In this report I’ve concentrated on the first two reasons. which in the current economic climate, seem to me to be the most relevant. But updated “modules” on the others, particularly the use of property to provide a tax efficient pension fund. will follow in time.

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3. FORE WARNING
THIS PUBLICATION DOES NOT CONSTITUTE ADVICE WITHIN THE TERMS
OF THE FINANCIAL SERVICES ACT 1996 (OR ANY SUBSEQUENT REVISIONS,
ADDITIONS, OR AMMENDMENTS).
The contents are a general guide only and are not intended to be in substitution for professional advise.
All readers are strongly advised to take advice from their solicitor, accountant and surveyor before
proceeding with any property purchase.
3

4. Contents
Page
5 Introduction
6 We are what we think we are
9 Attributes of a successful property investor
16 Anyone can do it…
19 A laymans guide to valuation
33 Why you don’t need to be able to afford a whole property
37 Other peoples money and how to get it
50 A clever thing to do in a hot market
55 Buying at auction
61 Safe as houses – residential lettings
65 A long term idea – going for growth
73 An alternative idea – going for income
82 Stuff you have to know if you want to be a landlord
89 Patience is a virtue – residential reversions
92 Blocks of flats for £1000 ? Freehold ground rents
98 Garage mania
102 How holiday makers can pay for your dream cottage
103 Appendix One How a lodger could pay your mortgage
106 Appendix Two How to buy a £60,000 investment property for £22,500
125 ACTION STEPS TO GET YOU STARTED
4

5. Introduction
Whilst every care has been taken in preparing this report the guidance given should not be
considered exhaustive nor does it attempt to give an authoritative interpretation of the law.
With one or two exceptions this report has not commented upon tax on the basis that each
reader will have a unique tax position. Any examples given within the text should be
considered in the light of your own tax position and due allowance made.
Naturally the investment examples given assume that the world as we know it now will
continue pretty much as it is. I have made no allowance for global or national economic
disaster, war, pestilence, plague, famine, earthquake or any other disaster, which will
adversely affect the investment market.
In a report of this nature I can only offer general comments which should not be construed or
interpreted as advice. Each reader’s requirements, financial background, and tax status will
be different so I can only give a very general view on the way I see things.
Every reader is strongly advised to take his or her own independent professional advice
before making any property purchase.
5

6. We are what we think we are
Property has universal appeal. Owning an investment property or renovating a property for
profit is something most people would accept as a worthy and understandable goal. I’ve
heard it said that more people have become millionaires through property than any other type
of business. This may happen for you, in theory, at least, there’s no reason why not if you
have desire and discipline. But even on a more modest scale there’s a lot to be said for
owning property.
Four reasons readily spring to mind although as individuals we may be able to think of other,
more personal, reasons:
it’s ideal for providing an income;
it can be used to grow capital;
in inflationary times it has traditionally been an excellent hedge to protect savings;
and
it can provide a powerfully tax efficient way to build a substantial pension.
In this report I’ve concentrated on the first two reasons, which in the current economic
climate, seem to me to be the most relevant. But updated “modules” on the others,
particularly the use of property to provide a tax efficient pension fund, will follow in time.
It seems that more people than ever before are thinking about, or actually, putting money
into property. On the face of it there has probably never been a better time; relatively low
interest rates, close to full employment, increasing capital values, and the success of the Buy
to Let scheme have given smaller investors the confidence to have a go.
Although the steps to building a profitable portfolio are relatively straightforward in theory,
in practice there will inevitably be frustrations and obstacles along the way, even for the
seasoned professional..
Most, if not all those problems will be surmountable with application. This is the first rule of
success, not just in property, but in any field
“Perseverance is more important than talent”
I’ll say more about my perceptions on the characteristics of successful property investors
shortly. But when the going gets tough, as the song says, the tough get going. It has been
said that “ a millionaire is a person who has tried just one more time”.
One key to success in property, which I’ll say a little bit more about later, is to see
possibilities where others would only see impossibilities. You’ve probably heard the
definition of an entrepreneur as being a “problem solver”, someone who finds solutions
where others see obstacles. Property entrepreneurs are ideally placed to profit from this
approach. On the larger scale it may be over coming problems with contaminated sites or
6

7. planning restrictions. At the level at which this report is aimed it might quite simply be
through raising the finance to get started.
Allied to this is attitude. Attitude and perseverance go hand in hand. If you want “it” badly
enough, you’ll get “it”. All problems can be solved eventually with enough effort. You could
restate the rule above as
“Attitude is 80% of success, aptitude is just 20%”
For a smaller, private or relatively inexperienced investor, the first hurdle can be
overwhelming. I think that this is partly due to the scale of property. Even “cheap” property
is relatively expensive, and if you have funded it through a loan, you can feel very
vulnerable and accountable if things don’t run smoothly.
This is why early in the report I look at the mindset of a successful property investor so you
can decide whether this is really for you. I hope that it is. I honestly believe that there is
nothing magical about success in property, and that with perseverance and common sense
anyone can make a go of it.
When the whole thing is underpinned by other people’s money, for some the risk can be very
uncomfortable. I would never advocate recklessness. The purpose, as I see it, of involvement
in property is investment, not speculation. But often the risk is only a perception and not a
reality. As we’ll see, the best route to making large returns is usually through borrowing, but
only after due consideration of the implications and the downside.
Starting any venture without tuning into the three preconditions for success is almost
inevitably going to be fruitless. Before you start, you must ask yourself whether you have:
the belief that you can succeed in property;
a passionate desire for improvement in your life through your involvement in
property, whatever form that improvement may take; and
an awareness that your situation will change only if you take the right actions.
Our greatest limitations are often created in our own minds, and unfortunately in the minds
of others if we allow them to impose their own doubts on us. If we see ourselves as “unable”,
then we “won’t”. The self-improvement brigade will tell you that “what you picture yourself
as, you become” and I can see the truth in that.
Couple belief with passion and you are starting to get somewhere, especially passionate
desire for change. If you had enough money to work just for fun, would you still be doing
your current job, or would you get out as soon as you could? If you’d quit as soon as you
could, then you are in the wrong place. Is property the answer? Perhaps, but in the short term
you still have to cover your overheads so don’t do anything hasty. The more important
question is whether you can feel that passionate about property, or what property will
provide. If you think it won’t give you that pleasure and fulfilment, then don’t even start.
Without passion you will be wasting your time.
Then add the third part, the awareness that things will only change if you take action to make
them change. Building a property business, or even maintaining an existing portfolio, is not
7

8. static and requires constant action. I’ll talk later about goal setting and planning. If you keep
doing the same old things then the only thing that can happen is that you will get the same
old results. To get new and different and better results, you need to do new and different and
better things. Being prepared can reduce a lot of the fears that inhibit the right actions and
stop us from doing something “new”. Don’t forget that one of the best remedies to fear is to
take action. To achieve any level of success in property you will have to regularly go beyond
your comfort zone. Otherwise, you are not going to move ahead any further than you are
now.
Finally, before you start, deal with your doubts and the doubts of others square on. What are
the two biggest doubts that probably hold back more potential property entrepreneurs than
any other?
Number one, “I have no capital”. OK, it’s not the ideal starting position, but it’s not unusual.
Conventional wisdom says that you need money to be successful in property, but it doesn’t
have to be your money. If you have a sound enough proposition there is someone,
somewhere who will fund it. I’m not saying it will be easy to find them, although it may
prove to be easier than you first thought, but with perseverance if you knock on enough
doors and ask enough people you, you will find them.
Number two, “ I’m waiting for the ideal time”. There’s no such thing, but by being aware
and flexible you can adapt to market conditions and plan accordingly. If you’ve got a good
idea, or have uncovered a promising situation, you have to press on with it but just be
prepared to fine tune along the way. I believe in the “ready, fire, aim” philosophy in this
context.
Remember that no one is too old or too young. There are plenty of old and young notable
successes in property, and in many other businesses as well. Just look at the number of
internet millionaires in their twenties. Don’t get into the “if only I had started earlier in life”
trap, things can still happen very quickly if you want them to.
Whatever you have done, and achieved or failed in, during the past, give yourself a break
and wipe the slate clean. If you dwell on your past mistakes, you’ll scare yourself into
inactivity. Everybody fails, the successes just learn from their mistakes and keep on going.
Learn to forget your failures.
Finally, remember that any success that is going to come your way is totally down to you
and nobody else. You have the responsibility to make sure that you have what you need to
succeed. You are the only one who can make yourself the “best” of the “best”. I hope that
reading this report will be a good starting point but don’t leave it there. Education is the key,
in whatever area of property you eventually decide to specialise in. There’s no substitution
for reading. If you’re serious, at least an hour day. There’s so much to learn: construction,
law, planning and economics, to name but a few and these are always changing so you need
to be updating constantly.
8

