A lot of investors simply rely on the price given to them by the agent or developer. But developers can overcharge, they over-design buildings in a bid to win awards and they are forced to overcharge for the buildings simply to break even.
Some savvier investors may base their investments on a search on one of the many
internet property portals to find the average prices for similar properties in the area.
The more experienced might also use sites like Zoopla to see how properties have been amended, re-listed, re-valued since their original posting.
However, these sites only give us the values that the vendors and the estate agents think that the property is worth. This isn’t reliable as the vendor clearly wants to
obtain the maximum price, a strategy supported by the agent who normally works
on a commission basis.
There is only one way for investors to ascertain a property’s value which is truly safe and that is to find a properties residual value. The residual value is based on the amount of net rental income it can generate – anything above 6% looks like a
For example, if a property brings in £6,000 rent per year after all costs have been
taken in to account, that £6,000, based on a 6% net yield would give the property a value of £100,000.
That £100,000 would be the Residual Value of the property and it should be the focus for every investor going in to a deal. But at the minute investors ignore the residual and rely purely on the capital growth of a property which is hopelessly optimistic considering the market place at the moment.
Despite the residual value of a property being £100,000. The investor may pay £125,000 believing that the value of the property will increase and they can sell it for
£150,000. But then if property prices start to fall slightly, he’s suddenly in
negative equity and then the only price someone would be willing to pay for the
property is the Residual Value and the investor will have lost £25,000.
The key to real successful and safe investment is how you derive the 6% net yield which you have used to establish the property’s residual value. By working out the 6% net yield using below market value rent it means that the investor will not have
to contend with tenants struggling to pay rent. As rent continues to rise, there will always be a demand for properties charging below market value rent.
First time buyers will be queuing round the block to save a £100 per month, yet the
investor is still left with a 6% net yield because they have bought the property
at residual value.
It also means that there will always be savvy investors looking to purchase a property at the residual value because they are not only purchasing a strong income stream, but they are purchasing a property at a price that will not be affected by market fluctuations or crashes.
If the property market was to fall again then the investors who have invested
in residual value will be protected from the fall in house prices and when
houses start to get repossessed and more people are forced in to the rental
market, then their yields will go up even though they are still charging below
In the end, everybody will be relying on residual property valuations. It’s inevitably in the future but there’s no reason why investors can’t take advantage of them now.
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There are lots of things to consider before moving overseas, to make sure that everything goes well.
Find out if you get free health care. You should do if you’re in the EU, but it may not be as all-embracing as on the NHS. In some countries, you’ll have to go private for all your treatments.
Decide if you can afford to keep the place for your exclusive use.
Will you need to rent it out, to make ends meet?
Find out if your pension will freeze, ie not go up automatically with
inflation. It might do, if you move outside the European Union.
Choose between living with the locals (for the authentic experience), or with
expats (good if you don’t speak the language).
Think jet lag and journey time – how many hours’ difference between your
foreign home and GMT? Or BST, for that matter?
How much tax will you have to pay? Will you be better off if you are
classified as a tax resident of the country you have moved to? Or not? Will
you even have a choice?
Be wary of burning your British property bridges. Where will you live if your
foreign life goes pear-shaped and you have to come back to the UK?
Work out how dependent you’ll be on low-cost airlines. What happens if they
stop flying to your overseas location?
Study the local inheritance laws. Can you pass on your property to family
members, and if so, how much tax will they have to pay?
Do your currency sums. What happens if the pound plummets – or soars?
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