Ready2invest Off Plan Property Investor Book

HOW TO BE A SUCCESSFUL PROPERTY INVESTOR

BY ALISE & JONTY CROSSICK The couple who turned £300k into £3.5 million in under a year

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INTRODUCTION Hello – we are Alise and Jonty Crossick, directors of Ready2invest. Our enthusiasm for property started when we sold our retail company in 2002 to become full-time property investors. We turned our capital of £300,000 into an equity stake of £3.5million in our UK portfolio. Not bad going in under a year! People asked us how we did it and we are happy to share our secrets. This book aims to do just that, with our 45 top tips for property investing. Since our UK experience, we have sold over 200 million euros’ worth of off-plan property in countries as diverse as Hungary, Romania, Spain, UK, Montenegro, Bulgaria, Portugal, Morocco, the Czech Republic and Turkey. With an investor base that is over 14,000-strong, our buying power is formidable, bringing great discounts. These discounts can sometimes reach up to 50%. Whether we are working in the UK, Eastern Europe or emerging markets, our common sense approach is the same: 1. Buying under market value – locking in equity when you buy and letting the discount help you to sell in any market condition. 2. Deal structure – making the most of leverage and getting your capital working harder. 3. Capital growth – looking for hotspots where demand is triggered but supply is constrained. To succeed in property, you need to build a strong skills base and develop a robust mindset. We address both in this book. Inside is plenty of technical information interspersed with tips on how to develop a mental edge.

Jonty and Alise Crossick

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INTRO

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FINDING THE TIME

Have you ever wondered why you are always working and never seem to have enough money? We bet you never have enough time either. Before we became full-time property investors we had a retail company. We worked hard and we worked a lot and it felt good because we worked for ourselves. The truth is, we worked to spend and a fine time we had of it too. Later we realised that if we had only invested some of that money, instead of spending it, we’d be in a very different position. We’d be able to make choices, do what we wanted to do and not have to continue working. These thoughts made such an impact on us that we made life-changing decisions. If you want to make money you have to make time. Watch less TV, go home on time and let a few more weeds grow in the garden. In effect, this is the ultimate “me time”. Look after yourself, your family and your future. Stop working for money and let money work for you.

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SET GOALS

To be successful you have to declare where you are heading and set your targets. Goals are important for many reasons: 1. They call you to action. 2. They help you make choices. Go for some things and reject others. 3. They introduce accountability. 4. They motivate you. 5. They increase your confidence to get you where you want to be. When setting your own goals, be honest with yourself. A great tip is to write them down on paper and refer to them. It’s a proven fact that those with written goals perform better than those without. A goal is a tangible result that is unambiguous and measurable.

Sir Alex Ferguson did not become one of football’s greatest managers by telling his team to ‘just see how it goes this year’...that ‘hopfully we will do well again’. He tells them ‘by Christmas we will be in the top three and by the end of the season, on May 17, we will be number one!’ “I want to own 100 properties as soon as possible” – that’s not a goal. “I want £1million in my bank account by December 31, 2008” – now, that’s a goal! Set yourself a clear, measurable goal now. Don’t stop until you have crossed that line.

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STRATEGY

Goals are about WHAT you want. Strategy is HOW to get there. Here are some of the questions you need to be asking yourself when setting your strategy. 1. 2.

Have I got my goals clear? Has someone I respect double checked that my goals are realistic and properly set out and written down? 3. How much do I need to make financially to hit my yearly goals? Break down your overall goal into bite-size yearly milestones. 4. What kind of property investment meets my risk profile? 5. What kind of property investments are going to help me reach my goals? 6. Property investments I can choose from include off-plans; buy-to-let; renovations; flips (see tip 12); land development; UK/Overseas. 7. How much time do I have on a weekly basis to make my goals happen? 8. To whom am I accountable for reaching my weekly and monthly goals? 9. What reading and researching do I need to do each week? 10. What support do I need to buy in or nurture such as accountants, lawyers, finders, lenders and brokers? 11. Have I prepared a budget and a business plan?

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We set a goal at the end of 2003 of achieving an income of £100,000 a year by December 31, 2004. Our strategy was to buy 100 properties, each of which would contribute a profit of £1,000 a year through buyto-lets in the north of England using local finders. We accelerated the process because we noticed how prices were rising faster and yields dropping quicker than we had expected. We stopped at 70 properties at which point we were comfortable that we had met our goals.

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MENTORS

This is a great way to keep you on track. A mentor: • Encourages you • Feeds back bad news • Explains new concepts, teaches you new tricks • Provides a reality check

A mentor works when he or she: • Has experience • Is someone you trust • Is independent and has no vested interest • Is able to be totally honest Why would someone mentor? Sometimes for extra money but usually: • To give something back • To play a part in a successful enterprise • To feel valued How do you find a mentor? • Friends • Family but not usually spouse, parents or children • Through work • Through property networks

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FIRM FINANCIAL FOUNDATIONS

If you are managing your personal finances badly to start with, getting involved with property will not help. Whilst property investing can be a great way to create wealth, it shouldn’t be used to paper over cracks in your existing finances. You need to sort out the cracks first so that when you do invest, the money you make doesn’t fall through them. Manage your property accounts and personal accounts separately. Use separate bank accounts. If your personal income is subsidising your property income or vice versa, be clear about how much and in which direction the money is flowing. You need to have a firm grasp on your finances to prevent problems. The simple answer that will solve all your money problems is to spend less than you earn and invest the difference!

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CAN YOU GET PASSIVE INCOME?

Property investing is about as passive as flamenco dancing. We all want passive income. It’s the Holy Grail of investing. But like the Holy Grail, it isn’t that easy to find. We look on it more like getting positive cashflow from your investments rather than it being a passive income. The word passive is misleading – it implies sitting still and doing nothing. Whatever you buy and whomever you buy it from, you still need to do your homework and you still need to understand and maintain your investments yourself. We have learned from experience that there is always something that needs our attention and action. The word invest is a verb, an action word, a doing word. It’s defined in the dictionary as follows: Invest: (verb) 1. To lay out (money or capital in an enterprise, esp by purchasing shares) with the expectation of profit. 2. to devote (effort, resources etc. to a project)1

Pay special attention to point two in the above definition. 1 Complete and Unabridged Collins English Dictionary

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PROPERTY – MORE LIKE A MARRIAGE THAN A FLING

Have you ever been in the throes of property lust? Fallen madly in love at first sight with the latest deal? Have you been blinded by infatuation so you don’t see the deal’s flaws and shortcomings? (By the way, this is different to having strong instincts about a property.)

