Welcome to Property 2.0 – Home and Away!

Dear fellow investor,

It's been a couple of weeks since my last broadcast, and things are
changing so rapidly in the fast moving world of property investment at
the moment, that we have to up-date our website on an almost daily
basis!

Petrol prices coming down … food prices coming down …. interest
rates coming down (4.5% at the time of writing and will almost
certainly drop further) … so there are some tiny pinpricks of light
at the end of a very long dark tunnel. But we still have a long way to
go, here in the U.K., make no mistake. Stay tuned to www.4wallsandaceiling.com for all the latest news.

As you have no doubt realised, the world is entering a new era of
property investing which means that those that want to survive these
challenging times need to adapt their strategies to reflect the reality
of what is happening i.e. prices falling, lack of financial products,
lack of creative deal structuring etc. The old ways of investing in property are now defunct. At 4 Walls, we call this "Property 2.0" and it is the subject of today's broadcast.

When it comes to purchasing property, one of the fundamental issues
that you need to be clear about is the "intrinsic value" of the
property i.e. how much is it really worth? There is much talk in
property, particularly in respect of NMD and BMV purchasing, of how to
determine Open Market Value in the current market conditions. The
reality is that it is almost unquantifiable and things are changing all
the time. The latest RICS Housing Market Survey shows both a renewed
deterioration in the net price balance and a further drop in the level
of transactions.

Click here to read the full RICS Survey story.

So we would like to put forward the idea that the new way of
determining market value (from an investor's point of view) is quite
simply that the property is only worth whatever level of borrowing the
achievable rent will support!

This in turn depends on mortgage product interest rates and rental stresses.

If a property pays its way with some net positive cash flow, then that
will tell you if it is a good deal and you have paid a reasonable
price. You need massive discounts to get anything to stack with present
mortgage products. However, if you are being paid by the property every
month, you won't be too concerned about house prices going up, down, or
staying stagnant! Following this strategy is a far more business-like
approach than hoping for a "get rich quick" pay-out from equity
release. We all need to face up to the fact that there is not going to
be any capital growth in the U.K. anytime soon and prices are probably
going to drop further, before stabilising.

To explain this business model using the metaphor of an employee: if
you had an employee on a salary of £30k but they brought in £40K net of
new business, would you mind? No.

If you had an employee who was on salary was £100K, but they brought in
£140K net in new business per annum, would you mind? No.

It's all just numbers, and thankfully numbers never lie.

Accurate rental comparables are now more important than OMV's in our humble opinion.

When mortgage products become more favourable, you will be sitting even more pretty.

We use a simple calculation to work out what borrowing the achievable rent will support. It goes like this:

Monthly rent x 12 divided by (product interest rate) divided by (product rental stress).

If your property has positive net cash flow from the rent, then it is a
valid business proposition! In other words, if it funds its own
mortgage and "running" costs, and pays you a few £££££'s above and
beyond that, it is a viable deal. It's as simple as that.

You also need to put this in the context that the maximum LTV is now
75%, meaning that you are going to need to put in 25% deposits for the
time being. In reality, this makes it easier to stack deals and achieve
positive net cash flow.

Coming soon: 4walls TV.

As you know from our blogs, we have been spending a lot of time over in
Cyprus of late, as we see far more opportunity over there in property
than we do here at present. Cyprus is a wealthy island, the banks there
never got involved in sub-prime lending, and lenders are cash rich. The
economy and population is growing and it is the No. 1 tax haven in
Europe! A very attractive package all round which will fuel business
and investment.

According to the London Chambers of Commerce (who contacted us last
week), Cyprus is the most popular re-location destination for
businesses seeking a haven from the credit crunch! This year they have
had 135,000 enquiries from individuals and businesses interested in
relocating there! That tells us at 4 Walls that there is going to be a
healthy demand for rental property in Cyprus in the future, in
particular the Larnaca area, which is the international portal to the
island, and its main business hub.

If you cannot make property investing work in the U.K., then it makes
sense to look outside the U.K. Entry level deposits start from £6K in
the Larnaca area of Cyprus for a one bed apartment which is
significantly more affordable than anything you can find here in the
U.K. Plus you have positive cash flow from holiday lets and a growing
economy that will keep capital growth stable for the future.

While in Cyprus recently, we caught up with millionaire investor and
international tax planning expert Jarl Moe to find out why he invests
heavily in Cypriot property:

So all of the above is actually good news, but only for those investors
who recognise that they need to change their strategy to reflect the
current market conditions and limited availability of reasonable
mortgage products. In the future, successful property investors will be
those who adopt a business-like approach, build their portfolios on
positive cash flow, recognise the value of education and networking,
diversify their investments to minimise risk, and take a mid to long
term view both here and abroad.

Welcome to Property 2.0!

Finally, we were interviewed on Love Property Radio last week. You can listen to our interview at www.loveproperty.org or on iTunes.

We currently have some Property 2.0-style cash-flow positive deals
available in Poole, Dorset, Basingstoke, Hants, and in Larnaca, Cyprus.
These hand-picked, limited, highly discounted deals are ones that we
are investing in ourselves. We focus on quality houses in up-market
areas as we believe these to be more recession-proof than cheaper areas
of the U.K. If you would like further details, please get in touch.

To your continued success!

Kind regards,
Nick

Remember – you can never learn less!

P.s I have a very trustworthy collegue in ecademy that is running a
seminar on how to build relationships with accountants, well worth the
consideration – click here -

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  • Rob

    Hi Nick,
    Forgive the complete n00b question, but what does the term ‘rental stress’ mean? I’ve tried Googling it but only found stories about stressed-out renters!
    I’ve only just started looking into property investing, but your approach of using rental comparables to determine the value of a property for investment purposes makes total sense to me. I’d want all my investments to be cashflow positive, be able to ride out any dips, and see capital appreciation as a bonus.
    Anyway, great blog!
    Rob

  • Hi Rob,
    Thank you for your kind words ref the blog, I’ve been writing it for 2 years now in the hope that I can spread the word about more people achieving positive cash-flow.
    The term “rental stress” is in reference to the “coverage” of the rent required by mortgage products. The current average rental stress is 125%, meaning the rent has to cover the mortgage by this amount in order for the lender to consider it as a viable proposition.
    Example:-
    Mortgage per month £1000
    Rental stress 125%
    Therefore, provable rental income £1250 (single occupancy) to be able to get the product.
    We are just about to launch our new web-site which will involve TV/Streaming video, all the content will be there to assist people like yourself, if you would like to use that then please register at our (soon to be) old site http://www.4wallsandaceiling.com and we will send you an e-mail to let you know when it is live.
    In the mean time please let me know if I can be of any help.
    Cheers
    Nick

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