In the last post we looked at some of the evidence which may suggest that the property market is poised for recovery.
There certainly seems to be grounds for optimism although we’re a long way from being able to suggest that a property boom is imminent, more likely a gradual increase in confidence, leading to an increase in lending by banks, which in turn will boost demand and then prices.
Assuming that the property market is beginning to turn around we need to answer the question as to whether this is a good or a bad thing for us as buy to let property investors.
You’ll often hear it said that ‘The profit is made on the purchase’. This is often said in the context of buying a property cheaply or, as it’s known to day in the using the new colloquial, ‘Below Market Value’. If you can buy a property at 25% to 30% below what it’s <i><span style=”text-decoration: underline;”>really worth</span></i>, you then have your profit built-in from day one. You’re not going to be as subject to the vagaries of the market as you would be if you buy and then have to wait for prices to increase before you sell and make your profit.
Buying Below Market should be easier in a flat or falling market, than a rising market, mainly because any motivated sellers (those who have reason to sell quickly) are more likely to accept a discounted price. There is little point in them holding out for a higher price in the hope that the market will increase and help their cause. In fact, in a falling market, when no one can know for sure where the market will eventually settle, it could be their interests to accept a low offer and get out as quickly as possible, in case by holding on the price actually settles below the level of the offer.
This isn’t to say that BMV deals won’t be around in a rising market. There will always be people who need to sell quickly for one reason or another, but these deals might take a little more work to find.
The same arguments also apply when trying to use other techniques to secure property, like options or delayed completions. If a rising market tempers the motivation of sellers to deal, then they may not be so open to negotiating ‘terms’ such as agreeing a future sale price.
On the other hand, in a rising market, banks should be more confident, and terms for borrowing should get easier. I’m not advocating or suggesting that we’d go back to the carefree days just before the credit crunch, but there should be scope for the banks to slacken-off a little whilst still being ‘responsible’. Easier access to funds can make doing deals easier, so that’s a plus.
Of course, whether you see a rising market as a ‘glass half full’ or ‘a glass half empty’ will also come down to what you are currently doing in property. I have a substantial residential investment portfolio and I wouldn’t shed many tears if the portfolio value increased 20% over the next few years. Coupled with easier finance I could refinance and inject a significant amount of working capital into my property business. I could even use some as a bit of mad-money, should I wish, and shake off the chains of austerity.
I’m glad to say that I’m not in negative equity, but I know some investors who are, and an increase in values would, no doubt, be of great comfort to them.
So would it be a good or a bad thing for us if values increased? It’s not cut and dried as there are pros and cons for both. But I think, looking at the bigger picture, on balance I’d say it would be a good thing as it would help to give some support to a battered financial system which is still carrying a relatively large amount of bad debt in the form of negative equity mortgages.
One thing the credit crunch has taught us is that, whether we like it or not, our economy runs on credit, and when credit is flowing more easily again, the economy will pick-up again.
If rising property values are part of this ‘virtuous’ cycle, then that’s got to be a good thing.
In the meantime, now is the time to ‘make hay’ and secure those BMV deals, or go out and negotiate a few option deals so that, when the time comes you can combine the profit made on the purchase with the profit made on the sale, and get a double profit.
Here’s to successful property investing.
Peter Jones