There is more to property investment than the initial thrill of the deal. You need to be sure that the property you buy in the heat of the moment is the one you want to wake up with in the morning and spend a considerable amount of your time with. Property is a longterm investment and the sooner you can adjust your thinking to take account of this fact, the greater the benefits you will reap. So if you find yourself getting worked up about a deal then go and take a cold shower. Step back and look at the deal for what it is – a series of facts and figures that may or may not stack up in the long run.

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MAKE SURE THERE’S ENOUGH CAKE TO GO AROUND

If you want to enter into long-term, sustainable investment relationships you have to think about building a good reputation as someone people want to do business with. You do this by sharing the cake out so that everyone gets something to eat. Build in motivation for others and give them an appetite to help you. The Americans call this a win-win situation.

So, for example: • Pay finders well. Reward the people who bring you deals and opportunities, otherwise they will take them elsewhere or offer you less than the best available. • Rent out properties that are in good condition and look after your tenants. They are your customers and you rely on them. • Leave something in the deal for the next investor. If you buy well under market value you can still afford to sell to the next buyer at a good price. • Do what you say you are going to do. Have integrity even when there is an easy, but dishonourable way out – people remember this. Remember, it is people that make property happen, so think about how to create the best relationships.

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We always paid them what they wanted or even a bit more. It was a crucial part of our strategy to be each finder’s number one customer.

HOW TO FIND A FINDER

You can’t do everything yourself especially if you are working full time. You need to put the time in to find the right people to work with and pay them for their effort.

Some people like to do everything themselves. It can work but it does limit you. You can’t move as quickly and you can’t go very far from your own patch.

It worked for us.

We bought 70 properties in the north of England in six months. We lived in Brighton at the time. So we realised we would need help. The question is – how do you find the finders? Our solution was simple – instead of using local estate agents to find our property we relied on local letting agents. If you want to let your property long term, then it makes sense to have a letting agent find the right properties. We found our finders by calling them up on the phone. The phone is a useful tool – are they helpful and friendly? How do they answer your questions? Do they call you back? If you’re not happy with any of this, then it’s time to look for another finder. We gave them strict and clear criteria on what we wanted. The good ones are generous with their local knowledge. Often we bought properties that needed work. Again, letting agents can help because they have reliable local tradesmen on their books. We would pay them a fee for this, of course, and they would also find us tenants – a one-stop shop!

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If you do have enough money to spread across a few investments and you want to diversify then remember the following guidelines:

SHOULD YOU DIVERSIFY?

1. Focus on what you are good at – don’t sacrifice this on the altar of diversification. 2. Look at the major external changes that can affect your investments. Don’t forget to diversify, enough so that one such change will not affect your whole portfolio.

Diversification is a favourite subject of investors. It is a tool used for reducing risk. However, the world’s second richest man said that if you are a “knowsomething-investor” then spreading your bets across a large number of stocks is likely to “hurt your results and increase your risks”. Given that American billionaire Warren Buffett has outperformed the market by a staggering 12% a year since 1965, you cannot ignore such advice. What Buffett means is that knowing what you are doing is the best way to reduce risk. We agree with this. We encourage you to get really good at what you do and accumulate your knowledge and experience. This is much more important than diversification. Indeed, if you diversify fully then you are less likely to be good at all the investments you make. Whatever you save in mitigating risk you lose more in spreading your effectiveness and skills thinly. Diversification is a primary strategy if you decide to invest via stocks, unit trusts and funds. As property often requires relatively large lumps of money it is very difficult to diversify with £50,000 or £100,000 when investing in property directly. The only way this can be achieved is to split the investment into smaller chunks and invest them in stocks and funds, SIPPs or syndicates that require much smaller minimum investment sums.

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CHECKLIST FOR OFF-PLAN INVESTING

1. Does the developer fully own the land? You can ask for evidence of this. 2. Does the development have planning permission? Ask for proof. 3. How many years has the developer developed for? 4. Get proof of other completed developments. 5. Ask around about the developer. People in the market know what’s going on and who is who. Talk to accountants, surveyors, independent financial advisers, the competition and even the estate agent, if you can. 6. If you can, visit a previous development. Check the furnishings. Obtain the opinion of a surveyor regarding the quality. 7. Carry out comprehensive comparable study (see tip 17). 8. Find out what proportion of buyers are investors. The greater the proportion of investors, the greater the risk when it comes to resale. There may be too many investors selling at the same time, creating a temporary glut. 9. If your development depends on views, check on any current or future threats to the view. 10. Define the kind of end buyers who will buy the unit and describe their key needs. Verify that these needs will be satisfied, e.g. local shopping centre, schools, hospitals, proximity of beach, restaurants, nightclubs. These needs will differ for every development.

Off-plan means to purchase a property from a developer before it is complete. The Investor often gets a discount and chance to benefit from capital growth as the property is built. For the Developer it is a means to finance the development. It’s a win-win situation. The following points are essential to minimise your exposure to risk when purchasing off-plan property. This is the checklist that we use for personal investing and also when sourcing off-plan deals for Ready2invest.

These are only the top ten points. For a more comprehensive list, see our website www.ready2invest.co.uk.

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SHOULD YOU BE FLIPPING?

Flipping is the buying of an off-plan property and the selling-on of the contract before the property is complete. How and why does it work? £20k Profit

£100k Price

£80k Owed £20k Deposit

£120k Sale Price

£20k Deposit

Flipping is leveraging without borrowing. You put down £20,000 to pay for a £100,000 property that is ready in three years. In exchange you get a legal contract that states you will own the property on completion but must finish paying for it. The good news is that you do not take out the £80,000 mortgage on that property until it completes. If you can sell the contract for £120,000 after only one year then the new buyer takes up the responsibility to complete the purchase and provide the mortgage. You walk away with your initial £20,000 and the £20,000 profit – a 100% return. Í Caution! If you fail to sell, you must be able to complete. Failure to do so will result in your losing your deposit. This can be a very risky strategy.

