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Thread: Fatal Mistakes in Real Estate Investment

  1. #1
    Join Date
    Nov 2008

    Default Fatal Mistakes in Real Estate Investment

    Fatal Mistake 1:
    You Do Not Have a Clear Strategy and Get Easily Distracted

    Too many investors buy because someone tells them the property will
    go up in value or they will be given a perceived discount, and not
    because it will help them achieve their goals.

    Are you buying for yield?

    Speculation on cap growth?

    Or to add value?

    Too many investors buy without having a clear strategy, or buy the
    wrong type of investment for them ie they want income but buy an
    off plan property that requires a 30% deposit and 10% buying costs,
    tying up all of their savings - and do not realise until further
    down the line. Or buy a buy to let and then realise do not like the
    idea of being a landlord!

    They can also have a perfectly reasonable strategy, which is
    working for them ie buying buy to lets for around 60,000 in their
    local area, and suddenly get distracted by a ***y new deal, buying
    a very expensive villa in Dubai, or a discounted apartment in Spain
    which does not fit into their overall strategy.

    Or buying a renovation project without the skills or adequate funds
    to complete.

    It is vital that you plan out your strategy before start buying. Ie
    how much time do you want to put into this, how much in terms of
    funds, what skills do you have, what timescales are you working to?

    Too many people go with too wide an investing strategy, for example
    I know investors who have bought individual properties in 5-6
    countries which I would think is too many. They may be good deals,
    but can be difficult to manage all the legal/tax and finance issues
    - I would aim to go with 2 or a maximum of 3 types of investments
    at a time, as it is easier to keep an eye on the overall market
    this way. It is better to become an expert in 2 or 3 markets than
    spread yourself too thin over 5-6 markets, whether it is buy to
    let/buy to sell/overseas.

    Part of your strategy should also include looking at exit
    strategies ie when do you plan on holding on until - what triggers
    will make you want to hold or sell?

    How soon will/may you want out, and how easy will it be to realise
    your profits?

    For example what may seem an excellent purchase when you buy may be
    difficult to sell on, which would mean it is difficult to realise
    your profits. For example purpose built hotels or student
    accommodation, where you can buy a room may give a good rental
    yield but not have a strong re-sale value. If you suddenly need to
    sell up - will there be buyers ready to snap your property/room up?
    Or many apartment blocks in UK and overseas are sold purely to
    investors. This means all may have similar investment strategies ie
    buy to rent or sell, and could be a large number trying to sell at
    once. This again will affect the re-sale value, purely down to
    supply and demand.

    It is often best to target an area where is a good mix of local
    owner occupiers and investors - so there will be a good mix of
    strategies and you will not be competing with many others all with
    the same strategy.

    For this reason it can be better to target smaller developments, as
    are less likely to attract the large numbers of investors, or
    investment clubs that look for 30-50 apartments at a time.

    Some areas will see an immediate increase in capital growth,
    whereas some will be more of a case of hold for 3-10 years to see
    the best levels of growth. You need to be aware of this before buy
    and also be sure about how desperate you may be for the money you
    have tied up. If you think there is a chance you may need to call
    on this money sooner rather than later, you need to ensure there is
    a strong exit strategy or you will become desperate to sell, and
    therefore not be able to sell at such an attractive price.
    So considering your strategy at the start is very important - you
    should consider:

    How much do you want to invest?

    What are your goals? Over what time period?

    How much time do you want to put into this?

    What will your exit strategy be?

    This should help you get off to an excellent start!

  2. #2
    Join Date
    Nov 2008


    Fatal Mistake 2:
    Forget importance of location, location, location

    Yes prices may be rising in the latest hotspot at an average of 15%
    p.a. but remember that is an average.

    Within streets you will see huge price differences. Ie there may be
    terraced 2 bedroom houses at an average price of 50k going up 10%
    per annum, and 2 bed new build apartments at an average price of
    120k going up 3% per annum within 2-5 minutes walk. So in that
    area the average across the 2 types of property would be 6.5% - but
    is significant difference - which is magnified when you have
    leveraged your investment.

