Finance
April 19th, 2010 at 05:19pm
Under Finance
How property development works: You buy something in bad condition, renovate it and immediately sell it on for a high profit. These are the type of properties usually avialble through tax liens. This type of amateur property developing is beloved of countless property shows on television, where we are almost always shown the things that can go horribly wrong.
Pros: Developing property is exciting and challenging, not least because you are turning something horrible into something wonderful. Property developing appeals to some deep instinct in us, which is to make something beautiful and usable out of unpromising material. In fact, all kinds of makeovers have this appeal, which is why they make such popular television, from House Doctor to What Not to Wear to Extreme Makeover and Look 10 Years Younger. We all love this kind of transformation, of turning the ugly duckling into a swan.
Cons: It can be difficult to make money unless you are extremely strict with yourself and work to the tightest budget and the shortest timescale. You have to know where to spend and where to save, where to cut corners and where to be lavish; also, you must be very exact with the market you are aiming at, and what that particular market requires. This is again where research comes in.
In order to make this kind of developing work, you have to be able to coordinate builders and building trades; work out your realistic expenses at every stage, not forgetting interest charges, council tax, stamp duty, VAT, capital gains tax, estate agents’ fees, for instance. There are very many costs involved in developing, including ‘dead’ costs such as stamp duty. These all have to be recovered on resale, otherwise you have not made a profit. You cannot just look at the purchase price and the selling price, and assume you have thereby made a killing.
When developing an existing property, unless you buy through tax lien certificates, as opposed to building from scratch, you cannot reclaim VAT. This means you have to add on 17.5 per cent (in the UK - VAT levels may differ in other countries) to all your building and renovation costs, including kitchen and bathroom appliances.
It is also difficult to make a good profit from a quick turnaround on property. Usually, a house or flat takes several years to reach its peak value and recoup buying and selling costs.
By Kym
March 9th, 2010 at 03:59pm
Under Finance
This is the form of property investment that most people think of when talking about investing in property. You buy a place that is not your main home in order to make money by renting it out or, alternatively, you bank on the property making a huge capital gain in a few years and rent it out to make it pay for itself in the meantime. These days, most investors look at the total yield, that is, rental return plus potential capital gain, when deciding whether to buy.
Pros: Buy-to-let, in all its various guises, has become by far the most popular method of investing in property in recent years, and is the main way used of making money - or turning you into a ‘property millionaire’ - at property clubs and investment seminars. The idea is that you get regular income through rental yield which offsets the many costs involved in buying and maintaining a property, and in the process you become a landlord.
Although you incur capital gains tax on resale, there are very many costs you can set against this tax, such as refurbishment and improvement, utility bills, council tax, service charges, accountancy fees, purchase costs and legal fees. Plus, the process of indexation on capital gains tax means that the longer you own the property, the less of this tax you pay on resale.
A further benefit is that buy-to-let mortgages are easily available and constitute cheap borrowing. The idea is that you make a killing by selling at a profit when you have bought with cheaply borrowed money. Mortgages are still the cheapest kind of long-term loan available, and a prime reason for so many people investing in buy-to-let.
Cons: There can never be any guarantee that your place will successfully rent out. Although many property developers are now offering a ‘guaranteed rental’ for a period of time, you as the owner do not know whether this is a genuine rent, or whether the property will rent out at that amount when the guarantee period ends. Or, indeed, that it will rent out at all.
In many areas, landlords struggle to find tenants as the buy-to-let phenomenon has caused serious oversupply of properties, with many developers now building apartment blocks specifically aimed at this sector, and canny tenants negotiating rents ever downwards. Rents also do not always cover mortgages, as Tony and Cherie Blair found to their cost when they had to keep lowering the rent on their West London house.
More recently in the UK there is now the requirements for home information packs, where a landlord must supply his potential tenants with a home information pack or energy performance certificate to state that the property has been certified as energy efficient.
Being a landlord is hard work and requires input from you. Renting out a property is emphatically not the same as hiring out a car, for instance, as the complicated rules of tenure always apply. Tenants are human beings, and being a landlord involves very human transactions - it is emphatically not simply a matter of moving money around.
