Why property markets are like an elastic band

Many investors who bought their investment properties at the peak of the markets have been very disappointed with the rental returns they have been getting from their newly acquired properties over the last few years. The relatively low rental yields are a short-term effect of the strong capital growth. For well located high growth properties low (in fact falling) rental returns are a normal part of the property boom; a part of strong capital growth markets.

The good news is that our property cycle is moving on and vacancy rates are low throughout the UK - the lowest they have been for years.

Let's look at what happens in a boom....
When it comes to finding a place to live people generally have two choices, they either rent or buy.

The main factor whether people decide to rent or buy comes down to the relative affordability of each. When our economies are strong and there is positive market sentiment (good news about property in the press) and when wages are on the rise, people have more and more money to spend and there is a strong desire for home ownership. People are prepared to pay a premium (pay more in their monthly mortgage payments compared with renting) in order to buy their own home. Therefore, when there is more demand to buy than to rent, as happens in the boom phase of our property cycle, rents will remain static or even fall a little, whereas property values rise.

As property values rise and rents stay the same, rental yields - the return you get on your investment from rentals - become lower and lower. This is why the average rental yield in the UK has fallen from 7-9% in 1998 to 5-6% in 2006.

High capital growth OR high yields?

It's one of the fundamental facts of property - you can only have 2 out of 3 of the following:-
1. High capital growth
2. High rental returns
3. Low risk

You can't have high capital growth and high yields without considerable risk. What this means for investors is that low rental yields are often a sign of very high capital growth markets.

But eventually property values rise so much that people can either no longer afford to buy, or they think it is too expensive to buy, and it becomes increasingly attractive to rent.

Therefore, demand shifts from buying to renting and this has the effect in slowing down price growth and forcing up rents (a bit like an elastic band being stretched.)

As property values falter, fewer investors buy property and this, together with less builder and developer activity, means that there is less rental stock available.

The increased rental demand plus deficiency of rental stock, as is currently being seen in most regions, often quickly breaks through the previous rental price ceilings leading to a rapid increase in rents.

This is the stage of the cycle when rental yields start to increase again playing catch up for the previous few years when they did not keep up with property price growth.

Smart investors are taking advantage of this stage of the property cycle because there is still plenty of negative sentiment out in the market place and plenty of motivated vendors - so there are some great property investments out there for astute investors

If you have equity now may be a good time to get set for the next wave of the property boom.

Do your research, find motivated vendors, make cheeky offers and buy investments below market price. In particular look for properties to which you can add value creating your own capital growth.

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A new psychology on investment

So how do you establish the quality of an investment? Like most investors, do you look at the Growth and Yield combination? Well if you do you need to read this article, because you need to change your psychology on investments. You need to consider leverage capacity. What is this?

Take a look at the following example which should better describe it.
Which is the better asset A or B?

	Asset A	Asset B
Asset Value	£500,000	£500,000
Growth%	10%	12%
Yield%	4%	6%
Growth + Yield	£50,000 + £20,000	£60,000 + £30,000
Net Gain	£70,000	£90,000

Asset B has 20% higher growth and 50% higher yield than asset A, so it must be asset B, right?

Well, not necessarily, we are missing one vital factor - leverage capacity. Let's look at the same example but this time considering leverage capacity.

	Asset A	Asset B
Leverage capacity	80%	50%
My Money	£100,000	£250,000
Finance	£400,000	£250,000
Interest Rate	- 7%	- 7%

After deducting interest cost:

	Asset A	Asset B
Original Net Gain	£70,000	£90,000
Interest Cost	- £28,000	- £17,500
New Net Gain	£42,000	£72,500

Asset B returns a larger net gain than asset A. But we're still missing something! Investment is about return on investment, i.e. how much are you getting back on your original investment.

Suddenly, we see that through leverage asset A has a better return by 13%.

	Asset A	Asset B
My Money	£100,000	£250,000
New Net Gain	£42,000	£72,500
Return on my money	42%	29%

If we put all three together, Leverage, Growth and Yield a very interesting picture emerges.

	Asset A	Asset B
Growth%	10%	12%
Yield%	4%	6%
Leverage capacity	80%	50%
Return on my money	42%	29%

You see, when you put Leverage capacity in the picture, growth and yield almost become insignificant. By using a higher Leverage capacity, you will not only increase the likelihood of a better return on your money, but it may also lower the risk on your investment as well.

Think about it, if most lenders are only willing to lend you up to 50% of an asset, it is because they consider the risk to be high. They are not interested in losing money, so they are basically saying that they believe the value of the asset could easily fall by up to 50%. But when you look at property, you can easily borrow 85% or sometimes even more. What are they saying? Well, they feel that property is such a safe investment they don't believe it would fall by any more than 15% at the very worse.

These lending figures are not simply plucked from the air but are carefully worked out by some of the most respected investment experts. Together with insurance companies they have researched and analysed huge amounts of data to establish accurate future trends, and they are rarely wrong. If they are only prepared to lend 75% of the properties value, they believe the risk to be greater.

Now don't get me wrong, a lower LTV does not necessarily mean that the investment is not as good as one with an 85% LTV. In fact, a higher risk can often result in greater returns. But risk is the key word here. You simply need to asses the risk to work out if it is right for you.

So next time you select an investment property, make sure your first question is:
How much can I borrow against this asset? I guarantee it will make you a better investor.

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"All our dreams can come true, if we have the courage to pursue them" - Walt Disney, 1901 - 1966

"Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish" - John Quincy Adams 1767 – 1848, Sixth President of the United States


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Overcoming self beliefs
by Brian Tracey

The worst beliefs you can have are "self-limiting beliefs." These exist whenever you believe yourself to be limited in some way. For example, you may think yourself to be less talented or capable than others. You may think that others are superior to you in some way. You may have fallen into the common trap of selling yourself short and settling for far less than you are truly capable of.

These self-limiting beliefs act like brakes on your potential. They hold you back. They generate the two greatest enemies of personal success - doubt and fear. They paralyze you and cause you to hesitate to take the intelligent risks that are necessary for you to fulfill your true potential.

For you to progress, to move onward and upward in your life and your business, you must continually challenge your self-limiting beliefs. You must reject any thought or suggestion that you are limited in any way. You must accept as a basic principle that you are a 'no-limit' person, and that what others have done, you can do as well.

When I was a young man, coming from a difficult upbringing, I fell into the mental trap of concluding that because other people were doing better than I was, they must be better or smarter than I was. I accidentally concluded that they were worth more than I was. I must therefore be worth less. This false belief held me back for years.

The fact is that no one is better than you are and no one is smarter than you are. If they are doing better, it is largely because they have developed their natural talents and abilities more than you have. They have learned the laws of cause and effect that apply to their lives and work before you have. And anything anyone else has done, within reason, you can probably do as well. You just need to learn how.

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"Obstacles don't have to stop you. If you run into a wall, don't turn around and give up. Figure out how to climb it, go through it, or work around it."
- Michael Jordan, Basketball player

"It is no sin to attempt and fail. The only sin is to not make the attempt." - Suellen Fried, Author and Speaker

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Meet a fellow Property for Life investor
Keith Roach

Keith is no stranger to the property industry. He runs a successful renovations company helping people to add value to their property on a daily basis. "I decided to invest in property because I know it to be a sound investment. My pension is not on course to make me rich and my other investments are stuck like a dying duck. Property appears to be the only viable investment on the market at the moment."

Like many other investors Keith starting out by attending a well know property investment seminar course. After parting with thousands of pounds for the course he made some enquiries and discovered that many of the same opportunities were widely available through other investment companies without having to pay any membership and seminar fees. One such company was Property for Life. "I initially came across PFL via the internet. I liked the way you could see the deals on the website, it gave me confidence in purchasing my initial property in Oldbury which was so uncomplicated and was such a great deal I decided to buy two." Since then Keith has purchased a further 5 properties through us and is currently sitting on a property portfolio of 10 which tops a million pounds.

Keith notes that with any financial investment there is an element of risk, however with regards to property acquisition this is a risk which can be easily managed. "My wife will tell you I am a seasoned risk taker, however I like to think I manage these risks. I always carry out extensive research in the areas I buy and have spread my portfolio across the UK so as to reduce this risk further. Generally I prefer to buy new build property as it tends to be easier than renovating existing property. I have peace of mind from buying through Property for Life and am able to use a hands-off approach to investing which suits me perfectly."

It's not only the peace of mind Keith enjoys from buying through our company, but also the buying power through syndication. "Buying new build through a company such as Property for Life enables you to purchase more property than you would be able to if you invested on your own. If I had gone down another route I would probably only have 2 or 3 properties in my portfolio at the moment, instead of the 10 that I currently own. The low money down deals are great for minimising capital outlay and I have recommended this route to my employees, many of whom are struggling to get onto the property ladder."

Keith's aim is to secure a comfortable retirement but also to help his children onto the property ladder in time. Keith's plan is to add around 4 properties a year to his portfolio through Property for Life. "PFL is a great company to work with, very friendly and informative, the website allows you to see the investments in black and white, there is no doubt, they have helped me on my way to my first million pounds. I'm looking forward to working with them in the future."

Keith has well and truly caught the property investment bug and is well on his way to financial independence. He is a great example of what can be achieved with research and a little courage and we look forward to a continued relationship with him.

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What's available?

We currently have the following investment opportunities.

UK property

92 Otley Road, Shipley, Bradford, Yorkshire


Overseas property

France
Les Crets, Meribel, French Alps
Chalets du Forum, Courchevel, French Alps
Le Britania, French Alps
La, Closerie, Normando
Val de Loire Resort, Loire Valley, France
Parc aux Airelles, French Alps
Jasses de Camargue, Southern France
Residence des Arts, Paris
Residence les Ecourts, French Alps

Spain
Terrazas, Costa del Sol, Spain
Terrazas de la Torre, Murcia, Costa Calida, Spain
Mar Menor 2, Mar Menor, Costa Calida, Spain
Roda Golf & Beach Resort, Roda, San Havier, Murcia, Spain
Corvera Golf & Country Club, Corvera, Murcia, Spain
Dona Lucia, Estepona, Marbella, Spain
Dona Julia, Costa Del Sol, Spain

Caribbean & Florida
Florida land packages

Brazil
Lagoah Do Coelho Resort, Brazil

Please go to www.propertyforlife.com/property/ for full details and look out for more great opportunities coming soon!

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Upcoming events

Over the coming months we will be attending several exhibitions in addition to our ongoing Property Academy programme. If you would like to attend a Property Academy session please call Laura on 01252 737575 or email laura@propertyforlife.com stating which session you would like to attend and how many places you require.


Exhibitions

September 15th – 17th – The French Property Exhibition, Olympia 2, London

September 22nd – 24th – Property Investor Show, Excel, London



Academy Dates

October 14th – The Montague Hotel, Central London

November 18th – The Cobham Hilton, Cobham, Surrey

December 2nd - The Cheshunt Marriott Hotel, Near Enfield

For further information regarding the Property Investor Academy Programme please follow the link www.propertyforlife.com/whyinvest/education.html


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Do you fancy a spending spree at one of the UK's leading department stores?

The new look Property for Life referral programme can offer you just that.

All you need to do is tell an interested friend about Property for Life and you could soon have a minimum of £250 in gift vouchers to spend in any John Lewis or Waitrose store.

Quite simply, for each person introduced by you who then purchases a property through us you will receive a cool £250 in John Lewis gift vouchers. If they purchase more than one property you will receive £250 in gift vouchers for each property they purchase. You could soon be well on your way to that spending spree.

Remember, the more people you introduce the more chance you have of grabbing at least £250. So why not tell your friends and family about Property for Life? Make sure they register on-line at http://www.propertyforlife.com/register. When registering it is important that they select the recommendation option in the 'How did you hear about us' section of the form and include your name in the 'other' box.

Please note that the referral programme is on a per property not a per person basis. Please see http://www.propertyforlife.com/services/referalprogramme.html for further information.


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