Mentor Moments #3-High Risk=Fail

For a long time now I have noticed that many new investors and some seasoned, seem to still get swayed by the various gurus into using some high risk strategies in their property portfolios. I believe many do not realise that they are high risk.

So today, for the mentor moments session, we will take a trawl through the various strategies so you can see clearly what some of them are and why they are high risk.

Listening to all the guru’s telling you to set up a ‘system for buying’ without showing you the other end of this tunnel vision- ie; what will you do with them long term is asking for trouble. Many investors are fixated on the deal and not the exit. Which is exactly why so many have been caught out in the latest banking crisis.

Everyone assumed the flow of lending would always be there. Of course, this was never the case, and a housing bubble burst was inevitable, it really was just a matter of when. Here are y top 8 high risk strategies.

1. Remortgaging your property to take out all equity

Why? If the market drops, your property will be in instant negative equity. Which isn’t a problem in itself, unless you wish to sell or raise finance on it before prices rise again. It leaves you high and dry with no leverage. Also, if rents drop in the burst, like they did this year, then you are really in trouble. You will have to find the cash to prop up your investments until the storm subsides. Many landlords have only been saved due to the low interest rate. If you have many properties the problem is compounded.

2. Having A Portfolio Of High Loan To Values (LTV)

LTV is an important factor in your mortgage set up. If all your properties are at 85% LTV then, this is not enough equity to sustain a property crash. The thing about crashes, is that after an intense period of hot property prices, property will always fall back to an ‘affordable’ level. What is the average wage? And, what multiple of that do people have to earn to own property? The property market is not driven by investors, we are merely a cog in the whole mechanism.

3. Having Only One Type Of Investment

Diversification is a much safer way of setting up your portfolio. By that, I mean a spread of different types. This does not mean a spread of property nationwide. There are lots of landlords who built large portfolios on the ‘daylight bridging’ method of mostly the same type/ value of property who are currently trying to sell them as whole portfolios. Last week alone I saw 4 portfolios for sale. One from the biggest landlord in the UK who owns 900 properties, who admitted that the interest rate drop saved him.

4. Using Options As A Replacement For Mortgages

I have written before about the newest fad in property- option contracts. This has taken over from the old “No Money Down & Sale and Rent Back” as top favorite of the marketeers. The lack of funding availability has caused investors to look at the use of options in their strategy. Whilst they are not a problem in themselves, options can be considered high risk because we are dealing with an unknown quantity. In other words, we have a government who is on a regulation frenzy right now. Options are long term contracts as a rule, where the investor uses a specialised contract to take over a property rather than to finance it with a mortgage. It would only take one flaw in a badly written contract, or one safeguard not met, or a regulation to change for the whole deal to crumble.

5. Off Plan

Make no mistake, off plan is THE highest risk other than large developments. Off plan is speculating. Or to put it another way-gambling. You will be gambling that the state of the market will work in your favor for the length of time for which the deal is out there. A two year deal for example, speculates that the market will remain high until the deal completes. You are legally obliged to complete, even if values fall.

6. Off Plan Foreign Property

This is the mother of all high risk strategies. To take on these deals you have to know the economics of the country you are buying in, understand the laws, liabilities, rental values, local competition, long term stability, funding options, supply and demand factors,and local economy. Many markets are hugely oversupplied. Valuations are often inflated by the developer in order to ‘give you a discount’. Under this banner also comes emerging markets. One such was Bulgaria. Bulgaria has suffered huge drops in value. Emerging markets are THE biggest in risk factor bar none.

7. Trusting Someone To Invest For You

Investing in property should not be left to someone else. Giving someone huge lumps of cash to play with on your behalf is a high risk strategy. Most folks would think of this as being the complete opposite too. They have the attitude, ” I don’t know anything about property so I’ll just give my money to someone else who does.” What? It does not matter how long companies have been in business, there is always a possibility things can go wrong. Businesses get caught out by recession and economic drivers all the time, why should this field be any different? Think very carefully before entering into this type of arrangement. What do you really know about the company or the investment itself? And, why do you want it? Are you being seduced by media hype or a glossy brochure?

8. Having One Type Of Rental

If you have all students for example in your properties and something happens in the market to change the supply of that type of tenant, you will be forced to look for new ways to rent your properties. Always look to diversify what you have in your portfolio and what you do within it.

Summing Up

So to sum up then, it is wise to learn as much as you can about your chosen form of investment. Try to keep LTV’s lower ( banks are forcing this at present anyway), keep some equity for use later if needed or as a get out of jail free card. Diversify your portfolio and be sure to do lots of due diligence on each chosen area. Keep away from high risk strategies until you are more confident about what you are doing. Gain as much knowledge as possible from as many sources as you can so that you can obtain a more rounded view of the markets. Weed out the lemons in your portfolio and reassess it every six months to a year. Property is about profit. Don’t take on something which just covers itself.

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