Five Ways to Make Money in a Property Crash
Let’s face facts, we are still at the start of a property crash, and if the 1989-1994 experience is anything to go by, then we could have another 4 years to go before things bottom out [that was not a prediction, by the way, this one could be shorter or longer.
The crash is being cursed by some, particularly those who paid too much for their properties in the final months (or years) of the last boom, but greeted with relief by others – not only first time buyers who want to get their feet on the ladder – but by savvy investors who are starting to buy again.
So, what are some possibilities for those hoping to make money over the next few years? The following, of course, hinge on the market going down further – If you believe that, then consider them – If you think the market’s going to bottom out quickly, then some will NOT be appropriate.
1: Consider selling some of your portfolio. If you bought a while ago, and have decent equity (ie – unless you remortgaged to stupid levels), then it may be worth taking advantage of the much lower rates of Capital Gains Tax that we in the UK now pay on property. Until April, we used to pay between 24-40 per cent depending on how long we had held – now we just pay 18 per cent.
Of course, you will not get what you would have done 6 months ago, but in many parts of the country, property are still moving fast if priced about 10 per cent below the competition. Clearly, it is worth having some conversations with your local estate agents, because in some areas, I am getting reports that sales have to all practical purposes, stopped completely (one agent reported zero sales in the last three months.)
The question is, as ever, what you would get if you sold, vs. what you would get if you held. If you have a £50-100k in equity in a property, and marginal cashflow, then it is possible that you could use that equity far more effectively by selling, paying the CGT (or, rather, putting the CGT you would owe into an interest-bearing account until January 2010 when it becomes payable), and using the equity to either buy now (see tips 3-4) or just wait!
2: Consider Sell-To-Rent (STR).
This is a more dramatic version of selling some of your portfolio – it is when you sell the house you live in, and move into a rental place, in the hope that you can buy back something similar later in the market cycle. Obviously, not suitable for those who want to guarantee they can buy back the same house.
Personally, while I have sold some properties this year, I would not consider selling my PPR. The reasons are not economic in my case – I am choosing to value continuity of schooling for my children (we live 2 minutes walk away from the gates) and general lack of disruption over the profit that I could probably make by selling, moving into a small, rented, place, and buying another 5-bed, 3-reception room house in a couple of years time.
Others however, particularly in London, have sold up and gone into rental places already, because they are convinced that they will lose a phenomenal amount of money if they stay put!
3: Go into your estate agents, and offer 20% less than the asking price on any property you think you can find a tenant for – the vast majority of buyers will tell you where to go, but agents are no longer acting shocked and receiving these offers, and more buyers are considering them.
Actually, I do this no matter where we are in the market cycle, but the number of swear-words I get in reply has reduced dramatically recently, and estate agents are looking at me with looks of gratitude (that they are getting any offer) rather than looks of shock.
4: Adopt more BMV (Below Market Value) techniques – look for buyers who need to sell quickly, and put together rescue packages for them (if they make sense for you.)
I have gone over this in detail in past issues of the newsletter (look at http://www.yourpropertyexpert.com in the Articles Section – there are four called Below Market Value – Parts I… IV)
The difference is that the techniques are even more effective now than they were back in December 2006! It is certainly time to review those techniques and see whether you have the time to put them into practice now. (None of them are passive – all involve a lot more time input that agency-related approaches.)
5: Consider using options – these take a lot more work, and are NOT suitable for everyone, but can be very worthwhile in the current market.
In summary, your tenant pays a higher-than-market rent in exchange for having a right-to-buy at a predetermined price (say, current market price) for the next 2-3 years. They are, of course, a cashflow strategy, and prevent you selling to anyone else in that time period.
The two biggest issues with such things are 1: that it can be hard to find a lawyer who has dealt with them before – you want a lawyer with some experience of commercial property rather than a pure domestic conveyancer, and 2: that most letting agents just cannot find tenants who are looking for this kind of thing – you need to look at either approaching existing tenants, with an offer to up their rent in return for an option – or start placing your own adverts. This is an area where Google Ads and local newspapers can help.
The bottom line, though, is that for active property investors, the crash we are now in is a fantastic opportunity. Not only is the current market rewarding those who are willing to find the right deals, but it is locking out the Saturday-Afternoon-Landlord set – those who believed in the Myth of passive income.