9. Attributes of a successful property investor
“Until and unless you can form a clear and distinct and accurate picture of what your
vision for the business… is, I mean when you get to where it is you’re trying to get to,
until you have that clear and defined and not abstract, you can’t possibly build or
fulfill or achieve your dream for that business”. So says Jay Abraham, my favourite
business and marketing genius.
Before we start looking at property investment and how it works I think it would be really
useful to take an inventory, if you like, of where we are now in out attitudes and attributes
which could have a bearing on whether we succeed in property or not.
As you have bought this report I can take it as read that you think you want to be a property
investor, but perhaps you’re not sure if it’s really for you or whether you’re really cut out for
it. No doubt even the great property investors of our time have felt like that on occasions, but
what sets them apart from the rest is that they still went out and did it.
I can’t prove it but I believe that the successful property investors have certain common
attributes. It is true that they might have been born with these, that they are part of their
nature. However, even if you feel that you may not possess these qualities naturally, I think
that they are something which with time and a little application, you can start to develop and
then apply to your own situation. I cannot guarantee that this will bring you success in
property, but frankly I don’t think it will do any harm.
These are what I feel are the most noticeable attributes of a successful property investor that
I have observed.
Attribute number one - they are focussed
The great and successful investors know where they are going, why they are going there, and
how they are going to get there.
I certainly agree with Jay Abraham that until and unless you know what you want, you aren’t
going to get there. That’s true for all business not just property. This has been put another
way, “begin with the end in mind”.
I guess that if they were starting again the first question they would ask themselves would be
“why do I want to invest in property?” If you were asked that question, do you know what
you would say ? The answer may be obvious to you, but you still need to ask the question.
On the basis of that answer I suspect that the great investors would set their goal, their
purpose for being in that business. Then they would plan how they are going to achieve it.
Then they would do it.
Goal setting in a business and personal context is a useful, if not invaluable exercise. If you
don’t know where you are going in an area of your life, how will you be able to plan to get
there, and how will you know when you’ve arrived?
There are many books written on goal setting but I think it’s worth saying a few words now.
Firstly, here are three basic rules of goal setting.
9

10. Number one – make sure that the goals are your own, and haven’t been set for you by
someone else. That would include peer pressure, parental pressure and maybe baggage and
prejudices from the past.
Number two – make certain that your goals will benefit others, whether in a philanthropic
sense, or to the benefit of your family, friends, work colleagues or others close to you. You
may not believe it at the moment but it’s easier to be successful when your motivation is
“self-sacrificing” rather than “self serving”.
Number three – Never measure your goals in comparison to others. We are what we are.
We are all unique and capable of achieving different things, and different levels of success.
If you compare yourself and your achievements with others, you run the risk of either
becoming disheartened if you feel that you don’t measure up, or at the other extreme,
pompous and complacent.
To be successful in any business you need to be successful in all areas of your life. If you are
not, then any success you do achieve whether in property or elsewhere will be transitory.
For example, what is the point of developing a property based business only to have to lose it
though ill health. Why struggle all that time to get there when you only have to sell it all
when you go through a messy divorce. No one on their deathbed ever said they wish they’d
spent more time at work.
There are eight main areas where I would suggest that you set goals:
Spiritual prayer, recognition that we’re not all there is, there’s something more.
Family family priorities and activities
Social clubs, friendships, pastimes and pursuits
Community volunteer work, civic duties, political involvement, neighbours
Mental reading, education, seminars etc
Physical wellness/fitness, nutrition, exercise, sport etc
Financial income, savings, pensions
Professional career advancement, professional objectives
Now you can set your goals in each of these categories.
• With each of the above headings in mind, write down everything you want to be, or do or
have.
• Next ask yourself “why” you want these and decide whether they are burning desires or
mere whims.
• Then start to eliminate the less important.
• Look at what is left on the list and ask if reaching each particular goal will make you
happier.
• Then ask whether your goals are big enough. Are you being self-limiting.
Ask these five questions about the goals that are left on your list
q Is it really my goal?
q Is it morally right? Will it benefit others?
q Will it take me closer to, or further from, where I want to be?
q Can I commit myself to this goal, whether emotionally or physically, and see it through
to the finish?
q Do I believe I can achieve this goal?
10

11. Finally, take the most important goal to you from each category and start to look at
the actions you will need to undertake to achieve it and devise a plan. Make this as detailed
as possible and resolve to follow it through. Then work through each of your lists in
descending order and make plans for achieving each of those goals as well. Set a time-table
for each goal and then, well, just do it !
Make it a discipline to review your goals and plans regularly so that you can keep focussed.
It is very easy to become distracted and to do things which seem urgent and even important,
but which are actually interfering with your moving forward, and which may even be taking
you further away.
I realise that this is a brief canter through the subject which is worthy of a book in its own
right. A worthy ‘Mental’ goal would be to do a lot more reading on this whole subject.
In the context of this report your goals may be related to:
capital growth
income
or a combination of the two
and may be expressed in terms of :
the capital value of a property or properties i.e a portfolio
a specific income requirement in the form of rent or expressed as a net profit
and may require considering:
the types of property you want to invest in
their location
and the vehicle through which you want to own them i.e privately, through a limited
company etc.
Attribute number two – they get their timing right
Successful property investing depends upon timing. Firstly, there is the timing of individual
deals and when to do them. Then there is timing in context of the economic cycle.
By nature I think I am a contra-cyclist. I have been privileged enough to work with the
Managing Director of a small property company and watch him become a millionaire
through his contra-cyclacism. What does that mean? It really means that he didn’t follow the
crowd, in fact he did the opposite.
This is the principal that he taught me. If you buy at the top of the market, what then? Where
is your profit going to come from ? Isn’t it better to buy at the bottom and give your asset
room to really grow? At the bottom of the market you can pick and choose yourself a
bargain as prices are pushed down because no one else is buying. At the top of the market
every one else piles in and buys, and prices are pushed up. That’s the time to be selling, not
buying, and taking your profit.
I am assuming in this that the boom bust cycle of the British economy is here to stay. It
would be nice if it weren’t, and in fairness the peaks and troughs may be a little shallower in
11

12. the future, but I don’t believe we will never have another recession. When the next recession
comes, as it surely will, it would be sensible to be in a strong enough financial position to be
able pick and choose some decent properties cheaply and collect the income until the
economy picks up. Then they can be sold at a profit.
This is what my old M.D did. He bought sound properties with sound tenants cheaply in the
last recession. As a function of the purchase price, they were nicely high yielding and the
company was very profitable. Then he sold the whole lot about six months ago and pocketed
a cool million in profit.
The problem most people wrestle with is when to buy. There is always the fear that they may
not be buying at the very bottom of the market. I don’t think this matters. I very much doubt
that any one can actually know when we are the very bottom of a cycle and so you almost
have to expect that prices might continue to slip after you have bought. This is unless you are
very lucky in which case you should treat that as a bonus. If the property is income
producing, or capable of being income producing, and is either giving you a surplus on your
interest payments or at the very least covering your holding costs in full, then it will come
good in the end.
Then, of course, they wrestle with when to sell. Again, I don’t think that one can count on
perfect timing to get out at the very top, but I don’t think that can be helped. ‘Always leave
something for the next man’ is a principal worth living by, it helps you sleep at night.
Not every one is a contra-cyclicalist and I am not by any means suggesting that one should
do nothing during a boom period. Specific opportunities will always arise and should always
be considered. Boom periods definitely allow the chance of quick speculations and gains as
against longer term holds. The aim then will be to make the maximum amount of capital
gain in the shortest possible period.
I would probably be looking to do a series of short sharp deals, moving quickly in and then
moving out quickly. Property renovation and refurbishment fits the bill well, and to some
extent outright redevelopment although I wouldn’t advise a beginner to get involved with
that.
Refurbishment works are good because you can create a new product and with careful cost
control and by choosing a property which needs the right sort of work the increase in value
will more than cover the cost. In a moving market this sort of tinkering combined with
rapidly rising prices means that you can justify coming back to the market within a relatively
short time at a substantially enhanced asking price.
A final thought on timing. If you do feel safer following the crowd just remember that it’s
better to follow in at the beginning of a trend and ride it for what it’s worth, than to tag on at
the end of a trend that has just about run it’s course.
Attribute number three – they take action
Robert G Allen got it right when he said “There’s only one good time to buy real estate; and
that’s now”.
So often in life it’s the things we don’t do which we regret, not the things we do.
12