When flipping, you never have the hassle of managing the property, and you also avoid all the buying and selling costs as you never have to register the property!

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Example Calculation This example shows how to roughly calculate the cost of a plot of land which that has the following criteria:

MAKING MONEY FROM LAND

1. 2. 3. 4. 5.

You can make plenty of money from land. This can be done without undertaking any development. One of the best ways to do this is to add value by improving its planning rights and then selling on to a developer.

The Floor Area Ratio (FAR) is two, which means the actual value per square metre of land is worth 2 x €1,200 (the local sales price). Put another way, this is what the total sales revenue would be worth to a developer per square metre of land – in this case €2,400 per square metre.

Remember that a developer only buys land to make a return on his money. The more profit the developer thinks can be made from a piece of land, the more they will pay for it. You can calculate, on the back of an envelope, what land is worth or how much it could be sold for as long as you know the following details: 1.

How many square metres of land

2.

The floor to area ratio or FAR is the ratio

The value of the land is worth a proportion of this figure, which is determined by using the following matrix.

between total floor area you are allowed to build and the overall area of the land The zoning bracket that the land will be in

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Detailed

Mature

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35%

40%

Emerged

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20%

Emerging

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As the land is zoned and in an emerging market, it should be worth approximately 10% of its sales revenue price of €2,400 per square metre i.e. €240 per square metre.

5. The type of market

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Zoned

Note: These percentages are illustrative only and should not be read as fixed or given. They will be affected by other factors.

when you come to sell

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Not zoned*

*But in the Masterplan

3. The local market price of finished property 4.

Square metres of land = 10,000 m2 Floor Area Ratio (FAR) = 2 (20,000 m2 potential floor space) Local property sales price = €1,200 per square metre Zoning = Zoned for building but no planning permission as yet Market type = Emerging

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CHECKLIST FOR INVESTING IN LAND

If you are seriously considering buying land as an investment then you should have satisfactory answers to the issues listed below. We checked these (and many more) when purchasing €73 million worth of land in Montenegro, Croatia and Bulgaria on behalf of investors. They work.

1. Check with a reputable surveyor that the land is the size you are paying for. 2. Research the various levels of planning regulations to understand the planning status of your land. Normally, countries have any combination of master national plans, regional plans and local restrictions. 3. When investigating the land planning rights, get at least two opinions and educate yourself so you understand all the issues. 4. Is electricity available to the land and where is the nearest connection point? Is the capacity sufficient for the developed land? 5. What is the access point? Are you sure the gradient can take a road? How much road has to be built? What length? What will the cost be? 6. Look out for neighbouring land that could, if built on, obscure key views from your site. What are the planning restrictions on this land? Could any future development augment or decrease the value of your site? 7. If the land you are buying is made up of several plots, are these plots contiguous and do they form a coherent whole? Each piece of land differs from the next, and therefore this list is not exhaustive. Please refer to our website for further details www.ready2invest.co.uk.

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ANALYSIS PARALYSIS

This is a fancy expression for fear. In investing, having to take the leap into the unknown is the thing that causes the most anxiety. Mostly people are afraid of what they don’t understand. Fear of the unknown can protect you in some cases. However, it is a mistake to be overly cautious to the point of indecision. Educate yourself and don’t be afraid to ask questions, even if you think they make you appear stupid or too aggressive. Investing is about evaluating all the information you have and then making educated forecasts about how you think your decisions will pan out in the future. There then comes a point when all the research is done and there’s nothing for it but to take the leap.

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How does it strengthen your upside? • The greater the discount, the greater the equity locked in from the start.

BUY UNDER MARKET VALUE

If you only read one tip, READ THIS ONE – it’s worth it!

• Buying below market value is a leveraging tool. Your return on capital is strengthened as you get the same growth as the full-price customer, despite having put less money in.

Buying under market value property is the most effective way of protecting yourself against risk, whilst offering an attractive upside. If you can lock in equity at the moment you buy, it puts a lot less pressure on you when you come to sell.

• The same is true for rental yield. You get the same amount of income, but you paid less so your yield is higher. Note: We must stress that we are talking about genuine under market value property, not just an advertised “discount”. Use comparables to work this out (see tip 17).

We typically aim for 20% or more under market value. How does it protect your downside? • The market would have to drop by more than the amount of your discount for you to start losing money. • You are not just relying on future capital growth. • For an easy exit you can also sell at a discounted price and pass on some of the discount to the next person. You will still make a profit.

20% Off

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HOW TO ESTABLISH MARKET VALUE Be aware that developers can measure apartments differently.

When making a purchase it is imperative to verify that the price on offer is either a true discount or a true reflection of the market value by comparing against other properties. In most places everything is sold in accordance with its size.

Balcony

Common area

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walls

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Common area

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Total internal area

Total area

The above three diagrams shows three of the ways that developers across the world measure the size of an apartment. Sometimes developers charge 50% of the sale price per m2 for balconies. There is usually a standard form of measurement used within a country but make sure to check every time.

If your comparable apartment includes items that your apartment does not, then deduct the total price of these items from the comparable. If your apartment includes a parking space and the comparable does not then add this price to the comparable.

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walls

“Carpet” area

However, property markets are not that simple and it can sometimes be difficult to find five or more like-for-like comparables. Large cities like London or Istanbul are easier to verify than new holiday destinations, for example.

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Common area

walls

Therefore, gather as many like-for-like comparables as you can in the immediate vicinity. Take the average price per square metre and compare it to the price you have been offered. If you can measure favourably against at least five comparables or more then you are doing well.

Balcony

For more information on methods, adjusting and finding comparables, visit www.ready2invest.co.uk.

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CAPITAL GROWTH – IT’S A SUPPLY AND DEMAND THING

Have you ever tried to get tickets to the FA Cup Final on the day?

Some factors that increase demand

Some factors that restrict supply

Wouldn’t you pay much more for an umbrella in a rainstorm?

