The dangers of obscure securities
This past two years I have spent many hours helping clients out who have bought properties through a multitude of property companies. Now this in itself isn’t wrong, but the mistake they have made is that the investment properties are based on ‘obscure’ securities.
Buying assets with obscure securities
OK, so the word obscure is not the correct term for these assets but I wanted to make it very easy for you to understand what are the right kinds of assets you should be investing in and those to stay away from.
I see this problem far too often when clients get a property or two under their belt and think that it makes them an experienced property investor but they fail to realise what it is that makes a successful investor and become attracted to the multitude of deals on offer.
I’ve been in the game over 15 years now and I still only invest in one type of asset – plain old residential investment property. The reason for this is simple – I know the rules of the game, I know the cycles, I know the process, the risks and laws. It allows me to make an informed decision rather than a hopeful, wishful gamble or punt.
Now I do have portfolios across 3 countries – UK, Spain and Australia but all are based on the same basic asset yet even with each country there are many different things that I need to consider. You see most clients we deal with are just starting out and are yet to see significant results from their portfolio. They also have no experience in anything else than residential property.
So back to the obscure assets and a few stories:
Buying a hotel room as part of a hotel – Apart-Hotels
A number of clients bought Apart-Hotels through two different companies that insisted they were a far better alternative to buy-to-let and they could use their SIPP monies as well, which apparently made even more sense. Everything sounded good and they exchanged on the properties while the properties were completed.
The first company, about 3 months after completion went bust and now the management agreement is useless, the share of income has become a struggle to work out how to let the properties out and for the banks that lent on-site a struggle to repossess the properties.
The second story is that because of the problems with previous schemes and the credit crunch lenders refused to lend on the Apart-Hotel scheme yet because the clients had exchanged they had to complete without mortgages or faced being sued by the developer. Of course the property company that sold the properties have all but washed their hands of the properties.
Caribbean Resorts off plan with little money down
When these first launched I did a lot of research into the values and rentals being quoted and I found them well and truly over valued. We’ll wait and see what happens with these but the First Law of buy to let still stands: always buy something below value. My fear is that these people are banking on massive capital growth which would have been a large ask without a recession, we’ll wait and see what happens with the recession.
I have a number of close mates who all do commercial property in the UK, some have many millions of pounds and in every single case the thing that every one of them says to me is that the only way you can buy commercial property is to buy it with a quality tenant on a long term lease.
There was a whole commercial development from a company based in Manchester (they have gone into administrations now). The problem being was that come time for completion nobody wanted the commercial premises so it was all void period and the banks, knowing of the over-supply would not lend. Clients were left either having lost their deposits or having to pay the full price with little hope of getting a mortgage.
Unfortunately this has probably bitten more people than any other.
My lesson from Spain – I have bought about 15 investment properties in Spain (I don’t own that many as a number haven’t completed yet) I have paid various reservation fees and even a couple of deposits yet some of these properties haven’t completed because the developer has gone bust. Now I can chase for the money but with legal fees and reality kicking in I have just written the money off.
Linda’s lesson from Spain
Linda is a new client who previously worked with another company that has gone into administration. After waiting for two years she was finally offered a replacement deal. She had put £40,000 into the original property and the company decided to offer her another flat valued at 180,000 Euros, that she could have for 160,000 Euros. They would honour her original deposit so she would need a mortgage of 120,000 Euros. She thought ‘Great’, I thought ‘Let’s do some investment research and due diligence.
I had her call the developer direct and she was surprised when he said 90,000 Euros and you can have any apartments on the site. Scary how much the company thought they could make.
Spain, or Morocco, Florida or Cape Verde, France, Thailand, Bulgaria, in fact, list off any country that UK buyers have ventured and I have no doubt there are people who have lost money, been mis-sold, or failed to uncover the true risks of the investment once all of the sales hype.
My most important lesson with ‘obscure’ assets.
The lesson that I have taken, and that I would like to pass to you is to build your portfolio first in UK buy-to-let then you can run off and play with obscure assets. Try and do it too early and you can end up regretting your decision.
If you have questions or perhaps you want to hear the 100s more stories about the good, bad and ugly call us on +44 (0)207 923 6100.
Live with passion,