as a reward. This is
not always the case and treatment of income and capital gains may differ. Additionally, the
ability to finance purchases may be affected by the structure of the property business you
form. Careful research is therefore essential.

To be honest, the subject of taxation deserves a book longer in length than this
one in itself. And it is important to note that tax regimes change frequently, so
basing an investment purely on tax benefits may not be prudent. Hopefully I have
done enough to get you to research fully the taxation of the area that you wish to
invest within and take professional advice.

Activity 7
Imagine you are the CEO of your business and you have called a monthly meeting to analyse
performance and make decisions on future growth and management. What aspects will be
on your agenda for the meeting? How would you gather the data to present to the meeting?

Agenda Points:

….....................................................................................…........................................................
….....................................................................................….......................................................
..............................….....................................................................................…..........................
...........................................................…....................................................................................
.….....................................................................................….......................................................
..............................….....................................................................................…..........................
...........................................................…....................................................................................
.….....................................................................................….......................................................
..............................….....................................................................................…..........................
...........................................................…....................................................................................
.….....................................................................................….......................................................

53
 Chapter 9
Finance and Currency – Getting Bang for Your Buck

Finance
The point on what level of finance, or leverage, you choose has been made in Chapter 2
when we looked at what kind of investor you are. Put simply, the higher level of finance you
take then the greater number of bricks you can buy for your given cash reserve. There are so
many factors to consider when taking finance, as we discussed in the last chapter. Ultimately
there will be a trade-off between long-term fixing of the rate and a lower initial pay rate for
shorter term money. When looking at what your options are hear, it is good to see what
the money markets are pricing different length of fixes at and how this fits in a historical
perspective. One of the tools I use for this is at:

www.swap-rates.com

An example output is above, for current rates for the Euro.

So, what does this all tell us? Well, quite a lot.

First off, the rates shown against the various length of fix shows what banks charge each
other for that money. Your access will typically carry a loading to this rate, typically between
1-3% depending on the competitiveness of the money markets. So, from the graph, 10 year
Euro fixes are based on an interbank rate of 2.63% as of 24 September 2010. You would
expect as a client to achieve a 10 year mortgage payrate of around 3.6%, very cheap on an
historical basis. You can check each individual length of fix for this rate and determine what
fits for you.

Additionally, you can check how this rate compares with historical trends and see if it is low
or high. As we write, money is at the cheapest it has been for centuries, if you can get access
to it!

54
Finally, the curve created by the graph overleaf, often called the yield curve when discussing
returns on bonds or gilts, tells a great deal. The steeper the curve, the higher inflation and
future rates are being priced into the future. Checking the gradient of this curve over time
tells a great deal and informs your choice on length of fix and when to fix very well. There
is a great deal of speculation here both in terms of the prices set for longer term fixes and
the length of fix that will fit your investment horizon. My advice is to get into these figures
to help inform your decision when you strike a finance deal. At the very least, you will be
armed with knowledge and information that will help you negotiate with the banks you
approach.

Currency Exchange
Getting the best deal on currency exchange can often make up to 2% difference on the
amount being transferred. The “spread” that is used (the difference between the spot rate
and the rate offered) can be very small with currency dealers in comparison with high-street
banks due to the high volume of business that they do. The spread can be as low as 0.3-0.5%
as opposed to around 1.5-2.5% with a bank for example.

So for a transfer of 500.000 Euro, a saving of up to 10.000 Euro can sometimes be made, just
by spending some time getting the best deal. Additionally, some companies do not make
transfer charges which will often save you a considerable amount of money.

Our recommended strategy is as follows:

• Contact your own bank to determine their costs, to gain a “benchmark”.

• Apply for a trading account at a number of Currency Exchange Dealers on the day prior
to proposed exchange (free).
• On day of exchange, ask for the ‘spot rate’ from various dealers and attempt to get the
best deal. If you are quoted say 1.20 Eur/£ early in the day then perhaps ask then to
book a rate when it hits a higher level, say 1.21 Eur/£.
• Book and pay for your rate by the close of play.

Additionally, for future exchanges, you can take advantage of ‘booking’ a rate for some time
in the future and making the payment downstream. This would work if you suspect you
need the cash in Germany in say 3 months and want to take advantage of what you perceive
to be a good rate. This costs nothing and you generally need only lodge a 10% deposit.

You will find lots of companies on the internet with whom you can set up an account. Here
are a few suggested ones that clients have used in the past with favourable outcomes:

• World First - 02078019080

• Currencies Direct – 08453893000 (get them to call you back as its an 0845 no)

55
 Chapter 10
Location, Timing, Location – Bringing it all together
There are a lot of ideas in this book hopefully that have got you thinking about how and
when to make your next investment, and make it succeed. I want to leave you with one idea
that hopefully brings this all together, before finally dealing in the next chapter with selling
of an investment.
So, let’s run off at a tangent for a bit. Something recently reminded me of my days spent in
the military and the type of training were put through. One of the training courses, and it was
done on an annual basis, was concerning the fighting of fires and the trainers successfully
turned an interesting subject [lets set things alight] into one of the dullest experiences, year
in year out. I do remember on the feedback form which was duly passed around after a
particularly dull session, some bright spark had written:

“If a nuclear war is announced, and we have a hour to live, I would like to spend it with
Corporal Jackson [the trainer] as this was the longest hour of my life”

The crowning joy of the fire training was the obligatory “fire triangle”, you are probably
familiar with it but I put it below in any case:

The idea is that, for a fire to start and take hold, the 3 elements around the fire need to be
in place. Take one away, and the fire cannot start or is extinguished. A useful little idea
perhaps, but oh did it get painful on my 20th annual training day when the Corporal first
asked us the 3 elements, and then removed one at a time and asked us what might happen.
This was always delivered in the style of a magician, the instructor believing he had some
passed on some hidden truth or indeed “Fire Station” Alchemy. All very tedious.