13. Sometimes an investor will see something in an opportunity that most others won’t. It can be
a bit scary being out in front. It’s easy to spot a good deal when there are so many people
queuing up in front of you you’ve got no chance of getting it. It’s a bit more uncomfortable
to be at the head of the queue. Good deals do come along more often than you’d think but
you won’t always recognise them, sometimes not even when someone else has exploited
them before your eyes. Individual investors have different objectives.
Successful property investor investors take action, at the right time, and when that action is
in alignment with their goals. Don’t forget, they have planned for this moment and when it
arrives, they act.
Try and do the same. Go back and write your goals, think about the timing. Make a plan.
And then act. I don’t mean in a reckless way. Of course you must be aware of what can go
wrong and be sure that you have plans in place in the unlikely event that something totally
unexpected moves against you.
Some things you can’t guard against and can’t plan for, but don’t let that be your excuse for
inactivity. If you are going to win at property it is always better to do something rather than
nothing. And much better than doing just anything, is doing the thing you have planned for.
Attribute four – they don’t assume anything
Very little in property is straight forward. Certainly not everything is what it seems to be.
Success in property depends upon not taking anything for granted and being prepared to dig
around to get to the bottom of the facts. The great property professionals are able to do this,
the greatest almost seem to know the facts instinctively. Through a combination of
developing your creative thinking, and experience gained over time, you will be able learn
the right questions you should be asking to get the whole picture.
Digging around is what unearths the opportunities not seen by others, and the pitfalls which
would otherwise have wiped you out.
People assume too much, almost always to their own detriment. The worst false assumption
is that they cannot afford a particular deal or a particular type of property. Anything is
possible if you really want it, if you are willing to put in the time and effort to make it
happen. But have you checked that you’re not assuming the wrong thing.
When we look we all see different things. That is one of the most exciting things about
property. It is entirely possible that you will see things others have overlooked. You may put
together two apparently unrelated facts to make a profitable situation, which others have just
ignored.
Never assume a property isn’t for sale. Never assume that the most obvious purchaser has
been approached already. Never assume that there are no problems, either physical or legal
of which you have not been informed. Never assume that a vendor won’t sell for less, how
can you know what pressure he is under ? Never assume that a deal is beyond your means
until you have tried every possible avenue to get it through.
This is why local knowledge and specialising on a single geographical area can be so
helpful. When you know your patch inside out you will know when something may work or
when something may not. You may understand when a change of use may be appropriate
and when it would not. You may see demand for something long before the market has
13

14. spotted it and know when to sit tight. You will know who is looking for what and why. You
will know the right time to move. All this comes through digging and learning and assuming
nothing, being open to every possibility and playing with the permutations. You must never
stop being creative when thinking about property.
Attribute number five – they are patient at all times
I think it is true that with property things either happen extremely quickly, or they happen
slowly. One of the attributes of the world’s great property investors is that when things are
going slowly they are able to keep their heads and their focus and if necessary just stop and
wait. In other words when they have to be they are supremely patient.
If you want to be successful in property you will have to accept that this is a long term
commitment. If things happen quicker than you’d planned, that’s great. If not look to the
future and content yourself that your assets are growing like a great strong tree. You can’t
always see it but it’s happening.
Property is illiquid. This paradoxically is one of it’s greatest strengths and one of it’s greatest
weaknesses. Buying takes time and selling takes time. Putting deals together takes time.
There are always many details to check and attend to. It can take time to make all the pieces
fit.
All property is in the control of people and people are unpredictable and irrational. They
don’t always fall in with our plans. Deals and situations need to be patiently cajoled and
nurtured.
The property market is also a function of fashion. What’s in today will be derelict in a
decade. Some things come, others go out. Irish theme pubs and out of town shopping were
the flavour of the month. Then it was call centres. Now it is e-commerce distribution centres.
If you spot the next trend coming you may well have to wait to make your move. The great
investors do wait.
But the great investors don’t use waiting as an excuse for doing nothing. They are preparing
and making plans, attending to every detail in advance so, when the waiting is over, they are
ready to act and they act immediately.
There are always things to do. There are always other deals to be done. Each one will go
through in time. The great investors just seem to know when that time is. If you are patient
and learn, with experience so will you.
Attribute number six – they invest enough to make it count
In my opinion one of the great myths of investment is that you should spread your risk and
diversify. This is explained as being your insurance policy against something going wrong.
The more you spread your investment into different things the less chance there is of all of
them going wrong together.
I see two things wrong with this approach. If you are reducing the chances of it all going
wrong, conversely there is also less chance of anything going right.
Second, if you try to do a bit of everything then you will almost certainly become a jack of
all trades and master of none.
14

15. The great property investors stick to what they know, love and feel comfortable with and
they get very, very good at it indeed. This is really another example of the great investors
being totally focussed.
Another aspect of this is that they have self-belief. If they really feel that their judgement is
correct they back it with everything they have got, whether in material sense with their
capital, or in an emotional or intellectual sense. If they believe something will work, they
don’t pussy-foot around, they go out and do it. As I’ve already said, they take action.
And finally….Attribute number seven - they love what they do
You can tell by what they say and do that they love their jobs. I am sure that with a few
exceptions most really successful property investors did not go into it for the money. You
know what they say, that most millionaires are so absorbed with the jobs they love they
don’t even realise that they are millionaires until their accountants tell them
OK, I think that’s set the scene. Now let’s have a go and see if we can do it, after all….
15

16. Anyone can do it, you just need to try
“It’s the law of supply and demand. Real estate, especially residential property, is a
commodity which is in critical shortage and for which there is enormous demand. It is a
necessity, not a luxury. People can’t print up 100,000 new homes as they might print up a
stock offering. That’s why I continue to say ‘Don’t wait to buy real estate, buy real estate
and wait’” (Robert Allen, American self made millionaire property entrepreneur)
Have you noticed that the British public are almost totally obsessed with their homes,
or at least the value of their homes? Perhaps it’s because we remember the excitement
experienced in the late 1970's and 1980's when house prices were moving so fast that paper
fortunes were being made almost overnight. Every one was a jackpot winner and you didn’t
need a lottery ticket to win; if you lived in your own house or flat you were guaranteed a
bumper pay-out. Now the market’s hotting up again and the same thing is happening.
Friends of mine who bought a four bed house in Surrey last year for £200,000 tell me it’s
now worth £300,000. I’m sure we’ve all heard stories like that.
Everyone seems to know how much their house is worth, almost to the last penny. What
makes this so surprising is that the professional valuers, who tell the Building Societies how
much your house is worth when you ask for a mortgage, spend at least five years training,
including three years at university, and yet most home owners seem to be able to get to the
right figure instinctively.
When they retire most people’s largest asset is the equity in their home; in a survey in the
USA a few years ago it was found that the average home owner’s assets were worth thirty
times the value of a home renter’s assets. Just look at how much the capital value of homes
has increased in this country over the last 30 years. In 1969 the average price of a British
home was around £ 4,500. In 1999 alone house prices went up an average 14% and today the
average house price stands at £ 83,100 (December 1999).
And despite recent proposals to radically overhaul the Capital Gains Tax system, owning
your own home and “trading up” is still the most tax efficient way to make money in
property; if your home is your main residence for tax purposes, when you sell at a profit you
pay no tax at all.
So if you are serious about making money in property the first step is to own your own
home. It’s probably the most important investment you’ll ever make. It isn’t just for living
in. As the capital value accumulates it’s also a cash machine, a savings account and a source
of equity for your future deals. I’ll talk more about that later.
But that is by no means the end of the story, it’s only the beginning. As the British public are
so naturally good at property I am always surprised that their interest stops at their own front
door. Most people don’t seem to realise that there are all sorts of opportunities in the
property world for every one to explore and exploit, which with a little bit of creative
thinking every one can afford.
I have been lucky enough to have spent most of the last 18 years working in commercial and
residential property and have been able to follow the careers and fortunes of individuals in
the property world who never seem to put a foot wrong and who have been tremendously
successful in making money from property.
16