    Ie if borrow 85% on a buy to let mortgage on both:

    On terraced property, deposit is 7500, and borrowing is 42500. If
    house prices go up 10% in year 1, is now worth 55000. So you have
    made 5000 in equity - therefore your initial 7500 is now worth
    12500 - this is a 66.7% increase.

    On the new build apartment, deposit is 18000, and borrowing is
    102000. If house prices go up 3% in year 1, is now worth 123600.
    So you have made 3600 in equity - therefore your initial 18000 is
    now worth 21600 - this is a 20% increase.

    (Clearly we have not taken any other costs in - and for simplicity
    have not taken yields in to this example).

    So there are big differences in the returns on your money, in an
    area where average house price growth is 6.5% and big differences
    in how much money you have tied up in each deal. You could be
    getting 3 times greater a return just by investing in a better
    investment within the same area.

    The other area where people get caught out in average price rises,
    is forgetting that this is not always the most relevant figure. Ie
    if you are buying a buy to let, the rental yield in that location
    is the most important. Is no point buying a very cheap property,
    where is no rental demand, if want the rent to pay for the mortgage.

    There are areas of Scotland for example where prices may be similar
    for similar types of property - but one will have strong rental
    demand and one will not.

    There are areas of certain countries I will buy in and some I won't
    - just as there are towns with area that are good for investing in
    and areas not so good - always look at the specifics and not just
    the generalisation of an area.

    You must either know your areas very well, or have someone you can
    rely on to check them out for you before committing to a specific

  3. #3
    Join Date
    Nov 2008


    Fatal Mistake 3:
    Do Not Factor in Buying/Selling/Management Costs

    Ie do you know the average buying costs to buy in different

    You may expect capital growth to be 15-20% in country X but if
    buying costs are 12% and selling costs are 7% it will take at least
    2 years before you make any money - are there quicker ways to make
    money? And may have to spend a few thousand on furniture - all this
    must be taken into account.

    If prices are flat for 2-4 years then this would not be a good
    investment - as would be far easier ways to make money. I am
    reluctant to recommend any deal where buying costs are this high.
    For example, it may be better buying where buying costs are around
    3%, and selling costs are around the same even if capital growth is
    expected to be half what it is predicted to be in country X.

    Do you know the different buying costs in UK, Spain, France,
    Cyprus, Bulgaria, Estonia, USA?

    In Spain is around 10-13%

    UK is around 3%

    Cyprus is around 6%

    USA is around 5%

    Estonia is around 3%

    Bulgaria is around 4%

    And management costs will vary significantly depending on the type
    of investment ie holiday lets, corporate lets, student lets.

    For instance in UK - can negotiate in some areas of the country a
    10% flat rate for management of standard tenant. However management
    for some eg student tenants can be as high as 20-25%. Clearly this
    makes a huge difference to your net yield. The gross yield is less
    relevant when comparing across different rental sectors.

    For example: I have seen student buy to lets advertised as higher
    gross yields than normal buy to lets eg 8% gross yield - but if
    management costs are 25% this takes this yield down to around 6% net.

    While a normal buy to let with 7% gross yield and 10% management
    costs, would still give you a net yield of 6.3% ie higher.

    It would also often have lower maintenance costs.

    It can be the same overseas - short term lets will invariably give
    higher gross yields, but will have higher ongoing costs - must
    always factor this in.

    So do not get distracted by headline figures giving potential
    capital growth or gross yield.

    And make sure you are aware of the total buying costs and
    management costs before commit to buying.

  4. #4
    Join Date
    Nov 2008


    Fatal Mistake 4:
    Buy Buy to Lets with Negative Yields, Hoping for Capital Growth

    I still can't believe people do this but all over the country I see
    people marketing and selling unattractive BTL deals.

    If your objective is to make a passive income do not buy an asset
    that will cost you money each month! If you have a good healthy
    salary, earning a net income may not be as crucial - but I would
    still be hesitant to buy a rental property with a net deficit
    unless was very confident on the economic situation and future
    capital growth of the area ie new EU country or regeneration area.

