How to avoid the failure of poor property research strategies
Unfortunately, the majority of the problems that property investors face are of their own making. As you can probably imagine, we hear horror stories about and from property investors quite a lot of the time. Mostly derived from people who haven’t given consideration to a number of factors, conducted due diligence or done their property research correctly, including:
- preparing a cash flow
- calculating the risks of interest rates rising
- the longer-term outlook for properties they have added to their portfolio
A lack of property market research always means that investors are in danger of falling foul of those factors that are deemed to be “out of their control”. While the following story is an extreme example, it's a fair reflection of what can go wrong when a property investor doesn’t consider what's really going to make a difference to the performance of their property portfolio.
Dave’s story – the foundation of failure in property investment
We heard about Dave’s story when we were offered his property portfolio at a ‘knockdown’ price. His portfolio consisted of 32 properties, all in the North East of England. It was 2011, and he’d been investing into property for four years, but hadn’t bought a single one for 12 months. When property values had crumbled after the Global Financial Crisis, Dave’s portfolio was in so much trouble that he couldn’t afford to drive the great bargains that we were now being offered.
After speaking to Dave at some length, it was easy to see what the underlying problem was: he hadn’t done his property research properly. Dave had been taken in by the overpowering media bias in 2006 and 2007, that property was a win-every-time investment. In fact, his whole basis of property research and investment was what had been tipped as the hotspots for property investors.
Many of these hotspots were in the North East at the time. Dave was blinded by seemingly cheap properties that offered incredible yields, and so began his short lived career as a property investor when he bought three terraced properties at a bargain basement price. Or at least, that’s what he thought.
He was further convinced that he had done the right thing when the value had moved up by 10% over the next six months. He ploughed more money into property in the same area, using equity in his own home to secure the loans he needed. Within three years he had amassed those 32 properties, but values had started to fall.
Interest rates fell, too. And this should have provided Dave with a big boost to his cash flow. The trouble was that his tenants were suffering from the effects of the recession. Suddenly, he found that half of them had fallen behind with their rent. Others simply disappeared, and often with the white goods and furnishings that he had included in the homes. Void periods became longer, too.
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Instead of being in a position where his cash flow had grown as interest rates fell, Dave found himself short of the mortgage payment every month. Eventually his property portfolio had become such a problem that he needed to offload at any price.
The root cause of Dave’s losses
When we first spoke to Dave, he was convinced that the whole world had been against him, and that it had been the banks and the economy that had bust him. Then we showed him the performance of some of our client portfolios. Sure, the values had fallen as the worst of the recession had hit, but by no more than 5% or 6%. And during the whole period, void periods had been almost zero and rental arrears non-existent. Many of these investors had been able to replace their income with the rental income they were receiving – the recession hadn’t affected them at all.
Rule number one – get the foundations right
While good property management and cash management are keys to these outcomes, the foundation has to be right. What our clients had done before they laid out a single penny was ignore the media hype and conduct their own research and due diligence.
They didn’t rely on the upbeat sales patter of a single estate agent, nor the over-inflated rental estimates of local letting agents. They went further – a lot further – than to base their property investor strategy on a three-page sales leaflet or ‘expert’ opinion in the tabloids.
These successful property investors went about their property research the right way. They wanted to know that the fundaments existed to guarantee that every property added would be tenantable in all market conditions. This basic research covers factors such as:
- local recreation amenities and retail facilities
- the local economy, job creation and work opportunities
- infrastructure such as transport, schools, and municipal projects
- urban regeneration and not urban sprawl
It is only when these fundamentals are in place that the property investor can be certain that a property might be right to buy. Dave’s portfolio fell down on almost every single one of these fundamentals on almost every single property he owned – even though there were other, far better investment opportunities in the North East. Needless to say, we refused the opportunity – some properties are not a buy at any price.
Get the lowdown on property research
In the next few articles, we’re going to take property investors through a research process that will ensure they start off on the right foot as a property investor and then always stay a step ahead of the game. We’re going to build on the basics of investing with good property fundamentals in place. We’ll examine how you can use the research that the best professional property investors use in their investment strategy, including:
- The ripple effect
- The Property Pentagon
- Property hotspot analysis
With these basics in place, you’ll have taken a big stride – perhaps even a leap – to making sure you never end up like Dave.
Stay tuned to this blog for the upcoming property research series. In the meantime, if you have any questions, feel free to call our team on +44 (0)207 923 6100.
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