Property Investment Market Research

I do not profess to be an expert on business, but one thing I certainly do know is that the vast majority of first-time business starters do not put their plans together the right way.

Many, many business start-ups have failed because the founders try to establish the business in this order:

  1. Decide what they can produce.
  2. Get the item/service to market.
  3. Decide who they will sell it to.

The reason this approach fails so often is that they aren’t producing the item or service to any particular ‘market’.  There is a good chance that whoever they attempt to sell to isn’t actually looking for the product anyway.

A far better approach to establishing a business is to:

  1. Research a market or field to understand it and the people immersed within it.
  2. Learn exactly what shortcomings are evident.
  3. Source a solution to that ‘problem’.

A property venture that makes money for you (let’s face it, why else would you be considering it?) is a business in the conventional sense; and the second business model above is very appropriate as a base.  It will prove to be an expensive mistake if you buy a development or investment property, get work carried out and then think about whom to sell it to.  Countless TV property programmes quote the novice developer as wishing to appeal to ‘young professionals’.  This is all very well if the property is the right type and in the right area, however it will not work for the centre of a university district (for example).

It is so important to be extremely fussy when looking for a potential property that fits your requirements.  In the case of professional developers, many plots of land will be under careful scrutiny so that the precise one is eventually chosen that will produce his expected return.  To apply the business model above is very appropriate because the property will be your ‘product’ taken to market.

All areas will have particular needs in respect of accommodation.  They are also highly likely to have accommodation that just will not sell or let.  The letting agent is the absolute best person you could speak to when considering the type of property that you are going to purchase as an investment.  If you are intending to develop the property, then speak to an estate agent in a similar way.  The agent will have access to potential clients that have pestered him for a property to rent or buy in a certain area (this could be narrowed down to a particular road).  He will no doubt be on the phone to these people on a very regular basis to provide an update on availability.  Therefore, if you do purchase the ‘perfect’ property that offers exactly what these purchasers or tenants want, you are almost guaranteed to sell or let and achieve a good price.

In contrast, the agent will also have an extremely good idea of the properties that just will not move.  These are the ones that appear in the paper every week with gradually declining prices or rents.  The agent will know exactly which property you should not buy.

The venture must be approached in exactly the right way if it is to succeed.  Several geographical areas can be considered, with the intention of purchasing a property in one of them.  However, the property type is very likely to differ considerably across the range of areas.  Your considerations might look like these examples:

  1. Area A could ‘carry’ more reasonably priced single-person’s accommodation.  Therefore the purchase of a large house that stands a good chance of obtaining consent for conversion into flats would be a shrewd move.
  2. Area B is more upmarket and fairly ‘suburban’.  It would support more 2 bedroom, generously proportioned flats because the agent regularly receives serious enquiries after them.  Therefore, it might be sensible to consider a newly-built block of three storeys with upmarket, well-sized flats.
  3. Area C is completely suburban with quiet roads but close to 2 good schools.  In this situation, a plot that could accommodate 2 or 3 new detached houses would be an excellent move.

This is to show that many property types can be considered.  It really does depend on the area and what is vital, is a flexible approach.  The venture is a business and the properties should not be regarded as a blank canvas to experiment with indulgent interior designs.  The aim is to produce a finished property that will have people fighting to rent or buy; and yes, this is perfectly possible in the current market provided you have done your homework.

Sep 13th, 2010

Becoming a Property Developer or Investor

Many people dream about becoming a full-time property developer or investor but simply don’t know where to start.

The first step is to decide which approach suits you and your circumstances.  Do you want to be a developer or an investor?

  • A Developer looks for a suitable property that is in need of work (to a lesser or greater degree).  This can be purchased at auction, through an estate agent in the conventional way or quite often the owner is approached and a deal is struck.  The work is carried out over a period of between 6-18 months and the property is put back on the market, hopefully to be sold at a healthy profit.  Being a developer offers the shortest route to making money through property as you have the best opportunity to increase the value.
  • An Investor will sometimes buy a property with a tenant already in place.  To be purely an investor in property (as opposed to an investor/developer) would mean that the property is purchased with no intention of carrying out any works, just getting an occupant in as quickly as possible so that an investment return in the form of rent is provided.  This situation is unusual as most landlords understand that some work is likely to be needed before occupation.  This approach is more passive than being a developer.  Be aware though, it is unlikely that you will see much financial return in the form of profit for several years.  Most landlords only make enough to cover the mortgage, management fees and tax.  The benefit comes in the years ahead when the capital value of the property has increased considerably.  Using this method is likely to take 10 years or more to see a significant increase in your investment.