Anyway, property.

Well, as it is a useful model [and I know it fairly well] let’s use it for our work to summarise
the book. Lets transpose our ideas into the diagram overleaf:
Let’s look at each element, describe it a little further, and see what conclusions we can make:

56
Fuel - Investor Confidence

We can think here about the conditions which put the investor confidence “fuel” in place.
Conditions typical for this are:
Recent capital gains, which are well-published in the media in the later stages
Economic improvements, unemployment falling or wage rises
Increasing population, often characterised by rising rent levels after a time
Investor successes in other markets, and looking to replicate their success

A sure sign that this is in place can be when conducting property viewings. In extreme cases,
you could be joining a line of ready buyers all looking around the same property. And the
auction houses are either empty, or auctions are being used to bid buyers up well above
usual levels. Estate agents in this period get lazy, and often don’t call you back. That sort
of thing.

Oxygen - Positive Yield Reward

This element is provided by the ideas we covered in Chapter 4. When a strong positive
yield reward is in place, monthly cash returns from day 1 are good, sometimes very good.
Interestingly, when yield rewards are very high, it really is a buyer’s market. Auction houses
and full of stock and empty of buyers. Estate agents welcome your arrival with red carpet
treatment, and you have the pick of an abundant stock. Great times. As the market reaches
a more stable state, yield rewards drop and usually go below zero for a long period, a good
period to hold a property perhaps but not such a great time to be entering the market.

Heat - Favourable Finance Conditions

The heat is provided by financial institutions, namely lending banks. A favourable condition
may be that 60-80% lending is possible for investor finance. A nice stable situation. Too
57
much “heat” is characterised by the 100% lending, on sometimes questionable property
values. A sure sign of things to come, as we all know from the financial crisis of 2008.
Another good sign of overheating is the number of new dwellings being completed per1000
inhabitants, per year. In Europe, 20 new dwellings per 1000 is about normal. When new
dwelling completions go much above this, it is a good indication that lending to developers
has extended beyond demand and are backed by over-exuberant banks. In Ireland for
example in 2006, there were 430 new dwellings being completed per 1000 inhabitants. This
was 20 times the European “norm” and a very good indicator that finance had overheated,
and a very useful “sell” indicator.

Fire - Capital Gain

We place this in the middle of the model, as it needs the supports, to some extent to initiate
it. Without all 3 outer elements in place, the capital gain will not start. If the 3 elements
are in place but weak, then the capital gain may start but frequently die down. Perhaps
the fire can keep going, and even roar for a time without other elements but soon goes out
dramatically. We will look at this case in a moment.
So, can we use this model in helping us discern different markets and investments within
markets and make better decisions? I think so. I think you can use the ideas in this model to
analyse any particular market you are looking to invest within, and it is a model I use when
considering new investment areas in which to operate.
Lets look at the case of the UK, set out in Chapter 4, and also at Germany and the USA which
are dealt with in more detail within the Annexes to this book, set against this model.

UK

Using the ideas of the fire triangle, perhaps best to look at is property in Aberdeen, Scotland.
After all, we had very strong positive yield rewards from 1998 – 2004, but no capital growth.
Well, we can say that this micro-location enjoys confidence on one big factor – oil price.
Aberdeen is the capital of oil exploration in Europe and the local economy relies heavily
on the price of oil, which is expensive to extract from the North Sea. Yield investors in
58
the market would have been buying quite happily from 1998, enjoy positive monthly cash
returns but flat capital values. That’s not a bad place to be. With finance in place to around
80%, 2 sides of the triangle were very much in place, and investors from other parts of the
UK, having enjoyed good growth in other cities such as London had confidence to buy, as
I did. But it was not until the third side of the triangle, investor confidence brought about
by higher oil prices as they rose from $30 to over $100 from 2004-05, that capital growth
really was “set on fire”. The timing of any investor to buy around 2005 was almost perfect
in hindsight, although the model makes this quite clear. It is just a case of working out what
will bring investor confidence to any particular market. The model also makes the point to
sell clear in this market. All 3 sides of the triangle fell, first the yield rewards went negative
in 2006, next access to finance started to fall away in 2007 and finally the fuel of investor
confidence dropped off in 2008-09 as oil prices plummeted and finance more difficult to
obtain for investors. So the model gives us some ideas for the timing of a sale also, well
done to the investors that cashed-out in 2007-08. I wished I had this model to hand, and
understood it in 2007. I still hold most of my Aberdeen portfolio, and watch its value drop
each month, although of course I still have a good yield based on my good fortune to enter
the market at the right time.

