The first question that new or inexperienced property investors tend to ask is whether now is the right time to enter, or re-enter the market. Investors worry that prices are too high- they must surely be close to a fall? Or perhaps prices are too low- have they further to fall? When it comes to investing, this is simply the wrong question to ask. Market forces prevail, for good or for bad, the investment opportunity lies in deal created. So the pertinent question for any would-be investors should be – do I have access to the cash or finance to enable me to buy a real asset that will out-perform deposit interest rates, with minimal risk and a realistic expectation of capital appreciation over the course of the medium term, which is typically considered to be a seven to ten year period. If the answer is yes, the time is now.
The most recent rental report from property sales website daft.ie confirmed that rents in Dublin, Cork and Galway are in their second year of consecutive growth and that stock in those areas is decreasing at an alarming rate. Whereas there are now five times as many properties available to rent throughout Ulster and Connacht as existed in 2009, Dublin has less than a quarter of available rental units compared with its 2009 tally. This points to an impending shortage of, dare I say, suitable stock for the rental market. Not great for tenants but this is all positive news for investors.
Arguably, 2010/2011 was the time for cash investors to get back into the residential investment market, but as we are no closer to perfecting a time machine than we are to perfecting a crystal ball, we can only work forward. The good news for investors ready to re-enter the market today is that the deal of a lifetime is a myth; deals are available at any time in any market. The challenge is that there is no search category on popular search websites that will generate ‘good deals’ at the click of a button. Properties are bought and sold but deals are created. The ability to identify all of the factors and opportunities that combine to create a good deal is what makes a successful investor. This factors may include a very motivated seller, lack of competing bids, a co-operative tenant and a willingness by all parties to do business.
Experienced investors were seeking opportunities throughout the years of the crash, that is their job and a chaotic market is their playground. The deals were coming in thick and fast and cash could be converted to double ‘value’ in a single contract. But that is not for every investor. Many sat on the sidelines watching opportunities go by, without the necessary resources and access to cash that was required to take advantage. Those inexperienced investors, with cash, watched the market for years but were very slow to make a move. For many of those, now is the right time.
The market within the capital and in other large cities is sufficiently recovered to a level of comfortable risk i.e. downward house price movements are unlikely, housing stock in key areas is decreasing while demand is increasing, gradually but consistently. The magic word is ‘recovering’; while the potential returns investing in a volatile market are huge – so too is the risk. While most investors have an appetite for risk, it is one of the primary characteristics of an investor, their role is to effectively measure and minimise that risk to an acceptable level. A recovering market is a much more predictable and comfortable place to be in, in terms of risk minimisation.
When it comes to selecting the right type of property, it really depends upon the strategy of the individual investor and there are many strategies. The one certainty is that some strategy is needed. An ad hoc approach to investing in property will rarely result in a well-performing portfolio that is generating a reasonable level of income while still being well-positioned for capital growth, as and when that happens.
The most common strategies for private, residential investors are as follows:
i) Focus on cash flow positive properties, which are usually low cost with limited potential for capital appreciation.
ii) Focus on capital growth, this suits a holding strategy and is arguably the best approach for creating wealth through property. The key here is to buy below market value, or BMV properties so that equity is bought in on day one.
iii) More speculative strategies include investing in sites/houses in up and coming areas or perhaps purchasing a bargain property with the intention of selling it on quickly at a higher price, or ‘flipping’ the property.
iv) One of the most successful approaches to building a portfolio involves a combination of cash flow and capital growth strategies.
There are many mistakes that investors make, the consequences of these mistakes are heightened when the market struggles. During the boom years, massive capital appreciation masked bad buying and allowed many of these mistakes to go undetected.
This is no longer true and investors, whether self-financing or dependent upon the banks for part-funding, cannot afford to get wrong. The most common mistakes that investors still make are as follows:
i) Failing to treat their property investing as a business.
ii) Trying to time the market – there is opportunity to buy well is any market just as there is an opportunity to buy badly.
iii) Not knowing the difference between a cheap property and a cheap price – a cheap price is the basis of a deal, a cheap property is not. This encompasses many of the rural ‘bargains’ available at discount auctions.
iv) Taking advice from the wrong sources – wherever the professional receives their source of income is where their loyalty lies. For genuinely independent advice on finance options, do not just speak to the bank sales staff, pay the fees for an independent financial advisor who has no vested interest in selling anything but their time. The same is true of estate agents, who are great at their job. Their job is to sell you property.
v) Investing in an area they already know rather than researching and educating themselves on new areas that might provider lower buy-in costs, equal rental returns but greater opportunities for future capital appreciation over the longer term.
vi) Inexperienced investors tend to be drawn to properties and areas where they would consider living themselves, this leads them to overpay for premium items, like a south facing garden, which will have zero impact on the rental and any capital growth will be in proportion to the higher premium paid, therefore no benefit accrues. Experienced investors know that such premium items are great to have but they also know not to pay for them. This is where true negotiation comes into its own.
vii) Selling in a struggling market to release cash when refinancing may be possible and this would allow the investor to hold the property over a longer term, which is the most effective route to accumulating wealth through property.
The most damaging mistakes that investors make:
i) Buying property at auction without the necessary due diligence.
ii) Retaining a previous family home or inherited property as an investment – Generally speaking, properties like this fail to meet the basic criteria of a good or strategic investment.
iii) Not understanding the power of OPM, or other people’s money – otherwise known as leveraging, the single most powerful tool available to property investors.
iv) Choosing financing based upon the lowest interest rates without examining the other terms and conditions. For example, many boom time investors paid a premium interest rate in order to avoid personal guarantees when purchasing commercial property investment. This had the effect of creating non-recourse loans. These were, without exception, the smartest investors in the market.