• • • • • • •

• Planning restrictions that limit land use. • Planning restrictions for building density. • Bureaucracy leading to planning delays. • Geographical constraints on plots. • Lack of debt finance for developers. • Topography. • Legislation that restricts foreign ownership of land.

These are the more extreme examples of intense demand coupled with serious undersupply that causes prices to skyrocket. The simple rule of high demand and low supply that also causes property prices to increase. This is what you have to look for in a market to find capital growth.

• • • • • • •

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Economic growth. Interest rates decreasing. Stable currency. Higher wages and salaries. Decreasing unemployment. Companies relocating. Changing demographics, e.g. higher divorce rates, internal migration. Politics and reform that bring stability and credibility. Changes in legislation. More mortgage debt available. Foreign Direct Investment. Government investment increasing. Hotspot overflow – being near a hotspot that is fully priced. Improving transport infrastructure – road, rail and flights.

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BE A POLITICAL OPPORTUNIST

A politically stable country is a must for investors with a low risk profile.

r o f e l Sa

However, there are certain situations of political change that act as trigger points and can shake up a country, causing accelerated growth or, in some cases, a decline, in property prices. There are four changes to watch out for to help you invest well: 1. A change from war to peace or peace to war. 2. A change of system – communism to capitalism or vice versa. 3. A structural change – from dirigiste1 policies, to laissez-faire2 policies. 4. A change in competitiveness due to a higher or lower tax regime, e.g. Lithuania has cut tax while the UK has a tax hike. Countries to watch: • France – if Sarkozy becomes President • Germany – under Merkel • Morocco – under King Mohammed VI • India – continued reform under Prime Minister Manmohan Singh • Ukraine – as it could leap forward or go backwards • Cuba – after Castro 1 A country overly controlled from the centre. 2 “Leave to do”, letting people engage in commerce with a minimum of interference from the state.

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PEOPLE WATCHING

Demographics is a term commonly used in investing to describe population characteristics. People need housing. Changes in demographics which increase population or, more pertinently, the need for more homes have a positive effect on the property market, increasing demand and driving up prices. Changes to watch out for: • Is the birth rate/death rate driving up the population? • Is the population urbanising, i.e. are people moving into the cities? • What trends are occurring within the white collar sector in more advanced countries? • Are families fragmenting so that more singles, couples and generations are living apart? • Are people moving towards sharing or living together in order to afford housing? • Are divorce rates rising or falling? • Are people buying second homes? • Where is the population rising the most and in which age group? • Where is crime increasing? Where is crime falling?

The answers to these questions help you to understand: 1. The broader trends e.g. Is there a long-term demand for housing? 2. The local situation e.g. Is a certain region of a city in demand? 3. The particulars e.g. Are one-bed apartments in higher demand than family homes?

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5. Look for margins of 30% and over – especially if you are investing in riskier markets. If the total estimated sales are less than 20% more than the total costs, including land, then there is no point doing the deal unless it is a property to live in and a labour of love, not an investment. In that respect, as it’s your primary residence, you can avoid paying capital gains tax too. 6. It is also worth noting down how much time you spend on the renovation. You can then see how much the renovation makes after you pay yourself a consultancy fee.

RENOVATE TO ADD VALUE

This is a numbers game. It’s important to have a budget and stick to it, and don’t get over-ambitious. There’s no point adding costs if you are not adding value that the buyer will pay for. Checklist for renovating: 1. 2. 3. 4.

Check all land due diligence items, e.g. title and plot size, etc. Verify 5–10 sales comparables. Verify build costs. Verify a list of potential costs including: (a) Full structural survey (b) Any taxes to pay when you acquire the property (c) Any taxes to pay when you renovate the property (d) Any taxes to pay when you sell the property (e) Legal costs when you buy the property (f ) Legal costs when you sell the property (g) Design and architectural costs (h) Sales commission (i) Planning costs. (j) New goods such as kitchen, appliances etc (k) Garden improvement costs (l) Project management costs

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Top 10 things to know/do in any country:

CHECKLIST FOR THE INTERNATIONAL LANDLORD

1. 2. 3.

How do you need to sign a tenancy agreement to make it legal? What information has to be in the agreement to make it legal? What legal obligations do you have as a landlord in the country? It is important you know what you could become personally liable for. 4. How much deposit can you request from a new tenant? This protects you. 5. Understand who is responsible for what insurance. Not knowing can be costly. 6. Ask if any additional regulations are due to be introduced as these increase costs and hassle. 7. It has to be clear who is responsible for repairing what, as this costs money and guarantees accountability. 8. Make sure that terms are clear about how the tenancy should end. Who is responsible for what and what condition is the tenant expected to leave the property in? 9. Ensure that tenants are checked regularly and, from time to time, check the checker. 10. Discipline whoever manages the tenants to communicate in writing. Follow up your call in writing. This ensures greater accountability and helps if a dispute occurs.

The principle of letting out a property to paying tenants does not change, wherever you buy in the world. But the details do. You must be aware of where you stand as a landlord, what you are responsible for, what happens when things go wrong and how you can enforce your landlord rights in the event of a dispute. Use a good lawyer and ask lots of questions. Choose a reputable letting agency and ensure it is their policy to make regular checks on the tenants and your property. Occasionally, verify that the agents are doing what they say they are doing.

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THE INVESTMENT STORY

Retail businesses do an astonishing amount of customer research. They study what sort of person will buy a certain dress and why. They look at how much demand exists for such an item and what will create a friendly and approachable environment that puts customers at ease. They figure out who their customers are, how much money they have to spend and what they will spend it on. The same principle should be used in property. Ask yourself: • • • • •

Who will rent or buy my property? What are the factors that will attract them to my property? When and under what circumstances will they look to rent/buy? Where do people want to live? Why will they want to rent or buy my property above any other?

You must be able to answer these questions with confidence. It’s a common sense way of evaluating property deals. Look beyond the initially tasty deal and calculate what will happen next. Build up a picture of your likely customer and invest accordingly. For example, there is no point in buying a student property if you are miles from the nearest university. Find the story.

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Let’s take, for example, Croatia and Montenegro. Croatia is a gorgeous place to go on holiday and much in demand by everyone, from tourists to celebrities. Prices have risen to reflect this.