Germany – Berlin

Well, the story of Berlin and its property market is fascinating and could fill a whole book.
Lets restrict ourselves to the property depicted in the graph, a typical 50sqm in a suburb
close to the centre.

Firstly, we can see the yield rewards have been positive for most of the last 20 years. The
collapse of the wall delivered property initially at a very low price level, and is still very
cheap today [50.000 Eur for a nice apartment in a European capital city anyone?]. So, yield
investors have enjoyed themselves here for 2 decades with few exception. Next, access to
finance has been in place for much of the past 20 years with perhaps over-lending occurring
during the mid 90s to local buyers and to international buyers between 2005-07. So, 2
sides of the triangle pretty much in place for 20 years, give or take a few minor blips. So it
59
is not surprising that capital growth has been steady and in some cases very good. Finally,
investor confidence is very interesting here. Confidence was very high between 1990-1997,
the optimism for the re-born capital was the story. But reality set in for some over-exuberant
investors in the late 90s, finance payments were high and the support for the plethora of new
builds from a steady or declining population not in place. Local buyer confidence dropped
heavily, and growth flattened or went backwards. However, a second wave of confidence
was brought to the market in 2000 onwards from international buyers, increasingly priced-
out of their markets back home. The 3 sides of the triangle were again in place and capital
growth took off again, until the financial crisis took hold. Today, you can say that all 3 sides
of the triangle are in place, albeit yield rewards are low. However, the chronically low rents
that are typical of the city [around 200-400 Eur per month for a city centre apartment is
typical] are bringing new upward pressures to yield reward and it should be an interesting
market for many years to come.

USA

Oh my god. Where to start? Well, it is interesting to note first off that the USA property
market does not normally do a great deal to excite. Prices are fairly predictable and rise with
the general economic conditions. More on this in the Annex on USA. The period 2000-2006
famously did not follow this path!!

The chart above shows yield reward over the last decade for Orlando property, an average
value of rent and capital value has been used as there are huge variations in this market.
What a sorry read it is too for any yield investor. With rent levels moderate, but costs of
ownership such as taxes and home owners associations and the like, net rents are really
not great. This all translates into a negative yield reward for the whole decade pretty much.
That is to say, any property bought here for the last 10 years will have been taking money out
of your pocket month in and month out, and capital values have collapsed into the bargain.
But what of the stellar price increases in the period 2001 – 2006 - 100% capital increase!!
Well, using the idea of the triangle, we would have predicted no capital growth, as yield
60
rewards were negative during this period. But when we remember the financial policies
of the time, 120% finance was available, and investor confidence sky high then the lack of
“oxygen” of high yield reward made no difference that it was absent. Perhaps stretching
the model a little too far, but we know that some fires, depending on the chemical of the
fuel, can burn without oxygen for a time. But this chemical fuel is not real and does not last
for long!! Capital gains during the period of strongly negative yield rewards always tend
to get wiped off or “corrected” eventually, and the market here is no exception. Capital
values have dropped like a stone, below that at the start of 2000. So is it a good place to
go shopping for an investor now? Well, yield rewards are now positive, and in some cases
very good now in Orlando and many parts of the country. So that’s one side of the triangle.
In terms of investor confidence, this is still weak, but again in parts of the country the real
economy is doing “okay” and populations are still on the up, as are rents. So, in places, 2
sides of the triangle are in place. However, finance is really not available to investors to
this day or is taken on very high terms, wiping off any yield reward. Perhaps somewhere to
watch and research and await the creeping back of finance to investors as a sure sign that
the market is worthy of consideration.

So, hopefully this model has served as a useful summary to the ideas in this book and at least
give you some new thoughts and tools when considering the timing of a purchase or of a
sale, more of which in the next chapter.

61
 Chapter 11 – Selling Your Investment
I have to put my hand in the air here and say I am not very experienced in this area. Perhaps
you have more experience than me, just by selling your own residential homes. The fact is,
I agree with the notion that property is held and not sold. The income from property you
achieve will grow through the period of ownership, capital value will grow over time and you
have an appreciating asset that be re-financed or inherited. During my investment career I
have sold only 7 individual properties and all of them through forced circumstances such as a
problematic building or the building being acquired for re-development. I truly believe that
profit in property is by steady growth and sustainable monthly cash flows, not speculation
on capital values increasing.

However, through my work as a property consultant to other investors, I have built up some
knowledge in this area, working with sellers to achieve deals that they need. Therefore, I will
attempt to give some guidance to this final step of your investment.

I suppose the first point we can all make is that a property should be sold, if not in forced
circumstances, at the point that the market reaches is highest capital values. Easy eh? Well
yes and no.

Let’s look at the Yield Reward graphs back in Chapter 4 for some clues. Well, we have already
seen that a period of high Yield Reward usually coincides with stable or rising capital values,
the demand from investors joining the owner-occupiers pushing prices higher. So selling
during a period of high Yield Reward, unless under forced circumstances is probably not the
most clever approach. Perhaps the period shortly after a high Yield Reward is the point to
sell. The rising capital values have pushed yields down but owner-occupiers and amateur
investors buying with the expectation of continued capital growth providing a ready supply
of buyers. I would agree with this timing, although it is difficult to predict the very highest
point of the market. Other factors such as availability of finance, affordability ratios7 and the
like will help refine your decision at which point to sell for maximum advantage.