17. It’s probably true to say that property has created more millionaires than any other type of
business. And it seems that business people who are successful in an another area are more
often than not tempted into trying their hand at property, even if it is only as a side line.
You would probably think all property entrepreneurs must have had at least a small fortune
to start with and could afford to play with property. For some of them that may have been
true, but certainly not for all. Many successful property investors have started almost literally
with nothing but by knowing just a little more than the average lay person have built up large
property fortunes.
There are several powerful secrets all successful property people use which give them a
better than even chance of being successful . In this report I will teach you what they are and
how to use them so that you can start to build a property empire. At the moment this may
seem like an impossible dream but if you have the time and the desire, and if you put these
secrets into practice, you too can be a successful property investor.
Let me start by telling you something that may surprise you. Any one can afford to be a
property investor. It really is true that you can start your own private property empire
tomorrow by buying properties for as little as £500, perhaps even less if you shop around.
And if you are really clever you can start by getting someone else to pay for them for you,
perfectly legally. I know this sounds almost incredible but I’ll tell you how to do it later in
this report.
Without giving away too much now, how successful you will be depends upon how you
perceive property, so now is as good a time as any to start you thinking the right way. You
need to understand that most people don’t think of property as something they can be
involved with. Perhaps it’s psychological and they are overwhelmed by the physical size and
scale of property. Perhaps it’s because they assume that all property is too expensive and out
of their price range and they don’t realise that they don’t have to pay the whole purchase
price themselves.
But the key to building your property empire is to start thinking more laterally, and to start to
see the opportunity and not the building. So this is the first point to remember, the value of a
property depends on the interest being sold and not on the physical accommodation it
provides.
Flats are a good example. Many people in this country own flats and most flats are sold on
long leases. It is quite usual for the lease to be for 99 years or 125 years and for the “flat
owner”, who is technically a long leaseholder, to pay a ground rent of say £50 a year to a
freeholder.
A two bed flat in my town costs on average about £70,000 if you want to buy it to live in. So
for the purposes of this example we will assume that this is the value of the flat to the flat
owner.
Now think of the value to the freeholder. Is the value of the flat also £70,000 to the
freeholder? Try thinking of it this way, how much would you pay to get an income of £50 a
year in ground rent from the flat owner. You certainly wouldn’t pay £70,000. In fact at
current prices property investors are paying between ten and fifteen times the amount of rent
received for freehold interests of blocks of flats. So in this example, assuming a ground rent
17

18. of £50 a year, you will probably only have to pay between £500 and £750 to own the
freehold.
Why would anybody want to buy the freehold of a flat? Well, if they paid £ 500 for an
income of £50 per annum they would be earning 10 % on their money; I will show you some
of the basic maths you will need to work out how well your properties are performing, and
more importantly how much you should be paying for them, in a future article. Even if the
investor paid £750 they would still get a 6.7 % return on their money which is still better
than they will get in a building society savings account. And there are other ways to increase
the return which I will tell you more about later in this report.
So you can see that it is possible to own a £70,000 flat for a few hundred pounds, although
of course you won’t be able to live in it, yet. We’ll look at the attractions of freehold ground
rents in more detail another time. I hope you are beginning to get the point. It’s true that to
be successful in property you need to engage in some creative thinking but don’t worry, I
believe that is a skill most people can learn with practice.
I have written this report especially for private investors who may have limited resources and
want to do something more interesting than leave it in a building society. Even with interest
rates creeping up they pay such a small amount of interest at the moment that waiting for
your investment to grow really is as exciting as watching paint dry.
In this report, amongst many other things, I am going to tell you why it’s better to buy
property using other peoples money, and how to get them to lend it to you, a rough rule of
thumb which will show you how to value investment properties and work out whether you
are getting the best return on your money, and about the different types of property that are
available and why they should be of interest to you.
18

19. Yes, but not at any price
A layman’s guide to valuation
Oscar Wilde famously said "a cynic is someone who knows the price of everything
but the value of nothing". If this is true we can assume that cynics don't get very far in the
property business, because, quite simply, if you don't know the value you can't make a profit.
There are two things that are disastrous for a property investor; either paying too much or
selling too cheaply. If you want to be successful you must learn not to do either. This means
that you must have at least a working knowledge of property valuation.
I mentioned earlier that most home owners have almost an instinctive feel when it comes to
valuing their own homes. That’s because, whether they know it or not, they are using the
“direct comparison” method of valuation, also known as the “comparative method” or
“market value approach”.
The “direct comparison method of valuation”
Simply, this is a method of valuation by which the value of a property is assessed by looking
at prices recently agreed on other similar properties. The more similar the other properties
are, the easier and more accurate the valuation will be. Ideally, you will be looking for the
price agreed for properties of a similar age and size, in the same or a similar location, and of
a similar quality and with similar amenities.
There is also a presumption that it will be used mainly for vacant properties, although if you
were valuing a property that had been let, and you were able to find identical properties let
on identical terms to similar types of tenants, I guess you could apply it if you are careful.
However, those circumstances are rare so I mention them only in passing.
So, for example, if you are valuing a three bedroom terraced house in a row of otherwise
identical three bedroom houses, and two have both sold recently, one for say £30,000 and
another for £30,500, then it is fair to say that the value of the property you are valuing will
be around £30,000.
I should say here that because valuation is an art and not a science precision does not come
into it. This is why valuers use terms like “in the region of” and “fairly represented by” and
occasionally “in the range of”.
Where there are obvious differences between the properties, you will need to make
adjustments to get to the valuation figure.
If the two properties which have just sold both have a modern full gas fired central heating
system but the property you are valuing does not, in an ideal world you would start again by
looking for sales prices of properties without central heating. But let’s assume that there are
none, or that in all other respects these properties are so similar that you feel that you can
accurately account for this one significant difference. The way you may deal with this is that
you estimate it would cost around £2500 to install a similar system so you knock this off the
figure to give a valuation of “around” £27,500.
Then suppose that in addition to the central heating both of these other properties have been
modernised and have new kitchens and bathrooms, and the property to be valued is in an
19

20. unmodernised condition. You may allow another £5,000 for a new bathroom and kitchen to
give a value of £22,500.
Time for a word of warning. Unfortunately, even this is something of an over simplification.
Any property professional will tell you “cost does not equal value”. The valuation figure
you are trying to arrive at is a reflection of what a purchaser would pay in the open market.
So a prospective purchaser may know that it would actually cost £6000 to install a new
kitchen and bathroom, but in order to secure a purchase they may offer a price reflecting a
reduction of only £5,000.
Similarly, you also need to take account of the overall quality and value of the property. For
example, an allowance of £5000 may be appropriate for a new kitchen and bathroom in a
small three bedroom terraced house, but would be totally inappropriate in a large, five
bedroom, luxury, executive detached house.
The more unique a property is, the less likely it is that you will be able to find directly
relevant evidence, and the more adjustments you will need to make. In other words, the more
“judgement” you will need to use and often this will stray into the realm of “gut-feel” where
there is no substitute for experience. It’s no accident that valuers spend years training and
then years out in the market learning their trade. But that doesn’t mean that you can’t have a
go and be close, or at the extreme, get a feel for whether a proposition is worth taking
forward before you start incurring fees and costs. If your initial appraisal suggests that it is a
runner then you can get additional professional help.
An interesting aspect of the property market over here is that we tend to consider property in
fairly general terms. For example, we compare a three bed house with a three bed house, but
unless one is significantly larger, we usually make no real adjustment for differences in size.
However, on the continent, our European cousins have for many years used the floor area as
a direct unit of comparison and will analyse the sale price down to francs per square metre,
for example, and then apply the resultant figure to the property they are valuing.
So if a 100 square metre appartment sells for £50,000, i.e £500 per square metre the property
appartment next door which measures 110 square meters, all other things being equal, will
be valued at £55,000.
This methodology is catching on more and more over here, in particular in high value areas
such as the City fringe in London, and more particularly since the loft style of appartment
caught on where in effect one buys a “shell” which is then fitted out to your own
requirements.
A Quick Guide to Investment Valuations
If you are serious about buying an investment property you will also need to know how to
value a property which isn’t vacant.
I've tried to keep the theory and maths to a minimum but unfortunately there has to be some,
but nothing you can’t handle without a pocket calculator.
It may sound obvious but the key to understanding the valuation of investment property is to
firstly understand what an investment property is and why investors buy them. My definition
of an investment property is a property that produces income, usually in the form of rent –
20

21. (although not always)- and mostly investors buy them to have the income, although they can
be equally concerned with capital growth.
By this definition any type of property can be an investment, whether it is a house or a flat,
an office, a factory, or a shop, or something more unusual like a petrol filling station, a sea-
front amusement arcade, a river bank with fishing rights, an advertising hoarding or a radio
mast, just so long as it produces an income for its owner.
When an investor values a property he is not really concerned with the physical bricks and
mortar, what he is really valuing is the current income or rent, or if he thinks this could
increase, his estimate of the future rent. If you remember this you shouldn’t go too far
wrong.
When you understand this the next thing to do is to take a deep breath and think of valuing a
property as like looking at your building society account, only backwards. Let me explain.
Suppose you have a building society account which pays you 10% per annum interest and
you want to know how much you need to invest to get £1000 a year in interest. This is easy
to work out. If it pays 10% you need to invest £10,000. What would the answer be if the
account only paid 5%? The interest paid is only half so you will need to invest twice the
amount, £20,000. To make it easy you could use the formula:
Capital sum x interest rate/100 = income received
or in this example
£20,000 x 5/100 = £1,000.
Now to relate this to property we need to add one more element to the equation, the "target
rate of return". This is also known as “the yield” and to all intents is the same as the interest
rate in the Building Society example.
Usually when buying a property an investor will not be trying to buy a specific amount of
rent but will be trying to achieve a specific return on the money he is investing.
Serious property investors will know what rate of return they want to achieve from the
different types and qualities of the properties available. Other than in exceptional
circumstances these “rates of return” will be market led. In other words an investor will not
usually want to pay more for a property than the “going rate” and through keeping an eye on
what others are paying, perhaps through regularly attending auctions, he will be able to
analyse the sales prices and see what “return” or “yield” is appropriate for particular types of
properties.
He knows that the “going rate” is really a reflection of the cumulative views of all the
individual investors in the market, and in particular reflects their views on the “risks” and
“expectations” for that type of property. An individual investor is at liberty to agree with that
view, or if he thinks he knows something the others don’t, he can bid either more or less.
Remember, investors mainly buy property for the income they produce. So the three most
important things the yield will reflect are the current income, whether this will increase in
21

