MONEY COMMENT
Become A Property Millionaire - NOT!

By Cliff D'Arcy
August 10, 2004

Ah, the joys of commuting! This morning, I endured a journey from Hell when my Tube train was held at a station with the doors firmly shut for at least ten minutes. As I'd already read my paper, I sought distraction from the heat by reading the advertisements displayed inside the carriage.

This one in particular caught my attention:

[Scene: Beautiful couple in swimwear running hand in hand across a wave-caressed beach]

Avoid rush hour - become a property millionaire

• Acquire a £1 million property portfolio
• Earn £100,000 a year
• Never pay the full asking price
• Get 100% funding and even money back

Sounds fantastic, doesn't it, especially to commuters stretched to breaking point in a London Transport sauna? The advert directs readers to a website where it all becomes clear: this firm sells seminars to prospective buy-to-let (BTL) investors. For example, its step-by-step guide to becoming a property millionaire costs an eye-popping £495 plus £11 P&P! (Incidentally, you can't shop around for this book, because you won't find it at Amazon or any other bookseller.)

However, there are a few things that worry me about the companies that play this game:

• They constantly refer to becoming a 'millionaire', but owning mortgaged properties worth £1 million is not the same as having £1 million of capital.
• Buy-to-let mortgage lenders will lend you up to 85% of an investment property's value. This means that your £1 million portfolio comes with £850,000 of debt. This debt will cost you £51,000 a year at an interest rate of 6%. Could you find £4,250 for every month that your properties lie empty?
• You need to raise a deposit of £150,000, which often comes from remortgaging your family home. Legal fees, valuation costs and stamp duty mean upfront costs of an extra £20,000 or so, based on buying five homes at £200,000 each. Are you happy to gamble with your home?
• To earn £100,000 a year from this portfolio, you'll need an annual rental income of £151,000. This amounts to a yield of over 15%, whereas realistic yields are around the 5% mark in most parts of England.

The 'inside secrets' that these glossy ads promise to reveal always play down (or don't mention) the risks of property investment, such as:

• House-price rises have soared above their long-term average and may be peaking. Annual rises of 20% cannot continue when wages are rising at 4% a year.
• BTL investors entering the market now are relying almost entirely on increasing house prices to make any money, when 'this is the most dangerous time to buy a house for a generation', according to one academic.
• Falling house prices could seriously hurt BTL investors: a 15% drop in property prices could wipe out your £150,000 of capital, and further falls would push you into negative equity.
• Managing properties and tenants is rarely straightforward and bad tenants are a huge hassle, as the experts on our Property Investing - Practical discussion board will confirm! Of course, unpaid rent and void (unlet) periods will reduce your returns.
• Other expenses for maintenance, repairs, servicing, insurance, letting agency and accountant's fees and so on also put a big dent in that juicy £100,000 a year income.

So, before you eagerly sign up to one of these workshops, ask yourself who is more likely to make the serious money: you - or the guys selling these seminars?

More: Buy-To-Let, Buy-To-Regret | Become A Zillionaire!