I suppose it would be useful to see exactly who wants to buy your property. If the only
potential buyers are professional investors, using techniques such as yield reward, then it
may not be the best time to sell! However, if your property attracts a range of buyers with
ready finance to a high level of their income (in the case of an owner occupier) or a low yield
reward (in the case of an investor) then perhaps it is time to hand the keys over.

As a final consideration, your tax position or finance deal may determine to some extent
when you consider to offload your investment. Capital gains tax may reduce significantly
after a certain length of ownership or your finance deal may make a hefty penalty for early
redemption. However, if you stand to make a large profit then please enjoy it – you have
earned it! Perhaps you could spend the money on a new property. Now where should you
look.......

7 The ratio of average house prices to average wages

62
 Appendix 1 – The German Property Market

Market Overview:

Over the last 10 years or so, property markets around the world have experienced rates of
capital growth typically between 200-300%, fuelled by cheap and plentiful credit. There are
few exceptions to this trend, one of them being Germany. Due to re-unification some 20
years ago, the property market in Germany, particularly in the old east, has been operating
out of sync with other markets. Speculation by mainly western German buyers fuelled a
boom which ended around 1996. As investors were chasing rents that were not achievable,
the German market gave way and went into decline from around 1996 – 2001. This was the
same time that most markets around the world experienced their greatest growth rates.
Prices have stabilised in most areas from 2001 and shown some capital appreciation in
certain areas, particularly the good locations in the bigger cities such as Munich, Hamburg,
Frankfurt and Berlin.

Market Features:

The residential market differs considerably from other locations, with more robust tenant
laws and longer typical residence times. Typically, a residential unit will be offered for letting
totally unfurnished, without kitchen units, light fittings or even flooring. The incoming
tenant will provide all their own furnishings and stay for a longer period, typically on average
about 7 years. Tenants sign contracts of a defined period but are effectively on a lifetime
lease thereafter, only needing to move out if they are not regular with their payments or the
landlord (or close family) which to occupy the unit. Tenants must give 3 months’ notice to
quit and will repair and decorate the unit to a good condition when vacating.

Commercial tenancies operate in a typical way with leases of 10 years or more (often
escalating with RPI) the norm.

Percentage of Owner Occupiers:

Between 10-40% (higher in the western part of the country)

Investment Finance in Place:

Finance for Nationals and international buyers is usually set around 60-80% loan to value.
The level of finance depending on the client’s income and the rental value of the property.
Typical interest rates are fixed for 5 or 10 years and around 1.3% above the Euro 5 or 10 year
swap rate. So at present (Feb 2011) rates are around 4.2% for a 5 year fix and 4.8% for a 10
year fix.

Typical Prices:

Property, both commercial and residential tends to be priced per sqm and not by room
or bedroom number. Therefore, investments can be easily compared by size, price and
location. Residential property can be purchased either on a single basis or by purchasing a
complete block of apartments. Purchasing a complete block tends to reduce the price per

63
sqm paid. Some typical prices per sqm in the major cities, depending on size and location:

Berlin – 1.000 – 2.000 Eur psm

Frankfurt – 2.500 – 4.000 Eur psm
Munich – 3.500 – 5.000 Eur psm

Locations to the east of Germany (Dresden, Leipzig, Chemnitz for example) have properties
in a good refurbished condition from 500 Eur psm. Remarkable value and the most
undervalues market in the world according to the OECD. Location in terms of sustainability
of rent is crucial in these locations.

Typical Yields:

In the same way that property is marketed for sale, rental property is priced per sqm. The
rental is often broken down in to “cold” and “warm” rent, with the cold rent being the
income to the investor and the warm rent covering all bills including ground tax and routine
property maintenance. Cold rents start at around 4 Eur psm in the very cheapest parts of
cities to the east of Germany with cold rents in cities such as Munich reaching 12 Eur psm
and above in many cases. Yields range between around 5% for single apartments in Munich,
Frankfurt and Hamburg to around 10-12% when bought as a block in cities such as Dresden,
Leipzig and Chemnitz. Berlin offers the complete range of yields and is a very diverse market.

Yield Rewards:

Being a market of predominantly unfurnished letting, a Yield Reward of above 2% would

ensure a good cashflow in this market. With typical finance rates of between 4-5% for a
long term fix deal, a net yield of 6-7% or above would be of interest as an investment. Yields
Rewards of 4% are readily available in markets in the east of the country and 6-8% Yield
Rewards are not uncommon although the ability for the location to support sustainable
rental demand should be determined.

Purchasing Process:
1. A property is found through the use of an agent.

2. The price is settled and a purchase contract drawn up.

3. If purchasing with finance, a finance application is made with a local bank to ensure
finance is available and terms agreed.

4. A survey is carried out to determine the property value, primarily on rental values.

5. Contract is signed by seller and buyer with a Notary.

6. An application to place your name in the Land Registry as a “priority notice” is made.

7. The purchase price is paid and rents collected from that date.

64
8. Your name is placed in the Land Register to prove you have charge over the property
(together with the bank if the property is purchased with finance).

The complete process from step 1-7 can take typically between 2-4 months, depending a
number of factors including time taken to arrange finance.