22. the future, and how secure the income is, that is whether the tenant can afford to pay the rent.
This is where the risk and expectation comes in.
Probably the most important of these considerations is the security of the income. If the
investor finds a property producing a cracking rent, it won't amount to much if the tenant
goes bust. That will leave the investor with an empty building and no rent, the cost of finding
a new tenant and, in a poor market, the possibility of having to accept a lower rent to find
any tenant at all.
The rule of thumb is that the riskier the income, the higher the target rate of return that will
be required by the investor to tempt him to buy the property. He will weigh up all of the
advantages and disadvantages of a particular property and decide which target rate of return
he requires to compensate him for the risk he is taking with his money.
So how does this relate to looking at a building society account backwards and how does this
help us to value a property? Using a hypothetical example, let’s assume I’m interested in
buying a residential investment. Other investments of the quality of the one I’m looking at
have been selling at auction recently at prices reflecting a gross yield on the rent of around
13%. If my target property produces a rent of say £5000 a year, the most I should pay is
£38,500. I can calculate this using the formula I showed you earlier but backwards.
income (rent)/interest rate (yield) x 100 = Capital sum (value)
£5,000/13 x 100 = £38,461, say £38,500
No one should pay more than a property is worth and so you will need to get a good idea of
what yield is appropriate for particular types of property. In practice this is easy just by
keeping an ear to the ground and seeing what different properties are selling for. I
recommend going to as many property auctions as you can.
You may be asking how did I know the other properties were selling at prices reflecting a
return of 13%? Well, you can analyse the sales prices by slightly changing the formula again
to:
Yield = rent/purchase price x 100
Once you understand the maths you can see that the higher the yield the less valuable the
property is. This seems a bit strange at first. After all it would be natural to assume that a
property producing a high yield will have a high value. But if you think about it a high yield
means that in effect you get a lot of income by spending not much money. In other words
you want to agree a low purchase price relative to the rent.
Let's look at a practical example to give you a better idea. This is illustrated by going to
extremes and by and comparing the attractiveness as investments of a batch of lock-up
garages, and a modern town centre office building that has recently been let to a multi-
national company.
If you were to do some digging around on recent investment deals to get a feel of what
other investors think about these types of property I would expect today to see sales prices
for similar properties showing yields of around 15% for the lock-up garages and, depending
22

23. on who the tenant is, 6%-7% for the office building. Because these yields have been
established in the open market through bids at auctions, and negotiations between
individual buyers and sellers, they directly reflect the current view in the market place of
the relative desirability of lock-up garages and offices as property investments.
The 15% yield achieved on lock-up garages is very high compared to the yields achieved for
other types of investment property and there are good reasons for this. These are all related
to the rent.
The first thing an investor will consider before buying a property is how safe the rent is.
Lock-up garages don’t provide a guaranteed and constant income, usually one or more of the
garages will be vacant. Some investors need certainty, particularly the certainty of receiving
their money, and the less certain the income, the higher the yield they will require.
Then there is the cost of owning the garages. They are often located on the edges of estates
and at risk of being vandalised. Of course some areas are better than others and an investor
may think that these particular garages won't be under too much threat and so he shouldn't
have to pay out a lot on maintenance and repairs. But he will have to decide whether he is
going to manage them himself or appoint agents to act for him. He may wish to appoint
agents if he lives a long way from the garages which would make it impractical for him to
visit them regularly, or if he knows that the current tenants have a history of being slow
payers and collecting the rent could be time consuming.
Lastly an investor will consider the probability of future rental growth and may conclude
that although demand for garages in this area is steady there is unlikely to be any
spectacular increase in the rent. It may just about keep up with inflation if he is lucky.
Weighing all this up an investor may conclude that these garages are only worth buying if he
can get a yield or return on his money much higher than he could get if he bought another
type of property investment. If he thinks the rent won't increase any faster than inflation,
and so the income is effectively fixed, he will only get a high yield by paying a relatively
small amount of money relative to the rent. Looked at another way, the income will have to
be high relative to the purchase price to achieve a high yield.
Because of his research into the market and sales prices acheived he knows that lock-up
garages are currently selling at prices reflecting yields of around 15%. If he thinks that after
allowing for some of the garages being periodically vacant he will get a rent of £4,000 every
year, he calculates their value to be £26,666, say £26,500, and this is the most that he will be
prepared to pay.
The maths looks like this:
Income x100/ Target yield =£4,000 x 100/15 = £26,666 say £26,500
He may think that lock-up garages are so risky that he may not be prepared to pay even the
market value and may need a guaranteed yield of at least 20% before he will even consider
buying. This means that the most he will pay is £20,000 which he will calculate like this:
Income x 100/ Target yield =£4,000 x 100/ 20 =£20,000
23

24. If the market is valuing garages of this quality at 15% he will have to search around to get a
bargain at 20%, but more often than not is likely to be outbid by another purchaser and will
eventually have to put his money into a more secure category of investment.
The offices let to the Plc don't have the same risks or problems for an investor. Let’s assume
that the tenant is an extremely profitable multi-national corporation, and in real life we can
check this by ringing up their head office and asking them for a copy of their latest published
company accounts. Most large companies (that are listed on the Stock Exchange) will send
these free of charge. If the accounts look alright they can be assumed to be a save bet when it
comes to paying the rent. Using property talk they are a "good covenant" and the rent should
be safe for the whole length of the lease which could be as long as 25 years if it were granted
some years ago.
So, unlike the garages, the rent should not only be paid, but should be paid for the
foreseeable future and beyond. Investors, as opposed to speculators, often need this certainty
and will be willing to pay for it.
An investment will be even more attractive if, in addition, there is good reason to assume
that the rental value of the property will increase. These offices are located in a prime
town-centre location and an investor may conclude that the rental value will grow faster than
inflation. Almost without exception modern commercial leases allow landlords to increase
rents periodically and so in time he will get a real increase in his income.
It’s modern practice for leases to make tenants responsible for all repairs and maintenance.
This means that the investor will be able to retain the majority, if not all, of the rental
income, which again will be reflected in a higher price.
In all respects the offices are a much more attractive and less risky investment than the
garages. Investors won't need to achieve such a high yield to compensate them for risking
their money, in fact there are likely to be so many potential buyers in the market for this type
of investment, that between them they will push the price higher and the yield lower.
This raises the interesting question of why should a property investor want to buy a property
with a 1ow yield. Why doesn’t he put his money into an investment which will give him a
high return such as a high yielding property. The reason is that a low yield implies that the
investor is confident that the rent is not only secure for the whole length of the lease but
that he is confident that the rent will increase.
It will be apparent by now that one of the most important considerations for an investor is
future rental growth but you may be wondering how and why rents rise and how investors
get the benefit.
Quite simply rents rise when demand for certain types of property increases in a
particular location. For example I have already mentioned the property boom of the l980's
when shop rents in particular went through the roof as retailers scrambled to open up more
and more shops to take advantage of free-spending consumers.
Commercial properties like shops, offices and factories are usually let on leases for
anywhere between five and twenty-five years. Historically the rent would be fixed for the
entire length of the lease but because of rent inflation during the l960's and 1970's landlords
realised that they were missing out as rents achieved on new lettings soared above the rents
that had been fixed on their other properties. To overcome this problem it became common
24