HOW TO SPOT THE NEXT HOTSPOT

So what’s next door? Montenegro. It’s much less well known but incredibly beautiful. It doesn’t yet have the upmarket hotels and restaurants, but it’s only a matter of time. Since we invested in Montenegro the country’s population has voted for independence from Serbia. Prices are now rocketing.

The simplest way to do this is to look at an established hotspot (area of high capital growth). Analyse all the things that make that particular place so popular. For example: • • • • • • •

Can we automatically assume that neighbouring Albania will be the next in line for dramatic growth? It’s not that simple. It’s a matter of perception. Due to the lack of tourist market, political instability and weak relationship with the EU, Albania’s property boom could be a long, long way off.

Commuting distances. Schools. Places to work. Transport links. Nearby beaches. Beautiful views. Great food and people.

Spotting the next hotspot is about making educated forecasts, backed up by copious research and data and a good dose of gut instinct.

A hotspot is somewhere where lots of people want to live or go on holiday, i.e. demand is high and supply is restricted. So what usually happens? The developers move on to the next town or city or beach where the prices are lower. If that location has enough of the same attributes that made the original hotspot so popular, you have a good clue that you’ve found the next big thing!

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GET THE TIMING RIGHT

Property investing is like a New Year’s Eve party. You want to get there just as things are hotting up, have a great time, and then leave before you’re stuck with the washing up. If you can get in a bit after the market begins to rise and exit a bit before it stagnates or corrects, then you’re on to a winner. There are some really brave investors out there – the pioneers paying €1 for land in a war-torn or politically unstable country. They get rewarded for bravery but they have impressive battle scars too! At the other extreme, there are investors who grab on the end of the coat-tails, finally getting the courage to buy where many others have already bought. But they miss out on the best returns because they get in too late. When we bought land in Montenegro, it was less established than Croatia but it was half the price and we could clearly see where the growth would come from. Big hotels and developers were already sniffing around – and a buzz was building up around it. You’ll get a feel for timing, but common sense can help you work out the best time to hit a cycle. Also, learn how to compare cycles to prices in a realistic way – don’t be tempted to pay heavily inflated prices by hotspot hype.

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YOU HAVEN’T MISSED THE BOAT

(THERE’LL BE ANOTHER ONE IN 20 MINUTES)

Prices in Byron Bay in Australia, where I (Alise) come from, rose from $100,000 when I was 10, to $1,000,000 by the time I was 21. At the time I thought I had missed out on the boom. However, due to the rarity and natural beauty of the area, prices continued to rise. Now at the age of 38 some of those same properties sell for over $10,000,000. It’s all too easy to look back and see all the deals you should have bought into. Hindsight is a wonderful thing but you must keep a level head and look forward. There are so many exciting, established, emerging and often re-emerging markets to profit from that there is no need to panic. The difficulty is often knowing which one to choose. Don’t make your decisions even harder by acting out of regret or desperation. “The deal of the decade comes along once a week” Dolf de Roos

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IS IT TOO GOOD TO BE TRUE?

£££ £££

Be prepared to look at unusual opportunities and don’t dismiss something because it seems too good to be true.

£££

£££ £££

Property is an imperfect market – there are so many variables and not everyone has the same information at the same time. Therefore you could well be the person in the right place at the right time.

Half Price!

Don’t forget to follow your deal criteria and checks, and remember:

£££

• Always stick to verifiable facts. • Don’t be rushed into doing something blind or with insufficient research. • Use your comparables. • Do your research on the names and places involved in the deal. It can also help to understand everyone’s part in a deal and what is motivating them. Why are they selling so cheaply or offering a fantastic bonus? If their motives make sense and offer you genuine benefits, then go ahead and do business. If you still smell a rat, having done all your research, trust your instincts and walk away.

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BE BOLD – NEGOTIATE

If you don’t ask you won’t get. Is talking about money difficult for you? Are you scared to put a low offer on a house because you don’t want anyone to think you are a mean person? Don’t be embarrassed, you are not the only one. Property is a world for grown-ups and it’s up to the other person to say no. Be brave, be realistic and offer an attractive deal so that everyone benefits. If you are offered something you don’t feel is beneficial to you, say no, or take a deep breath and negotiate. If you’re in property, you need to learn how to negotiate. If investing is a muscle then negotiating is an exercise that helps build it. Try to step away from the personal and don’t get emotional – it’s about the deal, not about you.

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INVESTING WITH YOUR PARTNER

This might seem a strange thing to mention in a book about investment but if we had a pound for every time we’ve heard couples tell us about their seemingly incompatible attitudes to money and investing, we’d be able to retire (except we love our work too much!). This issue seems to cause much heartache, yet it needs to be addressed if you are not to come to blows with your investing partner, married or otherwise. Money is one of those subjects that seems to cause a great deal of embarrassment and yet it is vital that you have that discussion to establish, amongst other things, your attitudes to risk-taking, where and how you want to invest and what your non-negotiable areas are. Here are a few tips: • Show mutual respect. Listen – really listen. • Security today is as important as preparing for the future. They are not mutually exclusive. • Remember – people first, then money, then things. • Try to find solutions to problems that both parties can agree to. However you decide to invest together, you must address your issues because even if you ignore them, or think they won’t affect your strong relationship, they won’t go away. It’s dynamic and supportive when there are two of you. Jonty and I balance each other and have complementary styles. We work really well together.

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GROSS YIELD

If a farmer buys a cow for its milk, the profitability of this action depends on how much milk the cow produces (or yields). Property is no different. In property “yield” is a term used to describe rental income in relation to purchase price. For example: If a property in Cardiff costs £100,000 and it rents for £500 per month, which is £6,000 per year, then the estimated yield is: 6,000 = 6% yield 100,000 The great thing is that you can use this calculation to compare gross yields in any currency with any property in the world. Let’s take an office block in Sofia, Bulgaria. It costs €2.4 million with estimated annual rental income of €288,000. 288,000 2,400,000

=

12% yield

Gross yield paints part of the picture. It’s net yield (see tip 31) that completes it. ✓ Good use: Helps you get a quick feel for the property and its profitability. Í Caution!