Purchasing Costs:

Costs can be slightly higher than the global average for the purchase transactions (although
much cheaper when selling). A typical breakdown of cost is a follows:

Property Agent Fee: 3-6%

Stamp Duty: 3.5% (4.5% in Berlin)
Notary and Legals: 1.5%

An average cost of the purchase is therefore around 10% of the property purchase price.
Running Costs:

Costs during ownership are transparent and are comparatively low. The majority of
deductions to run the property are taken from the “warm rent” or ancillary cost and should
not be included in yield calculations. This includes basic building maintenance, communal
area cleaning, buildings insurance and property tax. From the net rent, apart from unplanned
maintenance, the cost of letting management is the primary deduction. There are a variety
of fee structures for letting management including a flat fee per apartment or a percentage
of the rent collected. Letting management typically costs between 5-10% of net rents,
depending on area and fee structure chosen.

Positive Investment Aspects:

• Hands-off investment – long-term tenants, unfurnished property letting
• Well regulated and robust tenant and property management practices
• High rental yields possible, to fit all investor types
• Good finance available, at competitive levels of interest
• Reliable legal and land registry system
• Transparent running costs

Negative: Investment Aspects:

• Robust tenant laws – a tenant cannot just be removed unless they do not pay rent
• High purchase costs (between 10-12%)
• High yielding properties can be subject to a forced sell and can be problematic to
deliver

65
View on Market:
Very good yields, underpinned by strong legal system and high levels of finance. Capital
values very low in comparison with anywhere in the developed world. Truly unfurnished
property allows for significant holdings to be built up in a relatively “hands-off” manner.

An Historical Look at Prices in Leipzig

A common question we get from investors is what has been the price history in the areas
in which we operate. Whilst some good data is available in the capital Berlin, finding price
history in cities such as Leipzig can be difficult to find in the public domain. Here, we will try
and provide some guidance on price histories since re-unification and of the past 3 years in
particular. We will then make some predictions on how prices will develop in the coming
years.

Between 1990 – 1996, when interest rate policy was restrictive for investment across most
markets, a wave of speculation of the real value of property in the former East took hold.
With the market in the East effectively held under a social regime and property ownership
was not possible, the value of the property was unknown. A common-held view that the
re-unified country would equalise in prices to a great extent as the East caught up with
the successful development of the West during the period of separation. Investments
flowed into the East from domestic and foreign sources and the appetite for investment was
increased by high bank lending values and government-backed grants for development of
historical property.

What happened as a result is a familiar story of over-exuberance, albeit based on a unique

event of the fall of the Berlin Wall. As investments were made through the period to 1996
or so, the performance of those investments became unsupportable. The expectation of
rent levels being similar to those in the developed West were unrealistic, population fell
in many cities and towns due to the pull of the more affluent West and the ability for free
travel and high interest payments of the time began to bite. Many investments failed, or
needed to be supported from external income to prevent foreclosure. Think about it, just
as the developed world was gearing up for a decade in which property values increased by
200-300% on the back on low inflation and low interest rates, so Germany dropped like a
stone. Prices paid for property in this time climbed to 1000 Eur per sqm or more, and often
for unrefurbished stock which needed around another 800 Eur per sqm investment to get
in a condition for tenanting. It is not uncommon to hear of over-exuberant investments to
fall by 50-70% during this period. Despite the prevailing low interest conditions, particularly
after joining the Euro, the incentive or ability to support these failed investments waned.
Only the very toughest survived the markets of the East.

What happened next? Germany went through a programme of fiscal reform and set a
course for low-inflation and increased productivity. Wage bargaining was tough, and output
of the prized high-value German goods increased. All parts of Germany stabilised and began
the process of reform. In terms of the property market, equilibrium was found in most
areas between 2000-2005, with prices in Leipzig around 400-800 Eur per sqm for apartment
buildings in the various parts of the city.

66
So, what about the last 3 years? Well the story has been very interesting for investors in the
area. During a period of falling property prices in much of the developed world, the market
in Leipzig has held up very well due to the fruits of 20 years of government investment in
infrastructure, good capital values recognised by investors and the business climate returning
to decade high levels of optimism across Germany. In 2007, it would be typical to conduct
a search in the average locations in Leipzig for apartment houses in the price range 450-600
Eur per sqm. Steady increases have been seen since then, with an increase in demand from
local buyers with increasing access to bank finance. A typical search of the market today in
the same areas of Leipzig will be for property in the 550 – 700 Eur per sqm price bracket. In
most cases, property over the last 3 years has seen around a 20% increase in prices which is
good going in this climate. There are exceptions to this, depending on sub location. Some of
the areas to the east of the city such as Neustadt and Volksmardorf and Sellerhausen have
seen little or no capital appreciation, the stock being characterised by inhabitants of working
class or non-working people. Banks still find it more difficult to finance to any great degree
in these areas. On the other side of the coin, property prices in Schleussig and Plagwitz have
really caught investor attention, with increases of between 30-50% being seen.

So, what’s ahead of us in terms of capital appreciation? Well, with good yield rewards in
place. this depends on a number of factors:

Investor confidence
Investor access to finance
Rental level development
Increasing owner-occupation

In turn, investor confidence will be the key to purchase prices increasing with all other factors
being equal. Right now, an investor feels rightly rewarded with a net yield of between 7-11%.
With interest rates for 5-10 year fixes at around 3-4%, there is still room for an increase in
confidence pushing yields further down. Yields in a stable market would equate to around
2% over lending-rate, so around 5-6%. Should yields drop due to this increased buyer
confidence, then prices have the capacity to rise by around 40%, should finance remain low.