There are very many regulations governing renting out properties and also many ongoing costs associated with buy-to-let. Figures have to be worked out very carefully indeed, to make sure the expected rental will adequately cover your costs - and not merely the mortgage.
Tenants nowadays expect smart, modern, clean properties, and this means constant work maintaining and renovating your property to a high standard. The unexpected - such as no tenants, the boiler breaking down, the roof coming off in a high wind - can always happen.
The other major factor here is that if buying mainly for capital gain, you are taking a big gamble as you can never know for sure that the capital gain on resale will be worth it. You are looking into the future, a place where nobody has a reliable crystal ball.
Although many property professionals are in the business of prediction, as with all financial predictions, they can actually only go on past performance. Anybody who could genuinely and accurately predict future trends would indeed soon be a billionaire, but that person has never yet come forward.
Property investment can be very lucrative if you know what you are doing. Get the facts about investing in buy to let properties, including your obligations as a landlord in areas such as home information packs and energy performance certificates from a certified Lincoln EPC agent.
By Kym
March 8th, 2010 at 01:03pm
Under Finance
With the exception of the last few years, property has generally increased in value so much that there is a general belief that you just can’t lose with property investment. This impression is underlined by the growth of property clubs, where you pay to invest in newbuild and off-plan properties bought at a discount. Such clubs tend to be heavily advertised and appeal to people’s greed and laziness by suggesting that you can become a property millionaire in no time through tax liens, for little or no money down, and whether the market is rising or not.
The truth is that you can lose, but even so, property does historically come good most of the time - eventually. Also, investors in property can now, quite literally, have the whole wide world in their hands - or in their portfolios. It is now possible to invest in property in most countries in the world, so that your property portfolio can look as international as you like. Nowadays, anybody can be an international investor and financier! Anybody can swagger around brandishing an impressive-looking international property portfolio!
So why do I believe that property, in general, makes a good type of investment?
In the first place, everybody understands property, simply because everybody has to have a roof over their heads. Everybody also understands that home occupiers have to pay rent or a mortgage in order to continue living there. It is also self-evident that even when fully owned and mortgage-free, there are continuing costs attached to living in a home.
This is knowledge that we all have. By contrast, you have to be quite financially sophisticated to understand how equities and other aspects of the money markets work. You also have to be numerate and actually enjoy number-crunching. Successful people are doing sums in their heads the whole time; it is second nature to them. But few ordinary people really understand how and why stock markets crash, or how the stock market performance in, say, Japan, can intimately affect other stock exchanges around the world.
Few people, too, readily understand futures, hedge funds or derivatives. You have to be quite deeply interested in money and all its ramifications to be able to play money markets. It is a mindset which not all of us have. Yet everybody knows what estate agents and letting agents do.
Then, historically, at least, property is solid and substantial and far less liable than equities to stock market fluctuations, to crashes and recoveries. Obviously house prices fluctuate, but there has rarely, if ever, been a complete crash. One reason for this is that all real estate is built on land which will never go away. A further reason for the dependability of property is that everybody needs a home, whereas we can manage without a car, foreign travel, the latest electronic gadgetry, if we have to.
Then, there is almost always a shortage of housing. And while house prices can go up and down, there is always going to be some value in land. By contrast, the entire value of an equity can be wiped out, in a severe downturn of the market, performance in the High Street. And there is little the individual shareholder can do about this, except to buy and sell at the right time.
When you invest in stocks and shares, you may have very little control over whether their value rises or falls. To take a famous example, when former jeweler retailer Gerald Ratner made his notorious remark at a City dinner that his sherry decanters were ‘crap’, £500 million was immediately wiped off the value of Ratner shares, with the result that many shareholders lost very large sums indeed, through no fault of their own,
But even if somebody calls your house ‘crap’ - as ’specialists’ on TV home design programs often come perilously close to doing - it is still unlikely to lose all its value.
One way to invest in property is through tax liens. Investing in tax lien certificates is becoming more popular, especially within the current economy. If you currently invest in property but aren’t using this investment vehicle you should definitely look into it.
By Kym
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