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Property Finance:

Investment INDEX: | Articles | Cash Flow | Due Diligence | Example Deals | ISA | REIT | SIPP | Valuation

The task of the property investor is twofold: (1) to find property assets to invest in which are undervalued, i.e. they are worth more than they cost, or assets which are fully valued but have the potential to have value added and to appreciate in value over time. (2) to decide how to raise the necessary cash.

In efficient well functioning markets assets will have a value exactly equal to the market price. But property markets are seldom efficient (meaning everyone has full access to all relevant information) despite continuous activity and even the professionals find it difficult to put a true market value on some properties.

Not only are there so many variables in types of property, condition, location, amenities and prospects for the area, supply and demand, planning use permission etc, value to one investor is not good value to another. For example, a shopkeeper may be willing to pay well over the odds for the shop next door to expand his business. A surveyor could put a market value on the standard type of shop based on comparable sales and rentals in the area, but he could not predict the shopkeeper next door bidding up the price because of the special value to him.

Investors must always look for properties that are worth more to them than anyone else: because they know more about that type of property, how to add value, how to manage it more efficiently, their knowledge of the area and supply and demand. The property market is not efficient because (1) information like this is scarce and (2) time is a big factor in property.

Unlike stocks and shares, which you can sell instantly, property can take time to refurbish, to sell or let; weeks, months and even years in some cases. This represents risk and uncertainty to the investor, so those with the most information and time (which is really finance) can reduce their own risks.

Those investors who have done their homework, who have researched their market, have learning and experience on their side, and have finance available now, can usually take advantage of these information and time factors. When sellers are in distress they will usually accept a lower price for a quick sale.

It's a sad fact of life that economics changes fortunes over time, some for the worse, some for the better. The 4 D's - death, divorce, debt and destitution, whilst representing the economic demise of some may be a real economic opportunity for others who are prepared for risk and can act quickly.

Auction sales generally mean lower prices than on the retail market, but they represent higher risks. Here the information and time factors are crucial - the property auction investor must do his homework (due diligence), or already have enough knowledge and information to know the level of risk he takes, plus the time - immediate finance which is sufficient to see the project through refurbishment, sale or letting, with an adequate return at the end of it all - the risk premium.

Here are some Example Finance Deals:

London - Purchase of a vacant retail lock-up shop on a London high street at a price of 105,000. Here the applicant borrowed 63,000 to acquire the site from auction and convert it into a grocery business. The applicant had two existing sites and used the mortgage to expand his business in the local area. A rate of 4% over LIBOR over 20 years was obtained, with the applicant using self certification supported by management trading accounts.

See More Example Finance Deals

Information here is general only & believed to be correct, though we cannot guarantee it, nor do we accept any liability if you act or fail to act on this information. Always seek professional advice before making decisions. Investments can go down in value as well as up over  time.