    You must also factor in management/maintenance costs, and any
    potential interest rate rises ie in the UK recently the rises over
    last 18 months, before the welcome 0.25% drop made significant
    differences to many buy to let investors cashflows.

    Do not just take selling agents word for this - and if buying off
    plan try to see exactly what else is being built around it ie right
    now rental demand may be high but within a year may be oversupplied
    eg many city centres in UK.

    Too many buy to lets are marketed on supposed discounts, and
    potential capital growth with little mention of the rental
    expected, or inflated rental figures quoted. But the most important
    figure in any rental investment should be the rent expected - as if
    there is no rental market, this will be a very unattractive
    investment, and therefore little chance of capital growth unless
    owner occupier demand.

    If figures are not attractive - hold off and wait until improve, or
    look to other property markets.

  5. #5
    Join Date
    Nov 2008


    Fatal Mistake 5:
    Do not Understand the Importance of Opportunity Cost

    Understanding the Opportunity Cost of any decision you make is
    critical - to ensure you make the best choices to maximise your
    profits, and ultimately your long term earnings.

    While most investors have got involved in property investing
    because they understand the opportunities to make money - through
    leverage and capital growth or high yields - I still see and hear
    of many who do not fully understand opportunity cost and therefore
    do not maximize their profits.

    Remember anyone that gets into property is usually in it to
    generate money or income - how many deals/properties you own is
    insignificant - but I meet some investors who feel it is all about
    buying as many properties as they can and never selling,
    irrespective of performance or other opportunities.

    So what does opportunity cost mean?

    Well according to the encyclopedia,

    "Opportunity cost is a term used in economics, to mean the cost of
    something in terms of an opportunity foregone (and the benefits
    that could be received from that opportunity), or the most valuable
    foregone alternative. For example, if a city decides to build a
    hospital on vacant land that it owns, the opportunity cost is some
    other thing that might have been done with the land and
    construction funds instead. In building the hospital, the city has
    forgone the opportunity to build a sporting center on that land, or
    a parking lot, or the ability to sell the land to reduce the city's
    debt, and so on."

    So in property investing terms, if an investor decides to invest
    50k in a property in for example Wales, the opportunity cost would
    be what he could have made by investing in Spain, Ireland or Dubai.
    Or similarly if an investor decides to keep equity of 50k in a
    property, the opportunity cost is what he/she could alternatively
    have invested this money in and the resultant value.

    Now again this will depend on your specific strategy - and many
    people are not too concerned about opportunity cost, they are just
    keen to buy 1-2 properties that they can hold onto for 15-25 years
    to use as a pension. That is fine if that is your strategy - but
    for me that is too broad a strategy, carries risks and is not
    maximising the opportunities available.

    I have always had a philosophy, rightly or wrongly, that I should
    always be working my money hard. What does this mean? Well as soon
    as I feel my money has made a significant return and the returns
    are likely to drop off, compared to other possibilities, then I
    will look at realising my profits and investing elsewhere ie when I
    feel the opportunity elsewhere is greater than the current
    opportunity, after costs are taken into account.

    The great thing with property is this does not necessarily mean
    selling, as you can refinance, and invest money elsewhere.

    This is no different to any other type of investing, such as buying
    stocks and shares - you make/lose your money depending on what
    price you paid, and what price you sold at - although clearly with
    property there is a good opportunity to earn a regular income as
    well. If you hold onto a property for 15-25 years you will make
    money, but most likely there will be a few scares along the way, as
    the market passes through several cycles!

    To be a successful investor, you must know when to enter the
    market, and leave the market. And the people that do best buy low,
    and sell high!

    I'll give you an example. By doing all my due diligence I bought a
    property at the right price in the right location, but then sold on
    within a year of completion as I felt that was the period I would
    see the maximum returns in - and more importantly, the
    opportunities would be greater elsewhere over the next 3 years.

