A lot has changed in the past 12 months in the world of property investing, and this has to force savvy investors to change their strategy, but there are many newbie investors who have either just started, or thinking of buying their first investment, wondering if the conditions are right for them to start.
Since the crash of 2008 there has been too much of an emphasis on property income as a way to replace a job salary, and this came about because low interest rates created a false sense of high cashflow which fuelled the recovery and subsequent growth of the property market.
The result of the low rates meant that most property investments were making heavy amounts of cashflow and suddenly people who had a couple of investment properties which might have been balancing the books pre-2008, were now quid’s in probably over £1000 extra per month.
From these conditions rose the advent of the era of “property gurus”, all of whom had grown up in the world of self-made success seminars and they went about touting course and seminars of their own, promising to replace careers with “passive property income”.
This created a cycle of myths, mistruths, false understandings and ultimately pissed a lot of would be investors off. There’s no greater promise than one of little work and lots of gain, and that’s exactly what they sold.
I’ve never been a fan of these people, suffice to say if you’ve been in the property game long enough, you’ll know that although cashflow is important in sizing up a deal, the real gain in property is when the price goes up and you can cash out or sell.
Those like me, who were active before 2008 (myself starting in 2001), know a time when interest rates were between 5-7% before discounts! Imagine stacking up the numbers then to make a cashflow.
In fact, most deals back then would be classified as great investments if it made over £10 cash flow each month. That’s what we were working on in the beginning. Post 2008, lessons haven’t been learnt and I fear people getting stung as we head into the next phase of the property cycle, with “gurus” still teaching about cashflow and not about long term game.
Snakes & ladders
You see, the property game is a long term game, and it isn’t a sexy promise to make. Gurus certainly couldn’t sell a seminar on the main promise of it being a long term game and commitment to the game in order to reap the rewards later, whilst making little money now.
All those who are successful tend to plough all their capital back into the next investment, thus making the promise of cashflow mute as it comes it, it goes back out to build a portfolio. You never really get to use it on your life until you cash out, which might be when you sell, or drawn down on the loan.
The property game is like a game of snakes & ladders, where the board layout changes each game. Although the basics of the game remain the same, i.e. get to the end by climbing ladders and avoiding snakes, the structure of the game keeps shifting each time you play it.
It’s the same in the property investing world, with each year that passes the basics are more or less the same but the structure by which to play changes in the form of new legislations, new rules, changed parameters for lending etc.
With that, the ability to play the game lies in knowing more than one strategy and that depends on one’s experience and knowledge of the industry.
Be in it for the long term, or don’t be in it at all
My message is simple, if you’re not prepared to take a long view on your property portfolio, then you shouldn’t be investing at all. There are other better mechanisms for short term investment gain than property, but they mostly carry higher degrees of risk.
It’s all about arbitrage and supply and demand.
Arbitrage is the playing of difference of interest rates against each other, specifically in property we are pitching low borrowing rates again investment yield. Simply put if you can borrow at a percent less than what a property can earn as rental income, then over time you are earning the difference in percentiles. The larger the difference the more you earn.
With UK property, we have a great situation in that demand outstrips supply nearly every year. In fact for the past 30-40 years we have had issues coping with building enough houses and since there’s backlog each year, the gap just gets wider all the time.
This means certainty when it comes to house price rises. Although it’s true that a financial crisis may bring house prices down in the short term, in the long term they always rise back up again.
Couple that with a mini population boom happening right now and people staying alive for longer, means even less housing supply for would be first time buyers and investors.
This potent mix means only one thing, long term success for anyone with more than 1 property.
Forbes rich list UK
Here’s another way to look at it the long term game, although it might not be applicable to us right now, it might well affect our choices and decisions that then setup our own future generations to reap the rewards and benefits.
What I’m talking about is this, when you look at the Forbes rich list for the UK, you’ll often see on there several people who owe their wealth to property, and everyone else on the list will no doubt have small portfolios of their own as well.
Property is prevalent in every wealthy person’s agenda and they all know it. If they know it, what’s stopping you from getting started?