Invest without property fundamentals and you could buy a money pit
Oscar had an acquaintance, Martin, who had built up a property portfolio. When Martin announced that he was retiring thanks to the income from property investments, Oscar decided he wanted a slice of Martin’s luck.
Oscar started reading property investment blogs, magazines and taping property investment programmes on the television so he could watch at his leisure. After a few weeks, he decided that he would get the best value for money by purchasing at an auction. He took a week off work and spent the time visiting a few auctions and watching what happened. He was determined not to overpay and wanted to learn about the bidding process.
Bagging a bargain
In one of the brochures that detailed an upcoming auction, Oscar noticed a three-bedroom house in a village a few miles away. He took a trip out there to have a look. It was the perfect property for a renovation project. Martin had told him how he had built up his buy-to-let income by taking on properties just like this one and converting them to flats. “Double bang for my buck,” Martin had said.
At the auction, Oscar watched as the auctioneer called the price down from its guide of £160,000. He sat dumbfounded as the price tumbled. Finally, when the auctioneer called “Any takers at £120,000?” Oscar couldn’t resist any longer. He held up his number board. Another bidder came in £5,000 higher. The bidding between the two progressed until Oscar had the deal in the bag. £172,000 was more than he had wanted to pay, but the potential of the property was immense.
Renovation, but no rental
Oscar got the builders in and within months the house had been converted to a pair of two-bedroom apartments. Perfect for young professionals. A great aspect overlooking open rolling fields. In total, Oscar has spent £220,000 on the property. He expected the flats would rent for around £650 each.
After three months, he still hadn’t had any applicants. By now he had dropped the rental price to £500. ‘It must be the agent I’m using,’ he thought. He approached another agent, who told him something he hadn’t banked on.
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It’s all about the fundamentals
“If you drop the rent to around £400, you might have a chance. But seriously, what on earth made you convert this property to flats?”
“They’re ideal for young professionals,” Oscar argued. “And there’s nothing like this in the village.”
“No, I’ll give you that,” said the agent. “It is certainly unique in the village. But didn’t that give you a clue?”
“What do you mean?” Oscar asked.
“Well, this village is like a rural retreat for wealthy retired people. I think the average age must be about eighty-odd.
“The nearest school is five miles away. There’s a convenience store that’s been run by the same family for the last thirty years. Last year the local bus company withdrew services to the village because it was so underused. The pub is the heart of the community, yet it closes at ten most evenings. It’s like stepping back about a hundred years. Great if you want to be remote and away from it all, but not so good if you’re a young couple or singleton.”
Oscar was gob-smacked. He hadn’t thought about any of this.
No property fundamentals = property investment loss
“What can I do?” Oscar asked.
“My advice? You’re going to struggle to rent the two flats. The shared garden is a problem. One of the main ways to pass the time in the village is gardening. If I were you, I’d consider returning the property back to being what it was originally designed to be: a house. You might be able to make four bedrooms. Or put in an ensuite, which should help its value.”
“But all that work…”
Oscar went away and did the maths. It would cost £50,000 to return the property to its former self. He was now in for a total spend of £270,000. If he rented the property, he might get £800 a month. Once he included all of his costs, mortgage payments and property management fees, he’d be losing money every month.
The agent who had told Oscar about his mistake had recently sold a home very similar to the one he proposed Oscar should be seeking to create in the same village. It sold for £230,000.
If only Oscar had invested with the property fundamentals
A couple of weeks later, Oscar was nursing a pint in his local when Martin walked in. He hadn’t seen Martin for around six months, since the day he had announced his retirement.
“Hi there, Oscar, how are you?” Martin asked.
Oscar grunted and told Martin of his problems.
“The house in Leaping?” Martin asked.
“Yes, that’s the one. How did you know?”
“I was the other bidder in the auction. You outbid me. I wondered who it was, but I couldn’t see you from where I was sitting.”
“You mean you were going to invest in a money pit too? And I stopped you?”
“No, I wasn’t there to buy it as an investment property. I was after it as a place to retire to. I dropped out of the bidding when the price rose above where I thought it would break even with all the costs of renovation.”
“You’re not helping at all, Martin. Where have you been, anyway?”
“Oh, I promised the wife that if I didn’t buy that property – which would have been a nice project for me for a few months – that I’d take her on a round-the-world cruise. Four months of adventure.”
A spot of friendly property investment advice
Seeing Oscar’s discomfort, Martin offered some advice.
“You know, one of the beauties about property investment is that everyone has that one property that goes bad. It might be a tenant from hell, or not preparing for higher interest rates, or simply buying the wrong property. I did the same thing as you with my first property – or very similar. Lost a fortune. Don’t get disheartened, and you’ll bounce back.”
“Really? You screwed up with your first investment?”
“Sure did. And for a few weeks, I did exactly what you did. Tried to drown my sorrows. Then a mate of mine told me about investing with property fundamentals. Making sure that you buy where those fundamentals are strongest will make sure that you buy in the best places to invest in property UK.”
“What should I be looking for?” Oscar asked, feeling more optimistic than he had for a long while.
“You want to invest where people are going to want to live,” Martin replied. “People want to be near shops and where entertainment isn’t a million miles away. Transport’s important, too. Whether that is public transport – trains and buses – or a good road network, preferably both.
“And if you can buy where there are plenty of jobs, then that’s a major factor. People move to where the work is. That has always been the case. Sailors live near the sea. Farm workers live in the country. The Industrial Revolution encouraged people to move to where factories were built.”
“Jeez, I got things so wrong. And look at you, just been on a big cruise, looking tanned and relaxed.”
“That’s because I know my property portfolio will always produce the goods.”
“How do you know that?”
“Because I always make sure that I invest where property fundamentals exist, and where there’s a lot of infrastructure spending planned.”
Martin put his hand in his bag and pulled out a book. He handed it to Oscar. “Here, you can have this,” he said.
Oscar read the title out loud. “ ‘The 3+1 Plan’. What’s it about?”
Want to know what Oscar did next?
Oscar got his investment strategy back on track and is now on his way to his life-changing property portfolio. To find out how you could do the same, contact one of our team on +44 (0)207 923 6100 to arrange a property investment strategy meeting.
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