25. practice for leases to allow for periodic rent reviews, usually every five or seven years for
commercial property. Normal practice today is every three or five years. Under the terms of
the lease the tenant will have to accept the increase in rent if the landlord can prove it is
justified by comparison with rents agreed on other similar properties in the locality, or in
similar locations.
It is not so clear whether an investor can expect rental growth on residential investments as
this will depend very much on when the lease was granted. In the past residential
tenancies have been heavily legislated and if a lease was granted before 1987 it is probably a
Regulated Tenancy.
If it is, the law only allows the rent to be reviewed every two years and then to a level that
will almost certainly be below an open market rent. Things have improved since the
passing of the Housing Act 1988 and I shall explain why later in this report. Needless to say,
receiving rising rents will have a profound effect. Let’s have a look at an example.
During the boom years of the late 1980's it wasn’t unknown for investors to buy prime shop
units for prices reflecting yields as low as 2.5% - 3%. They were confident that because
there was strong consumer spending, and demand for shops from retailers was high, shop
rents would grow rapidly. They were happy to buy shop properties and wait knowing that at
the next rent review they would benefit from a substantial increase in rent. As a result the
yield on the money they had spent buying the investment would also increase dramatically.
For example, our investor may have bought a prime shop in a major commercial location
such as London' s Oxford Street, considered by many to be the very best retail pitch in the
country. Let’s assume the rent is £100,000 per annum and the investor is prepared to make
an offer reflecting a yield as low as 3%. This means that he will pay £3.335m which he can
calculate by:
Income x 100/Target yield = £100,000 x l00/ 3= £3,335,000
For a yield this low you may think it's hardly worth the effort to buy the investment and he
could probably obtain a higher rate of interest from a simple building society account.
However, our investor, who has been keeping a careful eye on the retail market , knows that
shop rents in Oxford Street have grown so quickly over the last couple of years that at the
next rent review, which we will assume is in three years time, the rent will at least double
and could even treble. If it does then the yield will double or treble respectively as we
can work out by slightly adjusting our valuation formula:
Income/ purchase price x 100 = yield
£200.000 /£3,335,000 x 100 = 6%
Or if the rent trebles:
Income /Purchase price x 100 = yield
£300.000/ £3,335,000 x 100 = 9%
With the promise of rental growth like this the property will soon be producing an
attractive yield and if the market continues to value prime Oxford Street shops at prices
25

26. reflecting yields of 3% then he will also make a considerable capital gain as the
value rises in line with the rent.
He paid £3.335m but if the rent received is £300,000 per annum the value is now
Income x 100 /target yield = £300,000 x 100/3 = £10,000,000
So he now has a property producing a 9% yield on his original outlay of capital, three times
the rental income as when he first bought the property, and an increase in capital value of
£6.7m.
In practice, after each increase in rent, the market would push the yield out to reflect that
there is no imminent prospect of rental growth. However, as retail rents continue to rise the
yield will move back in again until the next opportunity to increase the rent arises. So the
capital value will increase, but immediately after each increase in rent, part of the increased
value attributable to that increase will be off-set by the increase in yield. The underlying
trend will be for an increase in capital value but the yield pattern will be stepped.
In real life the calculations will be a more complicated depending how detailed an analysis
the investor requires of a transaction. The purchase price isn't the only money paid out on
purchase.There will be stamp duty which is currently charged at 1% of the purchase price (or
the value of a property, whichever is the higher) on all transactions over £60, 000, 2.5% over
£250,000 and 3.5% over £500,000 (April 1999).
Then there will be solicitor's fees for conveyancing and legal advice on leases although for
investments of the value with which this report is concerned with I wouldn't have thought
that this would be more than a few hundred pounds each time. And lastly there will be
surveyor's fees for valuation advice and undertaking surveys. Again for small
investment properties worth less than £100,000 you are likely to pay around £500 for a
valuation and survey if you shop around.
Obviously fees and costs will vary from one property to another and it is largely
common sense to estimate what they will be in each individual instance. A rough rule of
thumb used by large investors who deal in properties worth hundreds of thousands or even
millions of pounds is to allow a percentage of the purchase price for fees, which is
calculated as stamp duty at the appropriate rate, plus 1% surveyor’s fees plus VAT, and
0.5% solicitors fees plus VAT. This provides a rough guide and will not always be helpful
for small properties or cheaper investments where there is unlikely to be such an easily
defined relationship between purchase costs and purchase price. It will require adjustment
for abnormal circumstances such as title problems or a defective lease. These will result in
more legal work and so a purchaser’s solicitors fees will be higher as will the banks legal
fees, which will normally be the responsibility of the purchaser.
Once you have purchased a property there will also be ongoing costs of ownership. In the
earlier example of the lock-up garages I referred to the appointment of managing agents to
look after the day to day running of the investment, for example organising repairs and rent
collection. Managing agents generally charge 10% of the rent collected for their fee, plus
VAT. For a full management service the standard charge is 15% plus VAT. Depending upon
the lease terms and the type of property owned an investor may also have to budget part of
the rent each year to cover the costs of repairs and maintenance, and will have to insure at
his own cost.
26

27. To get a true analysis of the return on their capital investors will calculate the yield net of
costs. This means that they will take into account all potential purchase costs and the costs of
owning the property. If we go back to the example of the lock-up garages which our
investor calculated would produce £4,000 a year in rent, and for which he wanted a yield of
at least 15%, we saw that he would pay £26,500.
The yield of 15% is what the market is currently paying for this type of investment.
However, we can consider the 15% yield to be a “gross yield” because it only takes account
of the rent received. What the investor will want to know is whether he is really getting 15%
on his capital.
In this example costs would not include stamp duty as the purchase price would be below the
current £60,000 threshold but would include solicitor's conveyancing fees and possibly
surveyor's fees. If he appoints a managing agent to 1ook after the garages and collect the
rent, they will charge a flat fee of 10% of the rent collected plus VAT. The investor would
also be well advised to set aside a contingency sum to cover essential one off repairs and
maintenance. With these costs in mind he can now calculate the total costs of purchase, the
total income receivable after costs, and the actual return on his money as follows:
Purchase Price ( as before) £26,500
Solicitors fees and other costs say £ 1,000
Total capital expenditure £27,500
Income £ 4,000
less repairs at 10% per annum £ 400
less management @ 10% plus VAT £ 470
Net income £ 3,130
He can apply these to the formula:
Yield = Income/purchase price x 100
Yield = 3130/27500 x 100 = 11.38%
So he can calculate that the true return on his money, or the net yield, is actually 11.38%.
For the moment, that’s as far as I think I can go on this subject. There’s an awful lot that I
haven’t said. For example, I haven’t talked about the valuation of leasehold properties, or the
valuation of reversionary properties, that is properties where you know that the rent will be
going up at a specific date to a specific amount. That’s the stuff of university lectures and
musty text books.
But I think I’ve given you enough of a background to be able to undertake a fairly simple
analysis of sales. and to get a feel for the returns you should be looking for. And hopefully
I’ve given you enough information to do a basic back of the envelop valuation of the types
of investment property you are most likely to be looking at, so that you can at the least come
to an informed view whether a proposition is worth taking further and whether you need to
take more expert advice.
27

