Property Investment Guidance

Property Stories: ‘I purchased in the wrong area and right before the 2008 financial crisis’ 

In this series we recount real stories, collected from our team and our clients, about issues to be aware of when buying properties outside your hometown.

This week we chatted to our delivery manager Ty about his experience of purchasing a buy-to-let property in a city he wasn’t too familiar with, 6 months before the 2008 financial crisis. It was a case of wrong time, wrong place – and in hindsight, he said it really wasn’t worth it. 

The Background 

Back in 2007, and at the height of the property market boom, Ty was looking to diversify his property portfolio. His girlfriend at the time lived in a city that looked like it had promise, and he had visited briefly a couple of times. Ty said “There was a lot of development taking place in the city, and I felt sure it would be safe for me to buy there.

He found a property quickly, and though it needed quite a bit of work to get it into a good state, he wasn’t too worried as he’d found a brilliant mortgage deal from Northern Rock. This meant he had amount of money left in his pocket that he could put towards the works. “The 125% loan-to-value mortgage deal meant I could borrow 25% more than the value of the property without a deposit and borrow up to six times my income – it seemed like a complete no-brainer” he said  

 

The Problem 

Six months after purchasing the property, the financial crisis hit.

After speaking to local estate agents and understanding the prices in the area, I discovered that I’d bought a place in the worst area of the city – no wonder the sellers accepted my first offer!” Ty admitted. Not only had the property price dropped by 20%, but to make matters worse the Government also had to bail out Northern Rock. This meant his buy-to-let mortgage was taken over by a new state-owned business called Northern Rock Asset Management and he was forced to pay crippling rates of interest on the amount he’d borrowed. When all was said and done, his yield was much lower than he’d expected and he was lucky if he made any money at all from it.   

 

The Impact 

The property price remained at rock bottom for a number of years and Ty lost a lot of money as a result of his expensive mortgage.

I’d been monitoring the price of the property and only after 10 years was it worth the amount that I had paid for it in 2007. I had to get rid of it quickly because it was weighing the rest of my portfolio down!

Ty didn’t benefit from any capital gain on the property, had been paying higher fees on his BTL mortgage and was no longer dating the girl who lived nearby It really was a case of lose, lose, lose!” Ty joked. 

The Lesson 

Ty’s been burnt by the experience of investing in an area he wasn’t so familiar with, and told us he if he had known what he knows now then he would have found someone who knew the area that could advise him before he rushed in to buy. 

Top tips to consider when investing in property outside your hometown

Speak to a good independent mortgage broker when looking for your BTL mortgage – they’ll help you figure out what’s available but also which one is best suited to your circumstances. 

– When browsing properties, it’s worth trying to negotiate the price of those that need a lot of renovation. Once you’ve spruced them up, you can add a lot of value which will protect you if you need to sell.  

Consider the rental returns you’ll get as well as potential capital gains. Towns with good commuting links that are popular with families or have a sizeable university are a good bet for both of these. If it’s just the rental yield you’re looking for then you could be missing a trick. 

Get to know someone who lives in the location where you are looking to invest. There are a lot of things that the locals can tell you about the area which may not be common knowledge. 

Understand your model and buy accordingly – If you are renting to families, ensure that there are good school and a high street around. If you are renting to commuters, make sure you buy somewhere close to transport links.  

 

If you want to start investing in property but aren’t sure about investing in an area you don’t know,  why not rewatch our latest Property Investment Masterclass? Through this on demand webinar, we go through the areas we choose to invest in and how you can too.  Watch it here 

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