Access to finance shows now real sign of abating, certainly for local buyers. It is not unusual
for projects to be financed to 80% [or even higher] for German nationals, and 60-70% for
foreign buyers. These levels have remained reasonably intact through the financial crisis,
and should remain for investments where rents cover finance payments by at least 125%, so
called “rental coverage”. Currently, rental coverage is often 200% or more, so there seems
no immediate threat to tightening financial conditions.

Increasing rent levels are the typical trigger for capital appreciation in the more mature
markets in Germany. As rents creep up 5% or so per year, so the capital value increases by
the same amount, all other things being equal. The current rent levels in Leipzig are very
low and have remained so for the last 10 years or so, whilst excess capacity has been worked
through with the increase in population or through demolition of unrefurbished stock. Some
real anomalies remain to this day. For example, rental levels across the city for professional
tenants lie in a thin range, usually between 4-6 Eur per sqm, a small deviation. As popular
areas are developing,, higher rents are now being achieved. For example, in Sudvorstadt and
Schleussig and Gohlis South, rents in excess of 7 Eur per sqm are now not uncommon and
on the rise. The development is having an effect across the city, with pressures on areas in
demand or well-presented units with benefits such as balconies.
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With wages increasing, the proportion of take home pay used to service rents is now very low,
around 20%, and shows capacity for rental increases to be absorbed. Finally, the effect base
level for rents, the amount the government pay for unemployed people has not changed in
12 years. The current level of 3.85 Eur per sqm is the lowest in Germany, and is seen as very
out of sync with other smaller and less economically vibrant cities. For example, nearby
Halle which is half the size of Leipzig has a social tenant rate of 4.35 Eur per sqm. Leipzig
must catch up at some point, and when it does the floor on rents will rise over night.

Finally, and perhaps of greatest interest, is a fairly unique feature of this market. In 1989,
all property was held by the state and before the wall fell every inhabitant of the city was
effectively a council tenant. Since that time, owner-occupation has risen steadily to around
15% today. Some may wonder why this has not risen quicker, particularly with the low
capital values of recent years. An answer to this lies in the appetite and culture of those with
sufficient funds to buy their own home in the last 20 years. Typically, it is those aged around
25 years old or more that aspire to home ownership. It has taken some time for the lack of
a housebuying culture to work through the older generation and arrive in a new generation
with funds to buy. For sure, many of today’s 25-35 year olds aspire to own their own place,
much in the same proportion to the rest of Germany where average owner occupation is just
below 50%. Today, it is typical for out of town suburbs with new build single family houses
or the very best areas of town in apartment houses to support this growing sector. The
real point to note is the typical much higher price paid by an owner-occupier to an investor
of a complete apartment house. The property is not purchased on a yield-return basis,
more on the ability to pay and service the mortgage through income. So, areas in Leipzig
where owners occupiers are buying their own apartments are typically paying from 1.200
Eur as a very minimum to 3.000 Eur per sqm or more. This is between 2-3 times investors
buying apartment houses alongside them are paying. Quite an odd situation!! So, as owner-
occupation increases to a more mature level towards 50%, so the average to good areas of
the city will see viability for investors to divide their apartment houses into individual units
and dispose of them, in a good refurbished state, to owner occupiers at a very significant
uplift to the original price paid. In some areas, this may take 3-10 years to be a viable option,
in other areas such as Gohlis South, Sudvorstadt and Schleussig this is an option to do right
now.

A guide to prices in graphical form:

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Finally, looking to the yield rewards for a typical 60 Sqm apartment in Leipzig, we see the
strong yield rewards for the past few years, although the levels are now starting to fall. This
would point towards a period of capital growth coming to the market.

Further Research:

www.moneyweek.com/investments/property/why-you-should-invest-in-german-property-
now.aspx

www.property.timesonline.co.uk/tol/life_and_style/property/overseas/article2875619.ece

http://on.ft.com/hF8jZz=1

www.proventureproperty.com

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 Appendix 2 – The UK Property Market

Market Overview:
The market grew, with few exceptions, throughout the period 1997 – 2007. Capital growth
during this period was around 200% - 300%, fuelled by easy access to credit and a new sector
of buyers, namely private landlords (buy-to-let). Since around Aug 2007, the market has
cooled rapidly with capital values falling between 15-40% depending on location and type of
property. Capital values continue to fall or are stable to some degree with yields improving
for cash buyers.

Market Features:
The UK market has a range of buyers with (usually) plentiful supply to credit in a sophisticated
financial system. Planning laws have restricted supply of new housing which has come under
pressure due to increased households (immigration, social factors). Owner occupation levels
are falling due, serviced by an improved rental sector. Tenant law is less regulated than some
markets with a 6 month short term tenancy agreement the norm, followed by a monthly
rolling agreement between the 2 parties.

Percentage of Owner Occupiers:

Owner occupation levels are broadly the same as USA and some European countries at at
68%. This level has fallen over the last 5 years from a level of 71% and is predicted to
continue falling as the culture of home ownership changes or affordability improves for first-
time buyers.