28. A quick guide to “residual valuations” and development appraisals
The “residual” method is the principle method of valuing
• development schemes
• redevelopment schemes: and
• properties for refurbishment.
As well as finding the value of land or a building before redevelopment or refurbishment it is
also a very useful analytical tool for analysing and appraising whether a particular
development or refurbishment scheme is profitable.
As the name suggests the method involves finding the residual value, in other words the
amount left over if you take the costs of construction and other associated costs away from
the end value of the scheme. Associated costs include professional fees, marketing and
interest. If you are analysing profit you will find the residual after also allowing for the cost
of purchasing the land or building subject to the scheme.
This is a very subjective process and changing any one of the many constituent parts can
have a disproportionate effect on the end result. So the valuation or analysis will only be as
good as your knowledge or research. Like the computer saying “rubbish in, rubbish out”.
Here is an example template of a classic residual valuation to establish the value of a
development plot, or a property for refurbishment or redevelopment.
Gross Capital Value (once completed) £
Less agents costs of disposal £
Less legals on disposal £
Net Capital Value £A
LESS
Building costs £
Building finance £
Professional fees £
Interest on fees £
Promotion/marketing £
Contingency sum £
Agents/letting fees £
Developers profit £
Total costs £B
Residual land value £A - B
The amount left for the residual land value will include an amount for acquisition costs, and
interest on the funds used to purchase the land or property which is rolled up because it is
assumed that the acquisition costs occur at the point of purchase.
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29. To get to the land value the acquisition costs and the interest can be stripped out
algebraically by:
Sum available for land, acquisition costs
and interest (residual land value) £x
Finance on land
Interest rate/100 x No of months = y
Acquisition costs
Costs x interest rate/100 x No of months = z
1+y+z=x
Land value = x/1+y+z
If the cost of the land is known, by substituting this for developers profit, the appraisal can
be used to calculate the profitability of a specific project where all costs are known.
Don’t forget that if you are doing a “valuation” a lot of this will be a purely hypothetical
exercise as the market value is often based upon “a market average”. However, if you are
undertaking an appraisal, for example to determine the profitability of a particular scheme,
then you will use figures that are as accurate as possible for that scheme.
A good example is building costs. On a particular plot of land you know that the only likely
planning consent will be for a three bedroom house, and that because of prevailing levels of
value in the area most developers would construct it to an average specification. On this
basis you can determine the value of the land using building costs that reflect the market
view.
On the other hand, if you decide that you would like to retain the property and live there
once the building is completed, you may decide that you want to build to a higher standard
than the market norm. You can then use your estimate of the enhanced building costs to
determine whether this project is still viable.
A word of explanation about the constituent parts of the calculation:
The end value of the project, i.e the gross capital value, is found by using either the direct
comparison method or the investment method. The cost of sales like estate agents and
solicitors fees are deducted to get to the net capital value. This is the money you would have
left over when you sell the completed project.
The building costs will already be known if estimates are available. Otherwise you may need
professional help from a quantity or building surveyor, or an architect.
Because in theory building costs only need to be financed as they occur, i.e when the
building contractor sends in his bill at the end of each completed stage of building, it is usual
practice to average out the interest charges on these costs. There are two ways this can be
done relatively easily – firstly, apply half the interest rate to the whole of the building cost
for the whole of the estimated length of time the building works will take, or, secondly apply
the whole interest rate to half the building costs over the estimated length of time for
building works.
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30. Promotion and marketing ? Well once you’ve built it, there’s an assumption that you’ll want
to sell it. How much should you allow? For smaller schemes this will probably be wrapped
up in estates agent fees, and you won’t need to make a separate allowance here.
Developer’s profit. If you are doing an appraisal this will be whatever return you wish to
make on the project. If you are doing a valuation you will use figures that reflect what an
average developer in the market will require at the moment. Usually this won’t be less than
15% of the end value of the project, but can be 20% or more.
Agents and letting fees are again usually applicable to larger schemes. For smaller schemes
this figure will most likely include an allowance for promotion and marketing.
Although a residual can be very complicated the rationale behind the method is sound and
useful. However, you may be wondering whether it can be quickly and easily applied to
smaller projects. I’ve set out on the next page a very basic residual I developed on a
spreadsheet, which I have used to appraise the viability of a number of refurbishment
opportunities I have looked at. I must stress that this is only a very rough and ready reckoner
and I wouldn’t argue for its infallibility as a valuation tool. However, it has provided me
with enough of a guide to be able to assess from my desktop whether a project is worth
researching in more detail. I’ve made it fairly adaptable so it is relatively easy to add or
delete fields to make it bespoke for each individual situation.
The example shown is for a relatively small refurbishment of a low value house. You can see
that the end profit was minimal and this opportunity was considered not to be profitable
enough to justify the time and effort involved.
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31. Gross sale price 77500
agents inc Vat 1821.25
legals inc Vat 235
Net sale price 75443.75
LESS
Refurbishment costs
Roof
Damp
Timber 160
Bathroom 280
Kitchen 1250
Wiring 1128
Plumbing 300
Windows 1950
Cheating 2000
Ceilings
Replastering 210
clear gdn
Skiphire 300
Decorating 1000
Contingencies 2101.85
Total Development 10679.85
Other costs
Insurance 397.37
Survey
Valn
Travelling 804.96
Legals 462
Electricity 20.03
Gas 22.53
Water
Bank 17.5
1724.39
Purchase Price 54000
gross profit 9039.51
Finance
Development for 3 mths 133.49813
Property for 14 mths 4410
Arrangement fee
profit on property 10 %
legals on loan
Total Finance costs 4543.4981
Stamp duty
net profit 4496.01
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32. If you want to write your own spread sheet be careful about how you handle the interest and
finance section. It is easy to get dragged into circular arguments and achieve only
meaningless mathematical solutions.
As ever I advise that if you use your own residual model be very cautious about relying upon
it. By all means use it as a rough guide, but before you spend thousands or even hundreds of
thousands of pounds of your own money, get an independent view and take professional
advice. You will probably have to pay for it, but there’s no question that it will be money
well spent if it means that you avoid an expensive mistake.
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33. Why You Don’t need to be able to afford to buy a whole property
The secret almost every successful property investor has
used is…
I’m now going to tell you probably the most important secret known by and
used by all the great property investors. I think you are going to be surprised. “Nobody ever
rises above mediocrity who does not learn to use the brains of other people and sometimes
the money of other people too… it takes a combination of the two”. So said Napoleon Hill,
the man who through his philosophy of personal achievement probably helped to create
more self made millionaires than any other person in history.
The trouble with using other peoples money is that debt makes us squeemish. From an early
age we are told that debt is bad and should be avoided. And that is true, or at least partly
true. There are certain types of debt that we should avoid at all costs, but like it or not any
businessman will tell you that most businesses cannot grow without the proper use of
investment debt.
This is especially true of property where the sheer scale of the figures involved mean that
only the super rich can afford to be seriously involved without some form of debt. If you
want to build a sizeable and profitable property investment business the truth is that you will
require some short term debt.
So the first rule is “ investing in property works better when you use someone else’s
money”. I’ll show you later how borrowing the money you need is probably easier than you
think.
There are two main elements to this first rule that I would like to show you.
Firstly, when you are looking at a potential property to purchase don’t be put off by the
purchase price. Remember that you don’t need to have the monetary equivalent of the asking
price, or put a better way, you don’t need to be able to afford to buy the whole property
outright.
Most people don’t take the idea of themselves as being property investors seriously because
they assume that they can’t afford to buy properties. You may think that they have a valid
point, after all property is expensive. But the simple fact is that you don’t need to be able to
afford the asking price, you just need to be able to pay the part of the price that the bank
won’t lend you.
I’ll show you later that even if you do have enough money to buy an investment property
outright, it will almost certainly be to your benefit not to use all your own money.
You may be able to apply this rule in other contexts but I think it is best illustrated if we look
at investment properties. For simplicity I shall refer to residential investments but the
principles apply equally to commercial properties. Most banks or other lenders participating
in the buy-to-let scheme will lend between 75% and 80% of the lower of the purchase price,
or the value of the property, depending upon the individual circumstances of the case.
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34. This means that when you want to buy a property the question to ask is not “can I afford it?”
but “can I afford 15% to 20% of it?”
Looked at another way, if you have a sum of money which you intend to invest in property,
for example let’s say £10,000, rather than looking for a property worth £10,000 you should
be asking yourself “if I can borrow 80% of the purchase price where can I find a suitable
investment costing £ 50,000?”
As a purely hypothetical example, suppose you see a nice flat that you think would make a
good investment when it is let to a tenant. Because it’s in a good area you are sure it will be
worth keeping for a few years because the value is almost certain to go up. You have found
out that the asking price is £62,500 but you think you can get it for £60,000. You ask
yourself “Can I really afford a property worth £60,000?” Wrong question. If you can borrow
80% what you should be asking is “can I raise £12,000? ”
This is why I think that probably the most important part of raising money for property isn’t
to finance the purchase as such, but is to finance the balance not covered by the loan. If you
can find the first 20% to 25% of the purchase price, and as long as your existing income and
the rental income from the property you want to buy cover the lenders criteria, you will be
on your way.
If you have sufficient savings you will be ready to put in an offer and start talking to a broker
about a loan for the balance. If you don’t have the cash in the bank a flexible lender may
allow you to use equity in your home as security against which you can raise the money for
the deposit through a second mortgage, or an equity release loan. I’ll tell you more about
lenders and how to approach them next month.
Now, let’s look at the second reason why “investing in property works better when you use
someone else’s money. The reason is gearing, and this really is the star of the show. Let me
show you the amazing and powerful affect that it can have on your personal finances.
If there is a key to success in property this is surely it. When you understand what happens
you will see why buying property with other peoples’ money is much more profitable than
buying property with your own money. Remember I said that even if you do have enough
