Why you should build a cash pile
Landlords have profited over the last 10 years from having an aggressive purchasing strategy. The winning formula has undoubtedly been to buy – re-mortgage and then buy again. The result is an expanding portfolio funded partly through rising indebtedness. Given that house prices have continued to charge ahead then each additional purchase should have bought a reasonable return through capital appreciation.
Change of tactics
Any body that follows football or any sport indeed knows that the best managers are the ones that can adapt to changing circumstances. The best ones are those that have the sense and the timing to change just at the right time. Say from a 4-2-4 to a 4-4-2 to ensure for instance that they defend a good lead. Landlords should consider doing the same in the coming year. A strategy which is gaining popularity with a number of experienced landlords is that of building a ‘cash pile’ either through selective disposals or re-mortgage.
There are a number of potential benefits to this:
1. Interest rates have risen consistently since their low of 3.5% in August 2003. They now stand at 5% which means it is possible to receive a gross income near to this on your savings – risk free, hassle free. With house prices rises expected to slow, particularly in some parts of the country such as the East Midlands and the North to as low as 3% next year. Landlords need to think about the sums and think about the potential short term benefits of at least having part of their capital in cash.
2. Having cash puts you in a stronger position as a potential purchaser. A cash purchaser can act quickly without needing to go through a lengthy and often expensive mortgage application and approval process. This gives them a real advantage in a competitive situation or where they need to rise finance quickly such as at auction.
3. Auctions are increasingly seeing the products of poorly judged investments by novice landlords attracted by the ‘hype’ and ‘spin’ of the ‘discounted’ purchase schemes that have operated within parts of the new build market. The evidence is that repossessed properties are coming through the system at large and real discounts to their initial selling prices. For example in Nottingham city centre 2 bed apartments that were sold at £140,000 2 years ago are now being sold as repossessions by mortgage companies for £120,000 and even £113,000. Property Hawk predicts the numbers of these will increase in the coming year and it is likely that prices will continue to fall. So shrewd investors with a ‘cash pile’ should be ready to snap up an auction bargain. Have a look at the most comprehensive auction information service EIG to get information on auctions near you. Have a look at the Landlords Bible for an introduction of how to buy at auction.
4. Patient cash purchasers can often drive a ‘hard bargain’. In any market there will be sellers that because of circumstances will need to sell quickly. This is a very unfortunate fact of life, but it does represent an opportunity for a well prepared landlord to be able to offer the vendor a quick and painless exit from the property market. Obtaining get your investment off to a flying start and helps to increase your long-term returns. Even a modest 10% reduction on a £250,000 property will save you £25,000.
5. Having cash means that you have funds to refurbish properties. This means that not only do you not have to resort to expensive development loans and set up costs; but also by developing the property you should also be able to ‘lock in’ some development profit into the investment. This will really mean that you have secured your investment at ‘a rock bottom’ price.
The ‘motto of the story is’, with growth in the housing market slowing, then landlords should be thinking about taking steps to build a ‘cash pile’ ready to take advantage of any opportunities that might come there way in 2007.