At The Start – 12 Noon

The clock strikes 12 noon – but there’s no gong! At 12 noon hardly anyone knows that this area is a gold mine. It’s a buyers’ market. No one wants these properties and there are plenty of vendors desperate to sell. You walk in to the estate agents saying you want to buy and they roll out the red carpet! These agents have become accustomed to only vendors walking in to their office wishing to sell but at last they have stumbled across a buyer! You, with your hard earned cash and the bank’s money, want to buy big time.

So you ask the agent what he has got. He then proceeds to pull out of his filing cabinet details of over 20 properties all yielding in excess of 12%! You ask him what the areas are like and he says they’re fine. You’re not so sure. You are always told never to believe an estate agent. You flick further through the details and you’re seeing studios and one-bed flats yielding in excess of 20%.

You ask to view all of the properties and to your surprise he says no problem. He then books half the day to show you all the properties. A lot of them are empty as no one wants them as investments and some of the areas look a bit rough. However, you can be assured that it is only a matter of time before other investors follow and regenerate the area to a solid rental area.

Now you have to be a brave man to buy when it’s 12 noon. However, if you are brave, you will make the fortunes I have done as you have understood the concept of supply and demand. I had an email from someone who asked my advice. He was concerned that there was an oversupply of housing in Hull, East Yorkshire, and that if he bought a property it would not let out.

I asked him ‘well, what would it be like if it was the other way round – there was an under-supply of housing?’ He would not have been sending me the email as the property prices in Hull would be much higher and thus not worth considering. So you have to go where there is low demand for property and wait for the demand to rise. And you can be sure it will rise as the only way is up.

12 Noon – 3pm

Yields of 12% – 20% are unsustainable. If you were to find such a place that remained at this level you would be silly not to plough all of your savings and future income in to this area. This is because you will make a solid £50,000 out of every £100,000 invested if you geared up and bought wisely. If you took a risk you could make far more. However, a good thing never lasts forever. I will show you how it goes from 12 noon to 3pm. That is to say that the area goes from +growth and +yield to +growth and – yield.

Let’s just say that it is not only me that has found this magic area that is yielding in excess of 12%. So I buy as much as I can afford from every estate agent in the area. As soon as something comes on the market that meets my criteria I buy without hesitation.

It won’t be long before another professional investor finds this area too as there a number of professional investors looking for these exact areas! Some professional investors have a high buying quota, sometimes in to the hundreds. I have a high quota, typically around 50, but there are much bigger sharks out there. So when other professional investors get wind of this magic area a bidding war commences.

It starts with properties being sold within 24 hours of the property coming on to the market at full asking price. This sends signals to the vendors that they are selling their properties too cheap so they increase their selling prices. Usually the vendors underestimate how much to put up their prices by (due to the market being stagnant only several months before and vendors simply can’t believe that prices can get any higher) and professional investors pay over their asking price.

This is because a professional investor has set criteria to buy to. For example I have a criteria of buying at 12% yield. So if I see a property for £30,000 and I know it will still yield 12% at £35,000, and it’s a competitive market, then I would be silly not to offer £35,000 so as to ensure that I got the property.

What we then see is a rapid increase in prices. It’s all about who will accept the lowest yield. The market quickly changes from a buyers’ market to a sellers’ market. All the time this is happening the owner-occupiers – typically first-time buyers – are trying to get a look in. They are even struggling to get properties as the investors are snapping them up before they’ve had a chance to even look at them.

Now, there are professional investors and owner-occupiers bidding in this market. Prices have risen dramatically. The speculative investor now gets wind of what has been going on. He has heard the stories of dramatic price increases and properties selling for over their asking price. The speculative investor is now thinking that they can buy a property, hold for a year or two and then sell at a massive profit. Let’s welcome the speculative investor as a new entrant to the market.

The speculative investor is not the most clever of investors. It’s unlikely that they do this as a full time profession but as a secondary source of income to their full time job. They may never have bought a property before apart from the one they live in (is this you?). This is where the errors start to occur. The speculative investor is not familiar with net yield and overestimates what the property will return. They overestimate the rent, underestimate the void periods, mortgage payments and repairs.

However, blinded by the historic growth the speculative investor will push prices beyond the reach of the professional investor (as the professional investor now knows at that price it is a negative yield i.e. the property will take money out of his pocket) and out-bid the professional. Say goodbye to the good times because now at this point – the clock strikes 3pm.

Looking at this as a sweeping hand of the clock: