Start small and gain experience to grow your portfolio
We can learn a lot by investigating the experience (and mistakes) of other people. Property investment is no different. Investment blogs like this one can do much to educate and inform readers, including describing bad property investment strategies as well as good.
In this blog post you’ll meet George and Rita, a couple who had it all and blew it all. You’ll discover the mistakes they made, and be better positioned to avoid the same mistakes.
Property investment gone wrong
George and Rita had what appeared to be an amazing life ten years ago. They’d been together for nearly 30 years and married for 20 of those. They had decided not to have children, and instead concentrated on their careers. With a combined income of more than £50,000, they turned their attention to retirement and spent a considerable amount of time digesting investment guides.
They decided they wanted to build a portfolio of investment properties to provide income in what they hoped would be a long retirement free of financial worry.
They took equity out of their home to use as a deposit on two properties and to pay for refurbishments. A few months later, with the property market rising strongly, they refinanced these properties and repeated the exercise. Within a couple of years, using the same strategy, they had built a property investment portfolio of a dozen homes.
Then disaster struck. The Global Financial Crisis hurt a lot of people, but those who had rushed into property investment unwisely were hurt more than most. George and Rita had some success with their first few properties and dizzied by this they had lost their focus.
Instead of carrying out careful due diligence on every investment property they bought (as described in this property investment blog), they paid little attention to macroeconomic (transport, regeneration, and infrastructure, for example) and microeconomic (schools, community facilities, and tenant demand) issues. They got carried away in a rush to buy as many properties, as quickly as possible.
Now, George and Rita’s portfolio is underwater. Many of their investment properties are in poorly performing areas. Some have had no tenants for months. Others suffered from tenants who didn’t pay and had to be evicted. Many left behind a trail of destruction that cost the couple thousands.
The value of their portfolio is more than £500,000 below the price they paid. Their home is now mortgaged to the hilt as they struggle to cope with a significant negative cash flow position that consumes most of their combined earnings.
What went wrong?
Hindsight is a wonderful thing, especially in property investment. It enables us to learn from our own mistakes and those of others. George and Rita’s mistakes were many, but the overriding factor is that they rushed into successive property investments. They ignored investment guides and ‘flew solo’.
Their first two or three investments worked well. They researched, carried out due diligence, and conducted a cash flow assessment. This success made them complacent. They lost focus. Instead of using their experience, they forgot what they had learned from the property investment education they’d had. They rushed to build their portfolio as big as possible and as fast as possible.
They listened to sales agents, bought in locations that didn’t have good property fundamentals going for them, and refused to believe that the property cycle would ever return to its natural flow of price falls along the curve.
Three things you must do to make profitable property investments
George and Rita’s experience in property investment is a classic case of not paying attention to three of the must-dos to finding and assessing property investment opportunities:
1. Property investment research
In our property investment guide “Property research – your guarantee to success as a property investor”, we discuss getting the property investment foundations right. To assess the best places to invest in property UK, you must ensure that the property fundamentals that drive rental demand and value increases are in place. These fundamentals include:
- Infrastructure (schools, transport, and municipal projects)
- Urban regeneration (not urban sprawl)
- A thriving local economy that supports job creation
- Local amenities, such as retail and recreation
We cut out huge amounts of legwork needed by individual investors. You can search our database of more than 150 area property investment guides. We research 108 data points across 324 UK areas, ranking them for property investment potential.
2. Understand the property market cycle
Many market watchers discuss a two or three-stage market cycle. In reality, there are ten phases in the property market cycle. Successful property investors utilise different strategies throughout these different phases, building up equity buffers, before buying with strong fundamentals and decreasing leverage. They understand when to stop buying and learn how to identify when markets are beginning to weaken (or strengthen).
3. Plan your cash flow conservatively
There are plenty of factors outside of your control that can adversely affect your cash flow. I always underestimate my income and overestimate my costs. I also allow for an increase in interest rates, extended void period, and more maintenance needs than are likely. It is how I ensure that the cash flow on my investment property is enough to continue to pay the mortgage: by estimating cash flow using a two-year cash flow worksheet.
Don’t make the mistakes that led to George and Rita’s poor property investment choices. It’s better to take things slower and miss one or two property investment opportunities than act hastily and make a loss. Always remember to undertake research and due diligence, and make sure the property investment is financially sound with a conservative cash flow calculation.
In the next part of this property investment blog series, I’ll look at the need for education and mentor in property investment. In the meantime, feel free to contact one of the team on +44 (0)207 923 6100, who will be pleased to answer any queries you may have.
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