1. Price: at least 20 per cent below the market value
In property you make your money when you buy, not when you sell. With any market in the world, you’ve got to buy cheap and sell high – that’s how you make money. When you sell you’re much more likely to be at the mercy of the marketplace. Understanding this point is the crux to making your first million.
You’ve got to buy at the “right” price, which I would say is 20 per cent below market – unless you think you can add huge amounts of value to it later. You must be certain before you make a move that what you’re going to pay is substantially less than the real market value. Be prepared to renegotiate any deal that is offered to you.
You need someone who is going to sell you a house for less than it’s worth, a motivated seller. The more motivated the seller the better chance you have of getting a bargain. Unfortunately a lot of motivated people are hard luck stories where they’re just desperate to sell, but to be frank someone’s got to buy it, so it might as well be you. I always deal fairly because I believe in karma. I try and get a deal that works for them and that works for me. I’ve walked away from deals with people who have put me in a difficult position.
2. Location: the peripheral area with potential
As a developer location should take on completely different meaning; it’s not about the best part of town, its not where everything sells the most – those areas are already up there and it’s very hard to eek out a profit. You’re looking for locations that are up and coming, places where a new company has moved into town, a new tube station has opened, a new transport link or a new supermarket. Look for areas that are starting to get demand. One of my tips is look for lots of skips – that’s where people are moving in and refurbishing. Also look in the peripheries of good areas are great locations, people who can’t afford to live where they’d really like to often settle for what’s next door. But you also have to look at the bigger picture and what’s possibly happening in terms of planning. Then if you do find a great location you also have to look at the negatives; is it still going to be a great location in a few years time?
3. Market: know who is going to buy your property
There are two sides to the market, there’s the macro market, the big market. Then there’s the micro market, the smaller picture. The big picture is very, very important in terms of what the world is doing in regard to interest rates, employment, inflation, the banking world and the financial sector. I call the macro market the sea and the micro market is the boat on that sea. So your micro market is lifted up and down with the tide of the macro market.
The macro market is important but the micro is even more so, that’s the market on who’s actually going to buy on your street. Who’s actually going to buy these properties, what’s happening on the street next to you, what’s happening next door, how are the prices working in your market? Concentrate on the profile of potential purchasers within your area – this is incredibly important for understanding who your market is and who is going to buy your property. The micro market is absolutely crucial, if you get that boat right it can outride any storm on the big market.
Even in a falling market there are more opportunities because people start to get nervous and panic sell. They become your motivated sellers. Of course a market downturn is an opportunity as well as a challenge. If you go in at the bottom, you’ll rise that much further when the market recovers its vim and gusto.
4. Adding value: find a wreck
The only way you can be sure of making a substantial sum out of each of your projects is by making it worth more than it would otherwise fetch, and you’ll only be able to do that if the property offers scope for improvement. Remember – you are looking for a diamond in the rough. Look for the worst house in the best street and make sure you are adding value as the market goes down. You want to either be doing a loft or basement extension, a conservatory or a refurb. Make sure you get planning permission; even just knowing you can get planning permission for a property can increase the value. This agreement is potentially very powerful and can make you a lot of money, often without lifting a paintbrush. Before you cut your deal, you’re going to have to find out what will be allowed. This means consulting the library, the town hall officials and council staff to investigate planning applications.
5. Timing: time is money
In property time really is money, you’ve got to get in, get out and get it rented. Then on top of that you’ve got to do your legal diligence, your financial diligence, get the right builders, market the property properly, and then sell it or rent it as soon as possible. You’ve definitely got to understand how the whole timing scenario works, that’s really, really important, more so today than ever.
As much as you might try and time your purchase to make the most of the macro market, it’s much more important to make it work with your micro market. Plan a clear schedule so that everyone knows where they stand, and don’t spend too much time weighing up the risks, once all five essential boxes have been ticked, close the deal as fast as you possibly can!