Investment Finance in Place:

Investment finance has been readily available for residential and commercial ventures
over the last 10 years. The advent of the buy-to-let mortgage, with rates very similar to
residential mortgages and loan-to-values of between 70-85% have been common. It is
unclear whether the current removal of many of these products from the marketplace during
the credit freeze is a short or longer term measure. The proportion of mortgage defaults for
BTL loans as compared to residential loans will be an indicator of how this should play out.
Currently, finance can be arranged at around 6% (October 2009) on a fixed or variable basis.

Typical Prices:
Priced by number of bedrooms typically, not per sqm although sq foot is becoming more
common. The average cost of a house in UK is around £160,000 although varies widely
across the country.

Typical Yields:
The most popular type of residential investment property remains the apartment. Even
though there has been a significant house price correction, yields tend to be in the range
3-7% depending on location primarily. For example, in the prime locations of London yields
are often around the lower end of this range whereas 7% or higher can be achieved in the
midlands or north of England and in Scotland for example. Currently, investment in UK
property to provide any kind of income beyond anticipated capital growth is very difficult.
Perhaps the only area that can be viable is the Home of Multiple Occupation or HMO where

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a number of sharers are on the lease, similar to a student house. There is more regulation to
adhere to for these lets and the costs can be considerably higher through wear and tear and
also whether bills such as council tax and utilities are included in the rent.

Yield Reward:
Currently, Yield Rewards are at or close to zero. Falling house prices and the prospect of
lower rates of finance may improve this situation to levels above the 2% Yield Reward
required for an unfurnished letting in the medium term. Currently, the HMO letting sector
performs the best in terms of Yield Reward and around 4% is attainable in certain university
cities with lower than average property values.

Purchasing Costs:
Some of the lowest costs in the developed world due to competition. The typical fee for a
£100,000 2 bedroomed apartments let say:

Agent Fee – nothing paid by the buyer (around 1%)

Solicitor - £500
Stamp Duty – Zero (below £125,000)
Survey and other legal costs - £1000 (or less)

Therefore, purchasing costs can be very low, 1.5% of purchase price in example above).

Running Costs:
Running costs can be quite high, depending on the level of furnishing provided and type of
property. As a guide:

Letting Agent Fee – 8-12%

Buildings Insurance - £100 per year
Property Management Fee (typically for newly-built apartment) - £600 per year
Routine Maintenance (heating, electrical checks) - £100 per year
Inventory Checks (for each tenant move) - £100

Positive Investment Aspects:

• A growing tenant sector
• Housing still in scarce supply
• Yields are increasing in most areas due to capital values falling

Negative: Investment Aspects:

• Volatile capital values of late
• Short tenant residency time (average of around 8 months)
• Finance is currently difficult to achieve and is relatively expensive

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View on Market:
Beyond the HMO sector, which can be very intensive to manage, there is scarce evidence to
enter the UK market at this stage. Yields may improve during 2010 – 2011 due to further falls
in prices and a pick-up in rent levels (an improved employment outlook or strong inflation are
required) which may produce a positive investment situation in some locations / property
types. The tenant sector is increasing as owner occupation levels fall nearer to continental
European levels due to lack of affordability and appetite to own property as an asset. If this
trend continues and the love affair of the British to own property wanes a little, then more
competition by tenants should underpin higher rents in the medium term.

Further Research:
www.nethouseprices.com
www.zoopla.co.uk
www.propertysnake.co.uk

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 Appendix 3 – The US Housing Market

What an interesting market to look at, as we write this piece in Q4 of 2010. The USA is the
home of raw capitalism, and this harsh approach applies to the property market in much the
same way as the money and equity markets. Despite the assets in question being people’s
homes and security, they seem exposed to harsh write-downs more than other countries,
and this brings sorrow and hardship for those shielding losses and inevitable opportunities
for investors.

Taking a historical perspective on the market, we see that the USA has typically had an
average level of owner-occupation between 1960-1990 of around 60%. Home ownership
was a realistic aspiration for many, but not an imperative like in other markets such as UK
or Spain where owner-occupation rates have been as high as 85-90%. This led to, in most
locations, a stable market to invest within and a ready supply of short to longer term tenants.
The credit bubble of 1996-2006 changed all this.

During the period of low rates, sectors of the population who up until then could not aspire
to home ownership at their stage of life, if at all, entered the market on “teaser” loans,
affordable for the first few years of the loan but become crippling as the loan rates reverted
to usual market rates or higher. This greed on lenders’ parts, and their shocking lack of due
diligence into individual’s ability to pay, had a now famous global effect. Currently 14% of
the population are behind on mortgage payments or are in foreclosure. This is an average,
and some markets have double this rate. That’s 9 million homes in trouble, double that
are households sitting on negative-equity. So where are we now, and is the USA a place
worthy of investment research? It is safe to say, the market is bereft of confidence and sharp
declines have been felt pretty much across the board. But are there areas that have suffered
steeper declines than are justified?

Well, the USA is huge, and individual cities and states remarkably differing in their current
phase of the property cycle. For the purposes of this appendix, we shall focus on thoughts
on one of the 5 states that have suffered the post during the downturn thus far and survey
was is left for investors. We shall focus on metropolitan areas of Florida, principally Orlando
as a major conurbation on which statistics are readily available.

