Property guarantees to help you sleep at night
I don’t know how many times I’ve told people that investing in property is a numbers game, not an emotional one. If the numbers add up, your investment will be successful.
Unfortunately, I find that most beginner investors approach property investment more like a gamble than a mathematical equation. And they jump at property investment opportunities that offer ‘no-loss guarantees’. Often, they find that these guarantees aren’t worth the paper that they aren’t written on.
Instead of putting all your faith in the guarantees made by other people, you should create your own guarantees. Here’s what you should do.
Guarantee Number 1: Invest in property based on good, solid fundamentals
If you invest in a property that doesn’t benefit from good, solid investment property fundamentals, then the likelihood is that:
- The surveyor will post adverse comments on their valuation. That will affect your ability to get a mortgage.
- Rental income will be liable to swings – it may drop dramatically and quicker than you can control. This will affect your cash flow.
- The tenants you do attract won’t be the ones you want (ever heard of ‘tenants from hell’?).
- Your property’s value may suffer. As well as a shortfall in your income, you’ll suffer a shortfall in your expected capital growth (or even a loss).
- You won’t be able to sleep well at night, because of the worry your property investment is causing you.
What are the property fundamentals?
- Transport links
- Major employers
- Major investment
If your property benefits from these, it will have the best chance of providing the returns you expect. You’ll have the peace of mind that enables you to sleep at night.
Guarantee Number 2: Get a mortgage every time
This guarantee is created by knowing the factors that lenders examine when considering your mortgage application. I call these, The four Ps of the mortgage application. If you tick the box on each one, there should be no reason that your mortgage application will be turned down. Here are the four points:
This is based on your credit score from your credit file. Your credit score is a function of information about your current and previous financial history. Each piece of information is given a weighting in the calculation of your credit score.
Different lenders may give different weight to different elements, so it may be that what is perfect for one may be unacceptable to another. However, the following factors will be considered on your credit score:
- Length at home address (normally means how long you are registered on the electoral/voters roll) – the longer, the better
- Paying bills on time – if you do, you will have a higher credit score
- Not overusing or underutilising your available credit
- The length of time you have held credit accounts, and serviced them efficiently
- Number of previous searches for credit accounts over a period of time – the more credit you apply for, the lower your credit score
- If you own your own home, or other property – usually seen as a good thing
- If you have other liabilities, such as defaults, county court judgements – not good
The biggest determinant of the success of this aspect is the property survey or valuation. In the case of an investment property, the survey normally has three vital pieces of information that will make or break the deal:
- Property valuation
- Estimated market rent
- The valuer’s comments about the property generally
A quick story about valuation comments:
I was buying a property in Beechmont on the Gold Coast in Australia, a property about 500 metres above sea level with views across the Gold Coast. I paid for the surveyor to go in and value the property. The value was fine, the rents were fine, but he made a simple comment that destroyed the whole deal. He said, “Likely to Flood!”
And with that, the deal died in the water (pun not intended). That shows the importance of the comments on the valuation. The lender refused to lend me any money on the property.
The proposition comes down to the lending criteria of the lender. Each lender has many criteria for their products; in fact, each will supply a booklet for each of their products.
Assuming your credit file and the property valuation are fine, the underwriter will check your supporting documents. This is the point where they will raise queries that must be answered prior to the final formal mortgage offer.
With all their queries answered, nothing should stop you from receiving the mortgage offer.
The best people to use to complete the proposition are mortgage brokers: they understand the lenders’ criteria better than anyone, and they will point you in the right direction. I have always used brokers on every deal I have ever made: believe me, a good mortgage broker is worth his or her weight in gold.
At the end of the day, getting your mortgage will come down to one final all-important P: Prudence. Quite simply, is the lender acting ‘prudently’?
If the lender is confident that, should they have to repossess the property, they can prove to the ombudsman and the courts that they have acted prudently, they will approve your mortgage application.
The four Ps are essential to understand. They are essential to ensure that every mortgage that you apply for is approved.
Learning and regularly using the art of mortgaging is what will keep your portfolio (and wealth) growing.
Guarantee Number 3: Know the property’s realistic market rent
This should form part of your due diligence. I recently published an article detailing 24 questions to confirm the rental value of an investment property. Always ask these questions, and you’ll be able to accurately predict the realistic market rent for your property. (Of course, you should always allow for a tolerance.)
Guarantee Number 4: Guarantee that your property will rent
This brings us back once more to good, solid fundamentals. Invest with these, and your property will rent out.
No matter how much you worry at times that your property will sit there vacant, I promise you that it won’t. If you’ve done your due diligence before you bought it and invested with good, solid property fundamentals, it will be rented, and the void periods will become less of a concern as you begin to understand that it is the fundamentals that guarantee demand from tenants.
This guarantee is all about having a clear understanding of the two reasons a property will not rent out. Either:
- You have not found a competent agent; or
- You have not found the realistic market rent
The answer is to either sack your agent or drop your rental demand.
Guarantee Number 5: Pass the sleep test
Remember, when you are investing in property, always take a mathematical, systemic equation. Approach in a methodical manner, and you will get a predictable result. It is this predictability that provides a good night’s sleep, every night.
Of course, nothing can replace the actual experience of buying and holding property and building a portfolio. This will build your emotional intelligence – you’ll become an experienced, smart investor.
Passing the property sleep test is easy if you have done everything you should before completing the deal. But before you do, STOP! Go away for 24 hours and think about the deal, the opportunity, and the commitment. If you sleep well and feel as confident and well placed the following day, then it’s the right deal to sign. If not, then walk away.
Remember, the best deal in property comes along every day. If you turn this one down (no matter how much you love it and how great the deal appears to be), another will come along, as good as or even better.
Creating this discipline has saved me thousands of pounds over the years, (probably hundreds of thousands, if I’m truthful). I cannot stress this enough: go home, sleep on it, come back feeling refreshed and invigorated, or else pull out and find another property.
One final note: don’t listen to the agent telling you the deal will disappear if you don’t sign; that there are other people bidding for it; the price is going up; it’s the last one; it’s the deal of the century… this is all ‘BS’, hype, and salesmanship: for the 5% of times it is true, you’ll have avoided 95% of deals that were wrong for you.
The best deal in property comes along every day. Don’t be drawn into the emotional buy: any serious agent will be happy to let a serious buyer sleep on a deal for a night.
To discuss your investment goals and make sure your property investment strategy benefits from property guarantees, contact Gladfish today on +44 207 923 6100. We’ll help you achieve your lifestyle objectives with property, as we have for hundreds of others.
Live with passion