    So to go through the numbers, I have just sold a property 6 months
    after completion, that I had bought off plan last year 12 months
    before completion. I bought at a price that was already 15k below
    market value based on my research in an area that had little buy to
    let competition - and no it was not in any city centre in the UK!
    This was secured with only a 5k deposit. On completion, I put
    another 28k into the deposit - so tied up 33k of my own money.
    There was no stamp duty in this area.
    I then put the property on the market on completion - now even with
    the market slowing down slightly in the area, I sold it for a 23k
    profit. So I tied up 5k for 18 months, and a further 28k for 6
    months, to get back 56k 6 months later.

    Why did I sell? Did I consider refinancing?
    My first choice would have been to refinance and let out, but the
    rental would not have stacked up at the new valuation. So while the
    rental would have stacked up at the price I paid for the property,
    I felt that I would have had 56k in equity sat not doing very much
    for me for the next 3 years in this property investment. And I felt
    that there were better opportunities for my money both here in the
    UK, in different regions, and in several overseas markets, which
    would give stronger returns.

    How can I tell this?

    Clearly when we are looking into the future there is an element of
    risk and speculation and there are no definite answers - so you are
    having to forecast as well as you can with the data currently
    available ie how you forecast interest rates, buying/selling costs,
    supply and demand, employment, the overall economy and market
    sentiment over the next time period in the markets/regions you are
    investing/looking to invest in.

    I do not forecast huge capital growth in the area over the next 3-5
    years, for a range of reasons - the main reason being that the
    prices are now pretty high compared to the average salary, and the
    rentals are not as attractive for an investor at the price I sold
    up at - around 5% gross yield.

    As the yield was not attractive enough for me it was best for me to
    release this equity and find another investment - ie I felt there
    were better opportunities for me to spend my 56,000 on, to
    generate more money.

    Although opportunity cost can be hard to quantify, its effect is
    universal and very real on the individual level. The principle
    behind the economic concept of opportunity cost applies to all
    decisions, not just economic ones, for example when Steven Gerrard
    decided to stay with Liverpool this summer, his home club and where
    he is captain, the opportunity cost was what he could have achieved
    if he had moved to Chelsea or Real Madrid. In the end he felt the
    rewards he could achieve at Liverpool would be greater than he
    could achieve at Chelsea - but clearly this is an individual
    decision depending on individual goals.

    So, in conclusion, what does this mean for a property investor?
    Well, I would say always be looking at your equity/investments and
    looking at how well they are performing. If you have money tied up
    in a property that you think will go up in value over 15 years -
    but may not go up for the next 5 years, is this the best place for
    your money?

    It is no different to the stock market, you must keep an eye on
    market movements and other opportunities.

    By working your money hard, and maximizing potential leverage, you
    can maximize the opportunities out there.

  6. #6
    Join Date
    Nov 2008


    Fatal Mistake 6:
    Get Distracted by Supposed Discounts Offered by Developers, or put
    off by Surveyors' Valuations.

    I was checking over some properties last week, and the first thing
    the agent I met said was, "How much discount would you be looking

    Now what does this mean?!

    Discount from what?

    An already inflated price?

    A surveyor's value?

    Or current market value?

    All 3 will generally be different.

    When you see off plans being marketed at 15-20% discounts, remember
    this is marketing. All this generally means is the prices were too
    high in the first place, and have had to reduce to sell, or are
    trying to attract business with a promotion. No different to a shop
    that cannot shift its stock, and has to have 20% off sales, or even
    half price sales. Because the Brits love a bargain they often buy
    at these "discounted" prices - but just because you have got a
    discount, this does not mean you have bought below market value!
    Even the large supermarkets have been accused of putting the prices
    up one week, and then discounting them the following - is simply a
    marketing method.

    You have bought at market value, as that is what investors were
    willing to pay.

