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Investment Property - The 10x Rule
If you are first time investor you may not know that a building society or bank also views a buy to let investor and a private home buyer differently.
If you are buying your home, a lender will insist that your income is sufficient to pay the mortgage. As you know they will lend a multiple of your salary. This multiple may differ from lender to lender. When the lender surveys your future home they will assess its value.
However, if you are investing in a buy to let the lender is not concerned with your income or the value of the property. They judge the lending decision on two other factors. Do you have a 15% deposit, and does 10 times the monthly rent = the annual mortgage.
If you satisfy these two criteria, and you have even a reasonable credit history, you are almost certain to find a lender willing to offer you a mortgage. Whatever your salary.
This is because the lender has very strong security. The is paid independent of your personal financial situation and the property can fall in value by 15% before it is valued at less than the amount they have lent you.
The 'x10' rule is very good news for property investors - especially if you are 'cash rich' and 'salary poor' ie., if you have inherited money, are on a low income, are retired, etc.
However, the 'x10' rule also carries grave dangers for unwary or inexperienced investors.
This is because unscrupulous companies will manipulate the selling price, often above market value, to the maximum price that the 'x10' rule will allow.
If
the value of the property is £70K for example, the rental is £385 per month, and if you multiply this by 10, the lender will agree a up to an annual repayment of £3850.
This equates to a of £72250 - £2250 more than the property is worth. Add in the 15% deposit required and an unscrupulous company could sell this property for £85,000!
Unfortunately, there is always a danger of this type of 'manipulation' happening to some degree if you buy direct from a property investment company - rather than direct from the vendor. Especially if you buy in an area of the country that you are unfamiliar with.
Another 'trick of the trade' is to find a 'tenant' who will pay a rent which satisfies the 'x10' rule. This 'tenant' is actually a friend. The company pays the rent to you out of the inflated profit they have achieved and the 'tenant' then dissappears after 2/3 months.
You could be left with a property which is difficult to let, impossible to rent at the previous level, and vastly overvalued.
We cannot say how prevalent these practices are. And we are not saying that all property investment companies engage in these practices. But, as experienced investors will know, they do happen and many unwary investors have fallen victim to this type of practice.
It is always best to be forewarned and forearmed.
ONEPORTFOLIO Investment Property, the only company in the UK offering 20% below market value property deals direct from the vendor.
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