While we at Progressive Property maintain that there are always opportunities to be found in the buy-to-let commercial property market, there are also always reasons to be cautious, and red flags to acknowledge. We are living in an unpredictable financial climate, with Brexit and June’s snap general election clouding the judgments of economists, so now is certainly a good time to exercise caution and recognise the deals and properties that are advisable to avoid.
It is a time to use R.E.A.S.O.N.!
Now, experienced commercial property investors may have the right contacts, the right insights, and the right knowledge to know how to turn some of the following into profitable investments. However, the Progressive R.E.A.S.O.N. model is our list of property types to avoid in any financial backdrop, but particularly during times of extreme uncertainty such as the kind to be found in 2017.
We have encountered many new investors who have fallen into the trap of snapping up a commercial property simply because of its too-good-to-resist price tag. Major renovation and improvement work is not only a pain for your wallet but also intensely time-consuming.
The phrase “you get what you pay for” is particularly relevant here. Despite the fact that it is very possible (and advisable!) in the world of buy-to-let property investment to find BMV properties, when the buildings in question need rewiring, underpinning, and load-bearing walls require support, then novice investors are advised to steer well clear! When we were a pair of greener investors, we made the mistake of buying a commercial property like this, and were forced into flipping the damn thing because of countless costs we hadn’t budgeted for.
Repairs and costs for rundown properties have a habit of spiralling unaccountably, so stick to cosmetic work only if you can.
If a building costs more than the rent it brings in, then it is a money drain and is not an asset. The basic rule we recommend for a single let is to come under the first level of stamp duty, which currently stands at £125,000. Yields of under 8% gross are likely to cost you money every month, so think hard before you invest.
Of course, this rule has the exception of buy-to-sell ventures, but for buy-to-lets it’s a good way of avoiding subsidising the property’s mortgage every month.
Buying properties abroad is a risky strategy that we fell for before 2008, when we were naïve investors. The appealing idea is that, if you buy a property in a desirable location such as the Caribbean or Dubai, you are purchasing both an investment and a holiday home!
We put deposits down for a couple of properties in Florida, but thankfully got them back before we found ourselves in trouble. The problem is that areas billed as hotspots (i.e. areas of investment that are billed to rise in value very quickly) are often based on rumours that emerge from unreliable sources and local governments announcing a regeneration project. This is speculation and prediction, not provable evidence.
This is not to say that overseas investment can’t work, but expert property investors who purchase properties in foreign lands generally know the language, have property in or are moving to the country, and know the area as well as their home town or city. So we recommend that you save yourself the hassle and keep things simple, for now.
Dotting properties around the country is generally a poor idea for reasons that also apply to the “Abroad” point: you want to become an expert in your area(s) of investment, and remote management puts you at risk from spreading yourself too thinly and failing to pay enough attention to your properties.
We have seen investors buying low-cost properties across the country, thinking that they have found a set of fantastic deals, only to find themselves in possession of a portfolio only half-occupied. On one occasion, we saw an investor purchase 90 properties scattered across the country fold due to the £25,000 it was costing him every month!
So don’t buy all over the place – find your local goldmine area and stick to it.
O. Off plan
Buying off plan – i.e. buying the property before it is built, with only the plans available to inspect – is a risky strategy. It is not as lucrative as it was a few years ago when the rising market added value to the property before building commenced, and doing so now is to base your tactics on luck rather than anything tangible.
Mark once bought off-plan property in Bansko, Bulgaria, and subsequently made a net loss of 50,000 Euros. What had looked like a great rental market was in fact a total nightmare, because of a load of extra costs Mark couldn’t plan for, dishonest solicitors and rental agents, and an overflow of extra apartments in the area.
N. New build
Any new build property will be overpriced because of taxes, new premiums and developers’ margins. That initial dip is just like buying a brand new car straight out of the show room: its value is going to plummet the moment the vehicle rolls off the forecourt or the property is purchased.
While it was once the case that if you bought a property at the start of its development, the rising prices would drag the value up by the 2nd or 3rd phase. Not so, anymore, which means that as a general rule, buying new builds fails to provide any certainty of a lucrative deal anymore.
These are 6 compelling reasons not to invest in property, relating to the Progressive Property R.E.A.S.O.N. model.
What do you you take as a definite signal that investing will be a poor idea?
If you would like to learn more about commercial buy-to-let property investment, you can find the book “The 44 Most Closely Guarded Property Secrets” here.
Until next time, thanks for reading!
"If you don't risk anything, you risk everything"
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