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Don’t stop there. This is rough, stage one, back-of-theenvelope stuff. More digging is needed.

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NET YIELD

Gross yield is vanity; net yield is sanity. Profit is king. Gross yield will help you separate deals from duds. But you cannot base a property purchase decision on gross yields alone. Net yield, on the other hand, helps you estimate the profitability of a property. It tells you what percentage of the purchase price you will make in cash, after all costs are covered excluding mortgage repayments. Net yield

=

Annual rental income minus non-interest costs Purchase price

Costs can include: • Occupancy voids • Marketing • Managing • Maintenance • Repair and renewals • Local tax ✓ Good use: Helps you check whether a property will make you money.

We always look for properties where even a conservatively estimated net yield will cover the payments due on the mortgage. Staying in the black is as important to us as any other aspect of deal criteria when it comes to choosing which is the right deal.

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Working backwards can help determine how much of the property should be bought with a mortgage.

Í Caution!

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Easy to get costs wrong. Verify. Find primary information where possible.

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THE PRICE OF MONEY

An interest rate is the “price” of money. It is the price you will pay to have the benefit of the use of money for an agreed period of time. Why do you need to be aware of interest rates?

Bank of England base rate

1. Their movement impacts on prices. If interest rates go down they affect prices positively as buyers can afford to borrow more and demand grows.

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2. Their volatility impacts risk. A country whose interest rates only fluctuate within a 3% margin over 20 years is a far more favourable environment to invest into than an unstable economy where the interest rate stability reflects the yo-yo days of the 1970s and 1980s in the UK.

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Watch out for: •

Inflation. The expectation of future inflation increases interest rates.

•

Interest rate base rates of the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan.

•

Currency movements. Increases in the interest rate can cause an appreciation of the currency. These fluctuations can affect your returns.

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Another tip: Mortgages are not the only tool available to achieve leverage. Buying under market value has the same effect but without the payments!

WHAT IS LEVERAGING?

Caution: Borrowing too much means you may risk your rental income being less than your costs and repayments. If you don’t have enough cash to cover the gap, the lender could foreclose. Borrowing also increases how much you can lose.

A lever helps the individual apply the same force for a greater result. And so this applies with property leveraging. For the same investment of cash the investor can earn a more handsome return by using leveraging. The following example shows the difference when purchasing the same £100,000 property, first as a purely cash purchase and then with a 70% Loan To Value (LTV) mortgage.

100k cash purchase

30k growth

Cash purchase 30% growth = 30% profit Turning 100k into 130k 30k deposit

70k mortgage

30k growth

Cash purchase with 70% LTV mortgage. 30% growth = 100% profit Turning 30k into 60k

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MORTGAGES So what should you watch out for when choosing a mortgage?

Mortgages are the most regularly used tool by property investors to achieve leveraging and affordability by property investors.

1. The interest rate. This is likely to be the largest single cost to your property. 2. Discounted interest rates. Banks love to seduce customers with lower interest rates for 2 years. But check what the interest rate will be once the discount ends. And check for extra fees where banks may try to make up the difference, both at the outset and when redeeming. 3. Broker charges. Mortgage brokers who don’t charge you a fee can be more swayed by commission from lenders and not offer you the best deal. Paying no broker charge is not always better. 4. Lenders’ fees in addition to their survey costs. 5. Redemption fees. Costs when settling the mortgage early. 6. Any hidden annual fees. 7. Ability to apply second charge or to refinance.

How much to borrow? You must look at your outgoings, plan for a worst case scenario and be confident at covering your payments by net rental income even if interest rates jump 2%. Do not be guided by the lender’s criteria. Just because they will lend it, does not mean you should borrow it all.

Remember: If you are paying a repayment mortgage then when calculating your overall investment return only deduct the interest element not the re-payment element – you get that part back when you sell!

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CAN YOU COVER YOUR COSTS?

Interest cover is a very important indicator of the health of your portfolio. It measures the gap between your maximum gross income and your mortgage repayments. If your research is good it also aids you in determining how much you should borrow on a purchase. Let’s take an example of a £100,000 property purchase with borrowings of £80,000, an interest rate of 5% and a monthly rent of £400. Property purchase Borrowing Interest rate Rent per month Rental per year Interest per year Balance Interest cover

£100,000 £80,000 5% £400 £4,800 £4,000 £800 positive 800/4,800= 16.6%

Notice that the gap is expressed as a percentage of the rent, not of the interest. Lenders calculate this as 800/4,000 = 20%, which, ironically, is too optimistic. So if total costs exceed 16.6% of rental income or there is an increase in mortgage interest rates then the property will dive into negative cash-flow. The recommendation is to have at least a 30% interest cover.

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THE NO MONEY DOWN HYPE

No money down sounds great. It is very seductive. But when the numbers don’t add up, BEWARE! Between 1999 and 2002 in the UK, some special circumstances existed where it was possible to leverage 100% of the purchase price. With high yields of sometimes over 20%, you can see how attractive this was to investors and how 100% borrowing was perfectly sensible. But, as the market matured and new (and existing) investors bought many more properties, yields compressed and the gap between the net rental income and the interest payable per annum narrowed. As a guide, if the difference between the two is below 30% then any increase in costs or in interest rate will put the property into negative cash flow. In our minds, this is too close for comfort and it would be more sensible to put some equity in or simply walk away.

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HIDDEN COSTS REVEALED Buying

Making good decisions and sticking to them pays.

Stamp duty

Buying and selling too frequently can cost a lot of money because there are always costs incurred when properties are transferred.

Transfer tax VAT Legals Survey Mortgage fee Agent’s fee

Selling Income tax (local and UK) Capital gains (local and UK) VAT Legal costs Mortgage redemption fee Agent’s fee

✓ Good use: Helps you to arrange your strategy for the investment. Í Caution!