money to buy a property outright it would pay you not to use all your own money? Let me
prove it.
Going back to our earlier example of the flat let’s assume that your offer f £60,000 is
accepted and your purchase goes through. As you are cash rich you don’t bother with a loan
and you buy the property outright. The flat is let to a decent tenant at £500 per calendar
month which you know is the going rate in that area. We can easily calculate that if the
property cost £60,000 and the income received is £6000 per annum, you will be getting a
return of 10% on your capital invested. Not bad.
But now let’s compare this with the return you will receive on your money if you borrow to
fund part of the purchase price. Still using our earlier example, we know that you have
access to £12,000. Your mortgage broker has told you that it will be possible to borrow 80%
of the purchase price of a property and so, applying the rough rule of thumb, you start
looking for a property with a value of five times the amount of cash available to you.
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35. You are offered a flat which is let at £6000 per annum, and from your research and from
attending property auctions you calculate the property is worth around £60,000. As you can
get an 80% loan you can afford to pay this.
To keep things simple let’s assume that you can obtain an interest only loan at 7.5%.
As the purchase price is £60,000, you will be able to borrow
Purchase Price £60,000
Loan ratio 80% 0.8
Amount Borrowed £48,000
The interest you will pay on the loan is:
Amount Borrowed £48,000
Interest charged at 7.5% 0.075
Annual interest payments £ 3,600
The interest will be paid out of the rent so you will make a profit of
Rent received £ 6,000
less interest £ 3,600
Profit on rent £ 2,400
After paying the interest on the loan you will be left with £2,400 each year.
As before we know that the gross rent, that is the rent before the deduction of interest
charges, represents a return on the full purchase price of 10%. The return on the purchase
price represented by the profit left over after the payment of the interest is only 4%.
But let’s see what the return is on the money you have actually put into the deal. You have
put in your available cash of £12,000 and you are now receiving a net profit of £2,400 each
year. We can calculate that the return on your capital is:
Profit (net rent)/capital (own money) x 100 = £2,400/£12,000 x 100 = 20%.
So, by paying only part of the purchase price yourself and borrowing the balance you have
been able to increase the return on your money from 10%, which is all you would get if you
paid for the whole property outright, to a massive 20%. In effect you have doubled your
profit just by borrowing the majority of the purchase price.
This means that even if you had £60,000 and could afford to buy the property without
borrowing, you would be better off splitting your capital to fund the purchase of several
properties, and borrowing the balance to increase your total return. In this instance if you
bought five identical properties, the profit you would receive in actual rent would increase
from £6000 per annum to five times £2400, in other words £12,000 per annum.
This is a very simplistic example just to illustrate the point. In real life the calculations
would be more complex and would have to reflect extraneous matters like stamp duty, and
the costs of arranging the various loans. It’s also unlikely that you’ll find five identical
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36. properties let on identical terms. But it does prove that in property you don’t want to put
your eggs all in one basket, it’s better instead to spread your capital over several purchases.
This is the power of gearing and the effect is even more pronounced with higher yielding
properties, and when you are able to arrange loans at lower interest rates.
That’s why being able to supercharge the returns on the money you put in makes property so
attractive, and gearing a property investors best friend.
These kinds of returns aren’t the sole preserve of residential properties. A couple of years
ago I was offered a secondary shop in a fashionable and historic south east town, let to a sole
trader. The lease was a little bit short having only about 9 years left to run, which some
lenders may feel uncomfortable with, and the rent is £20,000 a year which is still slightly
more than the current market rental value, having been agreed in the late 1980’s. However,
retail rental values in the town were picking up and it seemed that they should catch up again
fairly quickly if things kept going the way they were.
The freehold of the shop used to be owned by a property company but they went bust and a
Receiver was appointed to dispose of the assets and pay off the creditors. This property sold
for £75,000 representing a return on the sale price of 26.6 %. But assuming that the
purchaser was able to fund this purchase the return on his money would be substantially
more.
Let’s assume that the buyer was be able to borrow at 9%, which is a fairly commercial rate
being 2.25% over the base rate as it then was. Also that as this is a fairly tertiary shop with a
less than substantial tenant the bank would want to reduce their risk by restricting the loan to
value ratio to 60%. For simplicity let’s again assume that the loan will be interest only.
If the investor could borrow 60% of the purchase price, ie £45,000, he would have to put in
£30,000 of his own money. We can calculate that the return on his own capital is 66.6%.
In the property world the expression “you get what you pay for” is often proved to be true,
and I wouldn’t recommend a purchase like this for a first time buyer or inexperienced buyer.
I’ll show you in a later article what influences whether a yield is high or low, or somewhere
in the middle. In this instance the yield reflects the risks of ownership, for example if the
tenant went bust this shop could have taken some considerable time to re-let, and then almost
certainly at a lower rent.
This is the type of property you’d want to tuck away in an existing portfolio, if it works out
you’re quids in, if not the rest of the portfolio will cover it until it comes good. Even so,
there are plenty of properties out there which are suitable for smaller investors, and where
the benefits of gearing can be reaped big time. So start looking and in the meantime start
saving up for your deposit, with any luck you’ll need it sooner than you think.
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37. Other peoples money and how to get it
Now that you can see that not only do you not have to be able to afford a whole
property, but it actually works out better that way, we’re going to have a look at borrowing.
If you have enough to cover around 25% of the purchase price, and you concentrate on
buying reasonable quality investments at the right yield, you should be able to borrow the
rest from the bank.
For a lot of us this is where things start to get scary. Let’s face it, until you’re established and
have proved you’re a good risk, no bank is likely to throw wide the doors and welcome you
with open arms when they see you coming.
As an aside, one of many great ironies in the property world is that once you are established,
you can afford to lose millions on highly speculative and disastrous ventures, and still be
confident that you will get a another backer. If you don’t believe me, just look at the number
of big names who completely blew it in the 1980’s along with millions of pounds of other
peoples money, who are making a come-back at the moment.
Have you considered what it means to be a property owner, and how much you are prepared
to pay and risk to achieve this? How are you going to feel when you put your money on the
table? How are you going to feel when you spend the bank’s money? After all, it’s easy to be
glib but the chances are that you won’t get a penny without signing a personal guarantee, and
if it all goes horribly wrong these people will think nothing of taking the shirt off your back.
So, you’re absolutely sure you want to buy property but don't have any ready money of your
own. Don’t worry. You've heard the expression "you need money to make money". This
may be true, in part, but it doesn't say that it has to be your money. Actually I think that
desire, commitment and action are more important to succeed in property. If you want
something badly enough you will find money somewhere, somehow. You’re just going to
have to use creative thinking.
There are two main places to start looking. Using very broad and general headings the first
of these is the “bank”, which includes all formal lenders and lending institutions and brokers,
and the second is friends, relatives, and acquaintances including prosperous individuals you
take on as backers for specific projects.
Here’s a brief guide how to get what you need.
The Banks
You’ve probably already worked out for yourself that paradoxically the more money you
have the easier it is to borrow. This is how the banks operate. If you have money they'll lend
you more. If you don't have money it’s going to be hard work. The description of a banker
as being someone who will lend you an umbrella when the sun is shining but who wants it
back when it rains is absolutely true.
There is one thing you will have to accept from the start. Unfortunately no institutional
lender is going to lend you 100% of the purchase price even if you go through a broker. The
best you are going to get is probably 75% to 80%. You are also going to have to have pay
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38. more in interest than on a standard residential mortgage; commercial rates are usually quoted
at about 2% to 2.5 % above bank base rate but you may well be able to haggle and get this
down by a quarter of a point. I have tried this successfully before but some lenders won’t
budge.
A word of explanation, “commercial” in this context refers to your status, not the type of
property you are purchasing. As the loan is not for buying your principal dwelling, but so
that you can make a profit, the bank will treat you as a business. So you can be buying
residential properties and paying “commercial” interest rates. This does not apply when you
apply for a loan under the ‘Buy to Let’ Scheme which we’ll look at later.
The one thing you can count on is that for all their training bank managers are not business
people, their role is to be administrators, and you cannot expect them to understand
entrepreneurs. Unfortunately, the moment you sit down in front of a bank manager you are
negotiating from opposite interests. Business people like you and me are by definition risk
takers, but bankers are conservative; it’s their job to protect their money and make sure they
make only safe, sensible loans. If you are going to succeed you will need to learn how to get
around that obstacle.
Approaching a Bank
If banks make their money by lending money, why do they make it such hard work to
borrow from them? The answer is, of course, that bankers know that if they make the wrong
loan they lose money and their jobs. This is why it’s up to you to prove you’re worth the
risk.
When you start it’s worth taking time to select your target bank carefully. Some banks are
more flexible than others. The big four or your high street bank may feel more comfortable
to deal with but the smaller foreign banks, which are mainly clustered around central
London, are often prepared to be more flexible. However they are more likely to want to
lend larger sums than you can afford to borrow.
Before you choose a bank to make your first approach it’s worth doing some homework.
Even the main high street banks vary in the way that they deal with enquiries and
applications. When I first started and wanted to borrow some money to buy a property to
refurbish, I contacted all the main banks in my town to ask for an appointment to see the
manager. Before they would make an appointment I was asked a few questions to find out
what I wanted to talk about so I explained that I was interested in buying a property for
refurbishment but I wanted to establish whether in principle whether the bank would be
prepared to lend to me, and if so how much. Then I could work out how much I could afford
before I went out and spent time seriously searching.
To me this seemed extremely logical. In fairness for three of the banks this wasn’t a problem
and I was able to make appointments to meet the respective bank managers. However, for
the fourth bank this was impossible. I was told quite categorically that I would not be
allowed to see the bank manager unless I had first found a property. In vain I tried to explain
that this was going about things backwards but this didn’t cut any ice at all. The girl on the
phone wasn’t at all interested in letting me through their door and wouldn’t even transfer the
call so I could explain to someone who may understand. Needless to say I didn’t do business
with them.
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