    Yes - occasionally a discount can be negotiated, but often this
    will be at the start of development, if the developer wants to sell
    the first phase quickly. I prefer to see developments where the
    prices go up during the development as get a truer feel for the

    I then hear people say - well it must be below market value because
    a surveyor has valued it at 20,000 more than I paid. In fact about
    a week ago, I received an email offering some completed new builds
    in Nottingham, which I have driven past several times. It had
    copies of the surveyors valuation done, and were offering these
    properties at around 15% below this valuation.

    But clearly although you could buy at 15% below the surveyor's
    valuation, this is totally different from market valuation. The
    market valuation is what someone is willing to pay. Perhaps if
    there is just 1-2 units left, but not when are 10-20. I'd be very
    concerned at buying a property 15% above the market valuation,
    which in effect is what you are doing as the 15% discount is being
    used as a deposit. Why would anyone pay a finders fee for that?!
    Especially at around 5% yield. This tells me these properties are
    too expensive for first time buyers, and not attractive for
    investors, so prices will only go one way as supply will outweigh
    demand. Remember the value a surveyor gives a property will often
    be different to the value a buy to let investor, who is more
    interested in yield, gives a property. I have seen some horrendous
    examples recently where investors are buying buy to lets solely
    because they think they have received an attractive discount.
    Unfortunately 6 months later the valuation is even less than this
    supposedly discounted value that was given and they are struggling
    to get anywhere near the rental figures quoted. This can be very
    dangerous, as can find yourself in negative equity very quickly as
    have paid too much in first place, even with a supposed discount.

    I'll give another example of the differences in different markets.
    As most of you will know I target areas in UK where yields are
    still strong and capital growth is still strong - although is
    getting very competitive. Currently properties that say are being
    valued by a surveyor at 40,000 are selling on the open market for
    nearer 50,000. Why is this? Well because yields are so strong, and
    demand is higher than supply. So again, you have not paid above
    market value, you have paid market valuation. This is often the
    case in a fast growing market, where surveyors look at historic
    data and do not grasp fully the value to buy to let investors, in
    this country and overseas.

    I know I'd rather be buying in a market where market valuation is
    10-15% above the surveyed valuation, rather than 10-15% below it,
    as this is a very good indicator of future prices and values.

    These discounts should not be confused with genuine distress sales,
    where one offs will come up, where the seller is desperate for a
    quick sale and will sell for below the market value.

    So I would say take any discount with a pinch of salt - always look
    at the actual figures paid, the yields, and the comparable prices
    in the area when making a decision.

  7. #7
    Join Date
    Nov 2008


    Fatal Mistake 7:
    Forget Importance of Cashflow

    "Cash is the oxygen that enables a business to survive and prosper,
    and is the primary indicator of business health. While a business
    can survive for a short time without sales or profits, without cash
    it will die."

    I spoke to an investor 6 months ago who told me he was asset rich
    but cash poor.

    What did he mean? He had bought several investments off plan, and
    several low yielding deals which he hoped would have good capital
    growth. Therefore while he had several good assets on paper, these
    assets were actually costing him money each month, meaning he had a
    negative cashflow.

    This can be ok, if some areas of your life, or investments, are
    making a positive cashflow to balance this. However this investor
    did not have this, and he ended up being forced to go back to work,
    and selling a couple of these low yielding assets for a loss - as
    he was put in the position of being a desperate seller - that is,
    desperate for cash.

    It is crucial to always be aware of how important cash is when
    running a business - which property investing is.

    The reality is that without cash, you won't last very long. This
    may seem obvious, however it is very easy to buy assets, and then
    realize you do not have enough money coming in each month - which
    can leave you in a very difficult position.

    Property investors must try and plan and prepare for all potential
    future events and market changes. This can include interest rate
    changes, economic changes or market sentiment changing, as well as
    changes in your personal life which you may not immediately
    associate with your property investing - such as promotion at work,
    or worse, being made redundant, or having children which can all
    make big changes to your cashflow as a whole.

    So I would suggest, the most important aspect of planning, for a
    property investor, is not expected capital growth, historic data,
    cost of borrowing, or yields but is effective cash flow management.

