This guide to armchair Property investing explains:
- what is property armchair investment
- profile of a typical armchair property investor
- types of property armchair investments and risks associated with it
So you want to become a Property Armchair investor?
What is property armchair investment?
The concept of armchair property investment has become popular in recent years. There are two types of property investors – an active investor with time and skills and a passive investor who is hands off, time poor but has access to cash funds.
Property armchair investment or passive property investment are suitable for cash rich, time poor investors who are seeking better than returns on their bank savings. In property armchair investment, there’s a cash rich but time poor investor and a property co-venturer who does all the work of finding a property, renovating it, letting it or selling it. The property armchair investor receives a return on the money as well as property as a security.
Profile of a typical armchair property investor
A typical armchair property investor will be either be a High Net Worth Individual or a Sophisticated Investor. A High Net Worth Individual meets one of the following requirements:
- Having an annual income of over £100,000 or more during the year immediately preceding the date of self-certification; or
- Having net assets of £250,000 or more – not including their primary residence, rights under an insurance contact or pension or termination benefits.
A Self-Certified Sophisticated Investor will meet one the following:
- Being a member of a network or syndicate of business angels for at least 6 months before the date of self-certification; or
- Having made more than one investment in an unlisted company in the last two years before the date of self-certification; or
- Working in a professional capacity in the private equity sector or financing small and medium enterprises (SMEs) in the last two years before the date of self-certification; or
- Having been a Director in two years prior to self-certification of a company with annual turnover of £1 million or more.
Types of property armchair investments and associated risks
There are following types of property armchair investments:
- Crowd funding platforms
There are a number of crowd funding platforms where you can invest as little as £100 into property. According to Financial Times, there are a number of risks for example:
- Crowd Funding firms can borrow against the property should the income from the house not cover the costs due to voids. This is a common scenario in buy to let;
- There are risks associated with platforms and potential for scams;
You can read Financial Times’ full article on risks associated with property crowd funding here.
- Off plan developments
Numerous companies offer off plan development properties in the North supposedly at a substantial discount – a term that is used often is below market value. You put up the money and buy the property in an area that may be going regeneration but because there’s high unemployment nobody can afford your 2 bed apartment at £800 per month when they get a 3 bed house for £500 per month.
Whilst developer may give you two years’ guaranteed rent, it will probably be funded from an inflated valuation that there are no comparable for. After 2 years you are on your own, and your property may need new paint and possibly updating kitchen and bathrooms, as it was let to tenants who didn’t care.
Then there are another 50 landlords trying to rent their properties all at the same time in the same development! So rental prices come down sharply and you’d be lucky to cover your mortgage payments, ground rent or service charges. There’s no such thing as armchair property management if you have buy to let properties, you will know that you get the call first when boiler breaks down, tenant does not pay the bills or leaves the property with no notice.
- Private Joint Venture Partnerships
In a private joint venture partnership a cash rich investor provides the funds and another partner does all the work of getting the property, renovating and selling it.
Let’s look at an example.
Tom is a builder with 30 years’ experience. One of his staff has inherited a property and wishes to sell it quickly to settle the probate and distribute proceeds between beneficiaries. Tom speaks to James, a successful businessman who is looking for a passive return on his money. James lends Tom the money to buy the property, refurbish it and once sold, James gets a return on his investment. In the interim, the property is bought in James’ name so he has full security. The key here is that property has to be purchased at a substantial discount to factor in cost of refurbishment, uplift in value and a quick resale on open market to an owner-occupier.
This is a really simple example but it demonstrates how a joint venture partnership in property works between a cash rich investor and someone with skills to bring a deal to the tables, that perhaps a cash rich investor may not have time, skills or inclination to bring about.
Of course, there are risks involved in this type of private joint venture partnership such as:
- The build costs can overrun because of unforeseen circumstances such as rotten floor joists
- The build can take longer to complete because Tom was offered other jobs and this project was delayed
- Tom may have overpaid for the property and under-estimated cost of works – a common mistake as seen on BBC’s Homes Under the Hammer
- The profit may take longer to realise because end value was over optimistic and properties rarely achieve the asking price
- If James is married, and his wife is looking for a divorce, she may have a claim against the property as it is not protected leaving both Tom and James with nothing.
- Property Trading
Property trading or flipping a property involves buy an off-market property direct from a motivated seller and then selling it straight on without doing any of improvements to the property. Property Saviour buy properties from motivated sellers and then sell them on in auctions at a profit allowing funds to be released to go again.
Timing is of the essence. In property trading, you have to time your purchase usually a property is bought within 4 weeks or quicker, and placed into next auction. Property auctions are seasonable and therefore, there are no auctions in January, August and even December. Therefore, from buying to selling the whole process can take 3 to 4 months. The minute hammer falls, contracts are exchanged and buyer has 28 days to come up with remaining 90% of balance of risk forfeiting their 10% deposit.
Many sellers do not have the patience to wait 4 months or know how to market a property correctly to achieve the best possible price. Of course, there’s no guarantee that a property will sell in an auction. This is of course a risk. This leads us nicely on to risks to be considered:
- An attractively low guide price will get buyers excited for example, if a property owes you £45,000 then guiding this property at £35,000 to £45,000 with £45,000 being the reserve will ensure that it achieves best possible price.
- Picking a poor auctioneer could affect your result. This is a common mistake by sellers persuaded by estate agent or auctioneer to place their property into a sub-standard auction room. Auctioneers with 80% or more sold properties must be picked – and picking an auctioneer that’s most prominent and well marketed.
- Placing a Durham property into a London auctioneer room may or may not achieve a better result than placing the property into a regional or local auctioneer. This is because many of local buyers will be able to travel to their local auctioneer to bid rather than 3 hours’ train journey to London. Whilst you can bid online, many property investors are traditional buyers and prefer to look auctioneer in the eyes when buying.
- Not factoring in the cost of selling a property. Get buyer to pay your selling costs is a sensible idea and agree a reduced fee with auctioneer upfront and adding that plus legal costs to the Special Conditions of Contract for Sale. This ensures that this risk is taken care of.
- Not knowing your numbers. There’s nothing worst than overpaying for a property and expecting it to make a profit – without doing the work. After all your profit should be locked in when you buy. Having insider knowledge of recent sales in the area as well similar properties sold in auctions and then factoring in your purchase price will ensure that this risk is mitigated against.
- Not having a Plan B and C. Of course your Plan A is to sell the property at auction. But what happens if it does not sell? Always have a Plan B to refurbish the property and sell or Plan C which is to refurbish and refinance the property.
It is important that when we buy property, we buy it ethically and offering seller a solution that meets their needs of providing certainty of sale and speed that sale will complete. The sellers know that whilst they could have achieved a higher price for the property if they waited longer, it did not suit their circumstances because they needed a quick sale.
The ultimate aim is to turn each seller into a raving fan so much so that they are willing to leave a video testimonial. When you are more prospects, they can talk to sellers who have sold their properties to us and get a feel for 1st class service we provide. This social proof is powerful enough to turn prospects into clients.
Our core values are honesty, transparency and integrity. If these values resonate with you and you are a High Net-worth Individual (HNI) or a Sophisticated Investor then perhaps you’d like to find out more about property trading? You are welcome to call us on 0113 320 6700 or email [email protected]
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