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It is appropriate to start with realising the fact that, this is not the first financial storm and uncertainty hitting the world, Europe or the UK. Let’s take a brief look at large financial crises which have occurred over the last 40 years:
- LatAm sovereign debt crisis – 1982. …
- Savings and loans crisis – 1980s. …
- Stock market crash – 1987. …
- Junk bond crash – 1989. …
- Tequila crisis – 1994. …
- Asia crisis – 1997 to 1998. …
- Dotcom bubble – 1999 to 2000. …
- Global financial crisis – 2007 to 2008.
And now Brexit ‘something’ (we will not know what title this event will be given) – 2006 – present day.
Unfortunately, a financial crisis does tend to repeat themselves. I this case Brexit is a political crisis; however, it is the financial outcome that matters to everyone. Will there be jobs? Will there be salary increases? Will we keep up with inflation? Will we have to pay to enter Europe?
Will my property lose its value?
This is a great Segway into discussing property specifically. I am no economist therefore wouldn’t dare spend my next 20 years decoding the political storm called Brexit. I wouldn’t dare suggest some large hedge funds were aware of the introduction of Brexit because of Mr or Mrs X politician, which allowed them to short the entire situation and make a secret fortune.
One thing is for certain, out of every financial crisis comes increases regulation to stop this ever from happening again. Some things do spiral out of control eg. the European sovereign debt crisis (not listed above, because will it every go away?), but if the leaders of the world cannot deal with it. The common folk should really focus on having a great life, for this great life is too short to worry about a never-ending financial hole a government has created.
I got side tracked, back to property. Now any property investor who buys based an appreciation of an asset must also understand they are speculating. Yes, we know property values do increase over the long term. But we are not in control of this, the economy is.
In the same breath, an investor developing a property must ensure they have two exits. What do I mean by this? Exit 1 – complete the development and sell to first time buyers, investors or foreign investors, for expected market price. Exit 2 – If there is a market downturn, the investor is able to refinance each apartment, flat, or house. Which allows them to pull out much of their borrowed money and return it to the private lender.
If there is only Exit 1, then the developer has increased his risk.
Because we can all agree Brexit is too complicated for any one individual to have an actual understanding of the entire spiderweb of information. And if we did, we wouldn’t know about the discussions which happen behind closed doors (and staying quiet to make a small fortune). We wouldn’t know who is incentivised to make what decision.
For example, if you have an EU based pension pot in excess of £500,000. You would want to remain.
But regardless off all the technical details or who is incentivised to do what. Brexit creates one thing. Uncertainty. Which creates fear. Which creates strange behaviour in humans.
Fear means, property prices become fragile.
Fear to an intelligent investor, is like hitting the jackpot.
When Amazon launch their black Friday sale. Everyone rushes online to get their 50% discounts before the stock runs out.
Then why do people not rush into the housing market when there is a massive sale on?
Like I said, strange behaviours begin to surface.
So how do we ensure we are Brexit proof when buying UK property?
We simply follow a set of rules, and if the property does not fall into the rules, we don’t buy it.
Rule 1 – Buy at a discount. This means we at minimum have a 25% equity buffer. If the market drops by 25%, we are still not in negative equity. Yes we may have to wait a while for the market to recover, but we bought at discount in the first instance.
Rule 2 – We buy for demand. This means at worst case scenario can this property be rented in a flash. If the answer is no, we walk away.
Rule 3 – Have a minimum of 2 exits. A sale or rent. The property has to work on both levels. If we cannot sell it, it doesn’t matter because it can rent and still produce a positive income.
Rule 4 – Buy for positive cashflow only. If the property at a 7% interest rate stress test does not still produce a positive net income, then we do not buy it. It must still produce an income if interest rates rise to 7%.
Rule 5 – Take a % of the cash income from the portfolio and begin to reduce mortgages over time. To increase the equity buffer for future market changes.
Rule 6 – Purchase quality assets at low price, not poor assets at a low price. A quality asset will stand the test of time. Quality can be measured in various ways, location, amenities, transport, tenant profile, area demographics, affluence and many more.
Rule 7 – Where possible try to get guarantee rent contracts with councils or charities. This is a niche strategy where the property is taken on a lease for 5 years+.
If we follow these rules and think about what the greatest investor of our era has to say on the subject of fear:
“Be Fearful when others are greedy and greedy when others are fearful.”
We have hedged ourselves and thought about the buying process. Reducing speculation as much as possible. So, if we take Brexit for example, others are currently fearful with the uncertainty, this is when we are greedy with buying. Once Brexit is resolved and everyone is buoyant again, this is when we take a step back and re-evaluate our buying.
In closing, by refocussing on the main question, will property lose its value? It becomes irrelevant if you are buying for positive cash flow. The property can go up, down or sideways in value. If it generates an income at the end of every month, it is an asset. This allows investors to be paid their return through the income and long-term value increase.
P.S For people reading this wanting to enter the property market and want to understand how we buy using all of those rules, what strategies we are using in today’s market or want to work with us, head over to https://toortalks.blog/get-involved-in-uk-property/.
This article is to be thought-provoking and never to be used as financial advice. Seek the advice of a regulated financial adviser.