Chapter 1: The First Questions Are For You
This is an extract from the ebook How to Really Buy a Property.
What's covered in this chapter
- Why "Is now a good time to buy?" can't be a simple question;
- What to take into account when deciding to buy or to rent;
- When property may not be the best place for cash;
- Why some people buy no matter what the property market is doing;
- Where you should buy.
If you are going to buy a property you are an investor, even if you are buying your own home. You are probably about to take out the biggest financial commitment of your life and so to some extent you are investing in your future.
If you are looking to sell your current home and buy something larger your financial commitment, and risk, is about to get even larger.
Many might say they are only purchasing because they need a home but without a doubt they would not want its value to be half the buying price when they come to sell.
You may be tempted to think about asking someone "Is now a good time to buy?" or "Where do you think would be the best place to purchase?". There are plenty of people around who think they know the answer and have speeches ready but the truth is that the first questions should be to yourself.
That's because a professional in the real estate business would not be able to reply immediately to your questions. They would need to know a great deal more about your personal circumstances before offering some sort of sensible guidance. It's better that you think about these questions now.
Should I Buy or Rent?
Even if you believe property prices are going to move down this does not always mean you would be better off to wait. That kind of thinking leads to a common error made by those renting who forget to take into account their current costs while deciding whether or not to buy.
Here is a simple example. A couple are renting for £1,500 per month in a property worth £250,000. They believe property prices will move down 10% over the next two years so they will wait until the value is £225,000. But in the meantime they will spend £36,000 on rent. A mortgage could have cost them about £12,000 over the same time period.
If they are right about price movements then by renting they have lost £24,000 (£36,000 - £12,000) and saved £25,000 by not buying. Overall they are better off by only £1,000 and all this time they have not been in their own home. If they are wrong and prices move up their loss is substantially more.
Should I Invest my Cash in Property?
There is often a great deal of competition between property investors and stock market dealers, each wanting to show that the market they work in is the best for making money.
If you have cash and you are simply looking for an investment, not a home, then property is not always the best option. If you know and understand the currency markets, for example, maybe you should put your investment there. If you have a good idea about the way shares rise and fall it could be that your funds would give you a better return on the stock market. Do not for one second believe making money in property is easy. As with stocks, currency exchange or anything else you will need to be educated and you will need a little luck because there will always be events, beyond your control, that will change your fate for better or for worse.
But if you don't have cash the property market offers a strange doorway. It is not possible to go to a bank and say "I want to invest £250,000 in the stock market, can I borrow it please?" but it is possible to do that with property, wierd though that is.
Property offers investors a chance to borrow sums unimaginable for other schemes which also means you can invest far more than the cash you have available at any point in time. However, as always, the cost of calculating any return must include the interest rate that you need to pay on the borrowed sum.
What is My Motivation to Buy?
The press and the media are obsessed with property prices. The hankering question asked month by month revolves simply around whether or not prices will rise or fall and for many buyers this overwhelming storm clouds their own considerations.
In reality many people want to by a property because they want a home, and usually for the long term. A place to put down roots and possibly an asset to pass on to their children. The bricks and mortar are not a financial tool that they plan to use within their lifetime and when they come to retire the mortgage will be paid off and they will have somewhere safe, and free, to live.
It will be four walls that they can decorate the way they want, a kitchen they can replace, a bathroom they can re-tile, a boiler they can upgrade. It is freedom.
If this is your motivation then, no matter what is happening in the market, now is a good time to buy.
Should I Buy in a Falling Market?
The assumption is that when property prices are moving down only the insane or the risk hungry investor are out buying. But in reality falling markets are often seen as a window of opportunity for those looking to upsize. Even though their current property is worth less, so is the type of property they are looking to buy, and the cash difference is actually lower.
In this example we'll imagine a couple living in a property worth £250,000. They want to sell up and buy a house which would cost £450,000 but they cannot raise the £200,000 needed to do this.
The market then starts to fall and values reduce by 10%. Their property is now worth £225,000 but the house they want is now £405,000. The difference, known as the 'Trading Gap', has gone down to £180,000. A falling market has saved them money and offered a chance to make a move they might not otherwise have managed.
To find out more about other buyers who welcome a falling market see the chapter Why Buy in a Falling Market?
Where Should I Buy?
If your final decision is to buy then you are going to start thinking about where. Ask the question to a property investor and you will get a very different answer to that of a parent.
If you are looking to make a return on a property investment you should probably consider an area no one else wants to buy in, but that may become fashionable in the future. If you are a parent you might want to consider schools and the catchment areas that they have. If you are a single women, how you feel walking on certain streets after dark could be an important factor.
"Where should I buy?" is one of the most commonly asked questions by buyers but it cannot be answered by someone who knows little about you.
Buying property is a big step and making money from it is not always as straight forward as the media or some authors might sometimes suggest. Generally speaking almost any real estate investment makes money in the long term. If you buy somewhere that you can rent out and the tenants pay off your mortgage then after twenty years you will have a very nice nest egg. If you are hoping the flat you buy will go up one hundred percent in the next twelve months so you can quit your job - good luck - it does happen. Overall however the most sound piece of advice anyone can give you is to treat property as a ten year investment, not a get rich quick scheme.