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QUICK TAX GUIDE

There are three kinds of taxes that affect investors: 1. Acquisition taxes – on the way in. 2. Operational taxes – during the investment period. 3. Exit taxes – on the way out. Examples of these taxes include: ACQUISITION

OPERATIONAL

EXIT TAXES

Notary fees

Council tax

Capital gains tax

Stamp duty

Municipality tax

Income tax

Transfer taxes

Service charges

Transfer tax

VAT

Notary fees

Land registry fees

Corporate tax

Legitimate ways to minimise tax that you can investigate include: Setting up a company so that more costs can be used to offset the income. • Setting up an off-shore company so that management charges can reduce local tax. • Using double taxation treaties. • Buying through family or trusted people. •

Tax is a major issue that we feel is too detailed to investigate in this book. However, visit our website www.ready2invest.co.uk for more information.

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IF YOU CAN’T MEASURE IT YOU CAN’T MANAGE IT

Keep good records and take time to analyse your data so that you can identify areas where there is room for improvement and act accordingly. KPI stands for Key Performance Indicator. Here are some annual measurements from which you can choose to measure your portfolio: 1. 2. 3. 4. 5. 6. 7.

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Maximum potential gross yield Achieved gross yield and achieved net yield Vacancies per year in weeks Average interest rate Interest cover and net interest cover Gross rental income and net rental income Interest costs

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FLEX THE INVESTMENT MUSCLE

Have you ever tried to get fit? We have, and while we hate the process we love the results. And the more you train, the stronger and fitter you get. The same is true of investing. At first it may seem like you’re trying to run a marathon, but nearly anyone can run a marathon if they make the right preparations. Alternatively, if you try to do too much you may get despondent and give up. It’s best to build up gradually and take one step at a time. The amount of knowledge and nerve required may seem daunting but it does get easier. When we bought our first investment property we spent three months solid working out our strategy, gaining knowledge and doing research. It still proved to be a nerve-wracking experience, but we kept at it, it became easier and we later bought 22 properties in Scarborough in the space of a week! We built up our knowledge and contacts and then we started running. We haven’t stopped.

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5. Paying cash directly to the developer without any form of security can be very risky. You need to safeguard your deposit in case anything happens before the building starts. There are circumstances where it is acceptable but mostly we would not recommend it. Go to our website at www.ready2invest.co.uk for more information on this subject.

HOW SAFE IS MY MONEY?

In property you often have to part with cash before you have received the finished product. You must always ensure that there is some method of protection in place to safeguard your money. Here are some of the ways you can protect yourself. 1. A bank guarantee. Here, the bank stands between you and the developer. The bank will not release money to the developer until a work-in-progress valuation has been done. Not all bank guarantees are the same though. Check your terms. 2. Escrow agent. Banks and lawyers often offer this service. The agent stands as the honest third party between the seller and the buyer. Each party contracts with the agent and cannot take the benefits of the contract until that party has met its obligations. 3. Via a lawyer. You can use a lawyer to only pass money on when certain conditions have been met. Check that the lawyer is a member of its Law Society. Also check that the lawyer operates fraud insurance. 4. In some less developed countries you may want to take a charge on another piece of land owned by the developer such that in the event that the developer fails with your money you have some land to compensate you. This is easier when buying a lot of property or through a club.

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EVALUATING RISK

Investing involves risk. It’s your job to reduce that risk to an acceptable level.

You will make mistakes, but they can often teach you more than the successes. We have two dud properties out of a portfolio of 70. Not a bad ratio, but they take up a disproportionate amount of time and energy. They’ve certainly taught us a lesson not to repeat the same mistakes again!

Let’s look at three risk scenarios: 1. Doing nothing. We’ve never heard of great investments made by thinking a lot but doing nothing. 2. Managed risk, whereby you have thought it all through and managed your downside. 3. Impulsive decisions – high risk, perhaps made out of desperation or fear of missing out, or with unrealistic expectations.

For a more thorough risk assessment visit www.ready2invest.co.uk.

We’d go for the second option any day of the week. Make lists of potential problems and then you can work out possible solutions. Have a clear, unemotional mind and try to think things through. Do your homework, research and ask questions. Use our checklists. Then you can assess risk reasonably. The more you prepare, the less you risk.

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CHECKLIST FOR LAWYERS 11. Check that the lawyer does not engage in selling property. 12. Check that the lawyer has a paid up membership of the country’s law society. If you can, check this with the law society itself.

Whether you are operating in the UK or abroad, you must ensure that you have proper legal title, i.e. ownership. This is the foundation of your security. Make sure to hire an independent lawyer who must be local and who will make sure that you are not hoodwinked.

Don’t assume anything. Get the facts. Insist on the lawyer writing to you and explicitly stating where you are in the process.

Knowing what questions to ask tells the lawyer you are on top of your game:

For a more thorough checklist on lawyers visit www.ready2invest.co.uk.

1.

Check the land title process. Ask how does property gets registered, how long this takes and how well organised the system is. 2. Ensure there are no charges against the property. 3. Trace ownership back to ensure no familial or other ownership disputes. 4. Where a country has been communist, check that the property has been privatised legally. 5. Ensure that your unit is unambiguously situated where you chose it to be. 6. Negotiate penalties for late delivery. 7. Ensure controls over release of your money. 8. Always demand certified translated documents before signing. 9. Check the description of goods that are included and not included in the contract. 10. Is the contract assignable? If so, on what terms?

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WHAT’S THE WORST THAT CAN HAPPEN?

That very much depends on the kind of deals you do. We can’t stress how important it is to do your due diligence before you sign on the dotted line. Assuming you have crossed the t’s and dotted the i’s, a better question is, “Can we cope if something doesn’t work out exactly as we want?” The key thing that we learned has been that we cannot control everything that happens around us. There is, however, always a choice as to how to react to events around you. This is the exciting bit. It can be a struggle to accept how much you cannot control. But if you can master your reactions then you are no longer a prisoner of the daily vagaries of life. This distinction – that you have the power to choose in all situations – gives you a sense of power and possibility even if things don’t go according to plan.