Orlando Property Marketplace

The Orlando region derives much of its economic power from tourism, business conventions,
medial and hi-tech research and the “grey dollar” or those retiring to the warm climes from
more northern states or from abroad. The property market has grown with the huge rise
in population, up 30% in the last decade alone. Typical in this region have been gated
developments and condominiums growing mainly to the south of the city and spreading
at an alarming pace in the empty land. The city or downtown area is well-established with
some property dating back 100 years or more, broken up only by the high-rise developments
which seemed viable during the credit bubble.

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Construction of property can be standard construction, or more rapidly built units from pre-
fabrication section. Use of wood in structural elements is often seen.

During the credit binge, Orlando was front and centre, financing and constructing homes to
service both the local and tourist market. Depending on location and subdivision, property
soared 200-300% from 1995-2005, unheard of growth rates in this market which has no
scarcity value and seemingly limitless land in which to develop. Commercial development
went just as mad. Business plans for “strip malls”, small malls by the road side took off.
Some areas of the city boast 10 Taco Bell franchised outlets in a 1km radius. All sectors of
the property market, even in downtown locations, could be said to be very over supplied.

To analyse what is left for investors let’s look at distinct property types:

• One Bedroom Condominium

• Three Bedroom Vacation Villa
• Three bedroom Family Villa
• Two Bedroom Downtown Apartment

For each property type we will look at price histories and project forward using the common-
sense approach of rental yield and sustainability, demand from population changes and
long-term value.

One Bedroom Condominium

These vary from developments built in say

1960s-1990s servicing the local market
in the main to developments built in the
1900s-2006 which were aimed increasingly
at the second home and tourist market.

As an example of property in this sector,

here is a 1-bed condo, 50 sqm and built in
2005. The list price is $41,000, the property
being in foreclosure having reached a value
of around $140,000 in the peak of 2006-07.

The property itself is in an area of good demand for long-term tenants, where a monthly
rental of around $700 should be expected. Even after the home owners payment to the
community and property taxes, a healthy yield. So what’s the due diligence points here, the
yield criteria being fully met? The points on rental stability based on demand and population
are perhaps the first points to consider.

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Three Bedroom Vacation Villa
Davenport, 2001, $95,000, peak 2006 Q4 of
$257,000, 3 bed 2 bath near disney, 140 sqm

More of a risk here, as pointed out in the

section regarding short term accommodation
in this book. My due diligence would focus
around the actual costs to run this investment
and the realistic demand and occupancy rate
that could be achieved through the year. Of
course, occupancy rate will come down to
your expertise with marketing the unit. If
this is your “bag” and you can get the unit
rented at a good rate for 35-40 weeks of the
year, then you have a viable investment with some private use options.

Three bedroom Family Villa

Good schools and residential location to
south east of city. 2006. $120,000, $257,000
peak, 180 sqm 3 bed 2 bath no pool rental
$1,100 per month

A really interesting unit here, a rare-breed

of near 12% yield on a family property. The
usual diligence is required, just to ensure
your yield is real and you dont hold a big
empty unit for much of the year. Basic
research on these units carried out in Q4
of 2010 show that there are many cheap
[$50,000 or less] family properties on the market, but rentals are hard. However, areas
which have some “scarcity” value such as uniquely good schools or inability to develop
nearby offer great value and should be given consideration.

Two Bedroom Downtown Apartment

2007 build / 120 sqm / 2 bed / $190,000
today, $430,000 on completion was paid.
Rent $1750 per month

I know this development personally, and saw

the prices which were being paid “off-plan”.
Clearly, the fortunes of investors off-plan
has been an unqualified disaster. What has
not changed is the demand to live in such
a building, it is out of this world in terms
of fitting and services within the building.
Rental demand is extremely high and worth
research for cash investors.

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 Appendix 4 – About ProVenture Property

Quite frequently in UK after-dinner topics when entertaining friends or colleagues notoriously

turn to investment and house prices in general. Of course, I enjoy these conversations being
a complete property nerd! An increasing number of my friends and colleagues asked me
to help them with their first investment or help with some aspects of management of a
poorly- performing property that they had purchased for rental. I really enjoyed this work
and around the end of 2005 it spawned the beginning of ProVenture Property.

ProVenture are now well-established in helping a variety of investors with their needs in
markets around Europe, and soon in USA. To date, we have helped around 200 investors
with their investment plans and assisted them in finding new investments or getting their
current investments under more effective control.

During 2011 – 2015 we expect to be mainly operating in Europe, focusing on Germany and
to a lesser-extent some of the markets in Eastern European countries. We are also looking to
USA for cash investors. Our focus is simple and remains simple and be captured as follows:

• We find unbeatable property offers in the most exciting property markets, on investors’
behalf. All of the investments we find are cashflow positive from Day 1.
• We assist investors with every aspect of the purchase and subsequent management, in
line with the principles in this book.
• Through scale of operation and our excellent contacts we can offer our services to
investors at a very low cost, sometimes for nothing!

Just let me or one of the team know if you think we can help you, in any facet of property
investment. We enjoy our work and helping other achieve their goals.

www.ProventureProperty.com

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(Footnotes)
1 The ‘Rich Dad Poor Dad’ series explain this concept well: http://www.
richdad.com/

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