    Failure to properly plan cash flow is one of the leading causes for
    failure. I know how tempting it can be to overstretch yourself and
    put all your liquid cash into assets - and then due to an
    unexpected, or more likely unplanned for, poorly performing asset,
    find yourself over budget and desperate for cash short term. You
    then are looking to borrow cash, either through loans, or
    overdrafts at less acceptable interest rates.

    However if this runs out you can be left with difficult decisions
    that are forced onto you by poor planning. This usually involves
    selling an asset, at a price below its value, as you are desperate
    for cash short term to support your property investing business

    Cash flow serves several purposes.

    Firstly it is used for meeting normal cash obligations such as
    paying mortgages, buying costs, development costs and covering

    Secondly, it is held as a precautionary measure for unanticipated
    problems. This is the area that usually is forgotten by investors.
    A cash reserve should be available for these unforeseen problems -
    this can be actual cash, or a flexible mortgage or overdraft, but
    must be available.

    Thirdly it is held for potential investment purposes. The term
    "cash" refers to those assets that are liquid and have immediate
    cash redemption value.

    There is not a problem with buying a property or land that costs
    money in the short term ie a plot of land to develop on, or a
    property off plan, indeed this can be very profitable - but it is
    clear that this will not generate cash in the short term - and
    therefore you must make sure this is properly planned into your
    overall strategy.

    I always think it is important to have a good level of cash
    generating assets - ie generating more money than the costs
    involved with borrowing and maintaining the asset.

    This gives you a positive cashflow which can help balance out less
    well performing assets, or can be held in reserve for emergencies
    or future investments.

    The other attraction of holding cash positive assets is that if you
    are ever forced to sell an asset due to an unexpected change in
    your professional or personal life, there should always be demand
    for cash positive assets, and therefore you should be able to sell
    this on relatively easily.

    For example, if a property development you are carrying out goes
    wrong or over budget, and you need extra cash - if you own a buy to
    let in the UK which is generating a gross yield of over 8% - or a
    net yield, ie after all costs, in any country of at least 2% - then
    this should be attractive to other investors and you should find a
    buyer relatively easily or be able to refinance this asset, which
    should generate cash quickly.

    It is no surprise that when you go to the banks requesting more
    money, they want to know your monthly cashflow - they need to see
    from your projected monthly cash flow if you will have the capacity
    to repay the loans or mortgages.

    So when you are forming your property investing strategy - ask
    yourself the following questions,

    How much cash will my assets generate? How much cash is required
    each month? How much cash do other areas of my life require? And
    how much do they generate?

    Ie. if you have a high paid job which you enjoy, which generates a
    high positive cash flow, or you already have assets generating
    extra cash on a monthly basis - you may be able to buy assets that
    will not generate money in the short term, as you can cover any
    short term costs, or unforeseen circumstances. You may therefore
    want to look at a longer timescale, and may go into property
    development, buy into a property fund, buy a plot of land - where
    you are comfortable tying up this money for a period of time,
    confident that it will rise in value, and you will have no short
    term need for this asset which could compromise the value.

    If on the other hand you are pretty stretched already for cash on a
    monthly basis ie say cashflow neutral, you may well want to buy an
    asset that immediately will generate cash, or at least as soon as
    the mortgage, borrowing costs start ie a more traditional buy to

    There are many ways to make money as a property investor - but
    financial planning is always key to ensure your cashflow stays
    positive to allow you to grow your property investment business.

  8. #8
    Join Date
    Nov 2008


    Thank you for sharing. May i know did u write all these yourself or did u quote from somewhere. If it is the later, may i know where is the source of info. Tks bro

  9. #9
    Join Date
    Nov 2008


    Quote Originally Posted by jc
    Thank you for sharing. May i know did u write all these yourself or did u quote from somewhere. If it is the later, may i know where is the source of info. Tks bro
    It's stated ''50k.

  10. #10
    Join Date
    Nov 2008


    Quote Originally Posted by jc
    Thank you for sharing. May i know did u write all these yourself or did u quote from somewhere. If it is the later, may i know where is the source of info. Tks bro

    Of course not by me la

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