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TAKE TIME TO CELEBRATE

Property is a painstaking business. There are highs. There are lows. There are people who reciprocate your trust. There are others who disappoint. So you owe it to yourself to acknowledge your achievement, pat yourself on the back and reward yourself. Property is a long-term game where you gradually work towards your goals. Sometimes, when there is a clear goal in front of you, it works well to say: “When we achieve this we will take a week off to spend time and be fully attentive to our family.” or “When we achieve this we will take two weeks off to go to that country we have always wanted to discover.” or “We will buy that watch we want or those shoes that we’ve been coveting.” This is all about reinforcing winning habits. Some sort of celebration of the win is key to encouraging you to continue the positive decision and actions that led to that win. It is important to acknowledge what you have done and not dwell too much on what you haven’t done.

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JARGON BUSTER!

Finder: A person or company who is paid to locate and select property according to your brief.

Capital Growth: The increase in value of the property in the market as a whole.

Flipping: Selling an off-plan property on or before it is completed (i.e. built).

Cashflow positive: Where your overall income is greater than your costs.

Hotspot: A location where demand is high and supply is restricted.

Cashflow negative: Where your overall income is less than your costs.

KPI: Key Performance Indicator.

Comparable: A process to measure the true value of a property.

Leveraging: Using capital in such a way that positive or negative outcome is magnified.

Density: The ratio of total build area in proportion to plot size.

LTV: Loan To Value in reference to a mortgage or other borrowings.

Diversification: Spreading your portfolio across a range of investments to reduce risk.

Portfolio: Your collective property investments.

Downside: The disadvantages or hazards of a deal.

Title deed: A deed or document proving a legal right to land or property.

Due diligence: The research and contract checking necessary before making investment decisions.

Under market value: The percentage that the property is priced less than the verifiable average of comparable properties.

Equity: The value of a property after deducting payment and other costs.

Upside: The advantages or benefits of a deal.

Escrow: Money held in account by an independent third party to be released when pre-agreed obligations are fulfilled.

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Zoning: Areas designated for certain purposes e.g. residential, agricultural, commercial.

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ABOUT READY2INVEST Knowledge Equals Wealth We are committed to producing the best information that we possibly can for each development. We like to explain to you how the country itself is performing politically and economically, how the area is doing, what the background of the developer is, as well as present properly researched comparables so you know that your price is good and you can verify this.

We are, first and foremost, investors. We think like investors, we behave like investors and we personally invest in the developments we launch. Ready2invest grew out of a need to group together with other like-minded investors in order to create the buying power to get great deals. We apply all the due diligence you will find in this book, plus more, to bring you some of the best property investment deals from around the world. Our deals range anywhere from 15% below the market value to 50% below the market value in areas of high capital growth.

We also publish research literature, hold free seminars about specific countries and ensure that our customer service team is highly knowledgable about property as well as each investment opportunity.

Good Teamwork Alise provides much of the inspiration for Ready2invest and has been the prime spotter of which new emerging markets to target. As well as being a dynamic communicator both within the company and to investors, she has carried out much of the due diligence on the ground both on her own and with Jonty. Jonty studied Economics at St John’s College, Cambridge. Later he obtained an MBA with distinction from The London Business School. His analytical and numerical approach to property investing makes for a very strong team. Before launching Ready2invest, Alise and Jonty built up together a nationwide retail chain, employing over one hundred people. They have worked together since 1989, and married in 1993.

Service and Relationship As our background is in retail, we are very attentive to service and try to please our customers whenever we can. Can we guarantee results? No, no-one can. But we are committed to doing things well and being attentive and open to our customers at all times. Contact Us If you want to receive our information or make further enquiries, it would be great to hear from you. Call us on 01273 627900 or email [email protected], or take a look at us at www.ready2invest.co.uk.

The Ready2invest team consists of 29 highly motivated team players. We would like to take the opportunity to thank them for their work and dedication, not only with this publication but with everything they do.

“Having known Ready2invest for almost 3 years, I have been impressed every single one of those days with their passion, trustworthiness and crystal-clear communications to clients, both on the existing base and newcomers.” Wayne Dejager,Watford

What We Do Our job is to build trust with the developer and trust with you. If you know that the properties we offer are well researched, superbly priced, judiciously selected and located in prime spots, then you will buy through us. If the developer is confident that we can sell a lot of properties quickly and efficiently, thereby taking some of the pain out of his transaction process, we can negotiate unbeatable deals with him.

“I have been impressed by the high standard of Ready2Invest’s customer service and even higher quality of property development opportunities.” John Maitland, Sutton

The result? You, the investor, wins. The developer wins. And we win.

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FURTHER RESEARCH The internet is an incredible resource for accurate information when it comes to doing your own research for your investments. However, sometimes the amount of websites on offer can be overwhelming. To get you going, here is a list of some of our favourite sites: www.wttc.org In-depth information regarding world tourism.

www.economist.com In-depth analysis on political and economical statistics on a global, national and local scale. www.worldbank.org Provides in depth economic statistics and figures from across the globe from which to draw your own conclusions. www.transparency.org A great site to measure corruption around the world. www.ft.com Another source for economic and political information. www.imf.org More analysis on world economy. www.cia.gov National statistics. A great source for information regarding country size, demographics, history, political stability and much more.

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www.wikipedia.org A general knowledge site. Great for a brief history and the background facts of an unfamiliar country. http://finance.yahoo.com/currency A great currency conversion site. Provides direct exchange rates with all currencies and trends with up to five years history. http://www.digitaldutch.com/ unitconverter An international unit converter. Converts all manner of measurements you will need, e.g. square metres into hectares.

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“I’m a music person not a money person. I trust these guys – they talk a lot of sense” Chrissie Hynde, Lead singer of The Pretenders

WHY READ THIS BOOK? Because we are investors. We have a strong track record and we love what we do. We want to share this information with you because it is sharing that makes the world go round. WHO COULD BENEFIT FROM READING THIS BOOK? Anyone who is interested in making money in property. WHAT’S DIFFERENT ABOUT READY2INVEST? We research and investigate assiduously. We visit and check every development with great care. We stay with you until completion and we have built a team who embody our commitment. We offer property at up to 50% below market value. WHAT NEXT? Go for it! We want you to get loads of value from this read whether or not you ever give us a call. We want you to be as successful as you can dream and if this read is of any help then our job is done. Please feel free to share your experiences with us either at [email protected] or by calling 01273 627900 or visit us at www.ready2invest.co.uk.

© 2006 Alise and Jonty Crossick

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