The next step is to realistically look at your finances.  Obviously buying property is never cheap, and it is probable that you will require a mortgage.  At the time of writing, the majority of mortgage providers ask that you provide a deposit of around 20%-25% of the purchase price (or the total development price if your plans are more ambitious).   You will also need to cover fees at the point of purchase (estate agent and solicitor with added VAT) and Stamp Duty.   Once the property has been purchased, if it is a development project there will be a period where the work is being carried out and you have to meet mortgage repayments.  This should be factored in.  If it is an investment property, then rent voids must be allowed for (when no tenant is occupying it and subsequently no rent is being collected).  Management costs must also be considered, such as garden maintenance, decoration and general property upkeep.

In common with a conventional mortgage, lenders will want to know what other borrowing you have, such as credit cards and loans.  Mortgage providers are very keen to minimise risk and they will feel that if you are committed to other lenders, your ability to meet the mortgage repayments will be compromised.  Also remember that mortgage interest rates can fluctuate a great deal, this will have a substantial influence on the monthly repayments.

Many property investors opt for an interest-only mortgage.  This obviously means that the capital must be repaid at the end of the mortgage term and the only way to do this (realistically) is to sell the property.  The difference between the selling price and the amount of the original mortgage is the profit.  This is a bit of a gamble, as it’s impossible to accurately predict what the property will eventually sell for.

The deposit required to proceed with the purchase should be carefully considered.  This might sound strange, as it’s clear that the higher the proportion of deposit compared to the amount to be borrowed will result in more profit and lower risk.  While this is largely true, it’s not quite that simple.  There is an optimum level of equity (money that is not borrowed) that will result in the best return and the most advantages:

  • The level of equity is high; if the venture is being run as a limited company, then tax will be payable on any profit gained.  It’s also not good business sense to put so much equity into a single investment.  For example if £100,000 of equity is available, it would be better to place £50,000 of equity into each of 2 properties rather than all of the equity into a single property.  For more information on the tax aspects of running a property venture as a limited company, visit this link.
  • The level of equity is low; this situation leaves you very exposed to risk in the form of interest rate fluctuations (and subsequent high repayments) and rent voids.  It could be argued that this aspect contributed to the credit crisis because borrowers left themselves far too narrow a financial margin.

The next step is to consider the market you wish to appeal to.  On the property-related TV shows, the developers always seem to concentrate on the ‘young professionals’.  This market in itself could be sub-divided into several smaller categories.  However, do not overlook the other markets such as students, retired people and ‘downsizers’. It is important to consider the market before purchasing the property; it is always easier to provide a product for an established demand, rather than developing the product (the property) and then wondering who is likely to use it.  Always do your homework, for example if there is a strong student population but a shortage of accommodation……it’s fairly obvious which type of property you should provide.

Get to know your target market intimately, do they own cars or use bicycles or public transport?  This will affect where it is best to buy the property and if you need to provide a garage.  Alternatively, you might be able to convert an attached garage to increase the floor area of a large house; thereby providing another student flat.  If your target market is downsizers, will they need a large garden?  Or a lot of storage space?

Information on an area’s demographics is available from the Office for National Statistics (www.statistics.gov.uk).  Although it tends not to provide very detailed data, it is a good starting point.  The other way to get to know what is in demand in your chosen area is to speak to letting and estate agents.  They will have an excellent idea of what is always being enquired after but supply is scarce.

One last thing for now, it is highly recommended that you look for a property close to where you already live.  You have a much better feel for values and know whether a property is priced too high.  It is also far easier if you have to attend site regularly to deal with builders, Architects or Project Managers.

Aug 17th, 2010
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