How times have changed from the initial heady days of buy-to-let. The market has matured, investors have come and gone, and the way people invest has changed dramatically.

It has always been important to get the best deal. A few years ago, this meany a decent return on investment or a good yield.

But now, investors seem more worried about price and whether they need a deposit, and there is a flurry of deals available. So how sensible is this, and have some investors lost sight of what it is really all about?

The “no money down deal” has become the holy grail for many investors, as opposed to the traditional way of making sure that the rent covers the mortgage each and every month.

I know I sound a bit old-fashioned, but as I am only 34, I wouldn’t say the description applied. I am, rather, just an investor with experience, who has seen enough investors buy below their “perceived” market value, only to either lose the property, or sell it at a loss later on, simply because they thought it was a short cut to success. (There isn’t one, by the way, despite what many property clubs say – at least, not in my experience).

Originally, the art of the deal was to make the sums stack: the rental income, less the mortgage costs and any other fees, and whatever was left was profit at the end of each month.

The profit was then multiplied by 12 (as in the months of the year) and divided by the initial investment. This is your Return on Investment (ROI).

This was – and still is, in my view – the way in which you could compare one property deal against another, especially ones with different rental values.

For example, is a property purchased at £150,000 with a rent of £650 per month as good as a deal at £95,000 and a rental value of £425? Do you know the answer?

Well, you need to know what the service charge is on each, and then add in the property management charges. Then you can do your comparison. Usually, it’s the lower-price properties that give a better return on investment.

An added bonus of a lower-priced property is that you may not need to pay Stamp Duty. In fact, when you’re starting out in property investing, there’s a line of thought that suggests you should only buy cheaper properties, ideally those without Stamp Duty, and spread the risk across multiple properties. Although you will have two mortgage fees, and two sets of solicitors’ fees, you will have a better return on investment, and having two smaller properties rather than one big property helps with void periods.

If one of your two smaller properties is empty, then it’s a 50% void. But having one large property empty means a 100% void.

I think buying a property at £220,000 as your first property is potentially “property investing suicide” and you need to cut your teeth on something less risky, without all the up-front costs and mortgage commitment.

No-deposit deals

Beware, too, of over-focusing on a nodeposit deal that gives you a discount from the developer. It may be today’s trend, but could get you into trouble.

Such deals can mean a lot of similar properties completing at the same time, all with lower rental valuations, and a potential loss of anywhere up to £250 per month.

Incidentally, it is usual for rental valuations to be low on new developments, due to normal supply and demand, but not when you have already paid over the odds for a property simply in order to get a nomoney down deal.

That said, not all no money down, off-plan investments are bad deals. Some of them do stack up, but you need to do your research.

For example, why buy a city centre brand new off-plan property with no previous history of rentals, when you can buy a twobed back-to-back (or two of them) and know that the property has been there 100 years, and already has a history of being rented in the local area.

 

Of course, you could say that in a new apartment you have guarantees for the first few years, but even that sometimes isn’t the case (as my tenants in one of my new Manchester properties discovered when they were left without a shower for six weeks).

But do you do the maths? Do you know whether it’s a good deal or not?

Let me quote an example, this time one involving a ‘discount’ but also a deposit. The investor had purchased a property off-plan from a property sourcing company.

The property was valued at £140,000 by the RICS-approved valuer.

The property, however, had been purchased for £150,000 minus a 15% discount, and the landlord didn’t have the funds available to go ahead, so he was going to lose his £3,000 deposit. The property itself didn’t stack up either, as it’s a one-bed and the rental value is £550 per month. So, the rent will not cover the mortgage. This deal was all about getting a discount on the purchase price.

“But you make money when you buy property,” said the landlord in question. He was quoting from Rich Dad, Poor Dad, the book that launched a thousand investors. But the context is incorrect. What Robert Kiyosaki meant was that you have to negotiate well to secure a discount, not purchase an already inflated property at a discount.

Let’s go back to basics: work out how to value one property against another, then do a direct comparison and reduce the chances of buying a property that may be too expensive, or not cover its costs.

 

Daniel Latto is an experienced landlord and a member of the RLA. He is also director of the Think Tank Group, a residential property management company in Leeds. www.thethinktankgroup.co.uk