Advance To GO by Samuel Oliver

Author:Samuel Oliver [Oliver, Samuel]
Language: eng
Format: epub, mobi
Publisher: UNKNOWN
Published: 2020-04-19T00:00:00+00:00

Negotiating With Fear & Greed

Negotiation tactics need to be used with caution. The risk is you get greedy and try to over optimise at the expense of your goals. If a property is on the market at a fixed price of £200,000 and you think it is worth £200,000, don’t mess around. Get the deal done and start executing your property investment strategy, don’t try and buy it for £199,000 and waste time haggling.

So how do you know what a property is worth? First start by setting your target yield. I always want to get a gross rental yield of 10% or more. If I know that a property will rent for £20,000 a year, then I think that the fair price of that property is £200,000. I think of property value using a traffic light system. If the rental yield is much higher than the interest rate I am paying the bank, then it’s a ‘Green Light Deal’. For example, if interest rates are at 3% and I can buy a property at a price that creates a 10% yield, then I am benefiting from a powerful compound interest differential of 7%. Any property value that makes the yield marginally above the bank’s interest rate is amber. For instance, if I pay £500,000 for a property that makes £20,000 in rental then I have a 4% yield, if the bank’s interest rate is 3% I am still benefiting from compound interest, however it is risky. If interest rates go up by more than 1%, I will start to lose money. Red light deals are any price that causes the rental yield to be lower than the bank’s interest rate.

Changing your target yield will have a big impact on the value you attribute to a property. If you know the property will rent for £20,000 and you want a yield of 10% then you will pay £200,000 to buy it. If you want a yield of 9% then the property becomes worth £222,222. It is important to be firm with your target yields, drop them too low and you’ll over-value the property and put yourself at risk of losing money.

By the time you’re ready to offer on a property you may be overly enthusiastic. You’ve got money burning a hole in your pocket and you urgently want to buy. This excitement is dangerous, it can make you become desperate to buy causing you to over-pay. The price you’ve worked out at your lowest acceptable yield must be your maximum price. Any price above that is not acceptable. Be firm here. If your maximum price is £250,000 and you get told that you can buy it for £255,000 you must say no. This is really hard, but the reason why you are doing all of this work is to make a profit, and paying too much means you won’t.

The majority of properties sold on the market are in the red light investment zone, they don’t make financial sense and are not good deals.

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