Buying an ‘investment’ because everyone else has
“The Financial Services Authority do not typically regulate Buy to Let Mortgages”.
There is a tendency for investors to copy what they see others doing i.e. following the herd for safety. This is very dangerous and here is why:
* By the time something is ‘big news’, all the professionals have been ‘in’ and are on their way out. They have seen to it that ‘it’ (whatever the investment is) is in the headlines.
* If everyone else is already buying, then prices are not low because of the simple laws of supply and demand.
* If someone is willing to lend you the money to invest, then walk away. They are the only ones who will profit.
* Investors, who make big money, do the opposite of what everyone else is doing. These are the ones who buy cheap when everyone else is panicking.
A good example of this is the buy-to-let market, which has mushroomed as people have turned to property speculation in the hope of getting a better return on their money than they could on the stock market. This is speculation, not investing.
Unless the rent could cover all the overheads, including mortgage repayments, (not just interest) then the ‘investor’ is relying on capital growth to help pay some of the shortfall.
The question has to be asked ‘would you borrow money to by Stocks and Shares’? If the answer is no, then why would you do this for any other investment that can go down as well as up; because everyone else has?
When everyone else is panic selling and prices are falling, wait a while and when the panic has fallen away and is out of the headlines, then buy.
Example:
In 1993 I invested in a flat for £15,500. This was before anyone had even thought of the term ‘buy-to-let’. I had to borrow the money on a 10 year term Business Development Loan because mortgages for this purpose were unavailable. The risk was in my mind small because of the figures below. It had been empty for a year and cost a buyer £42,500 in 1989. I rented the property for £375 per month and this covered all the overheads by nearly two to one. Even if the price went down, I was sitting pretty because the rent covered the overheads so handsomely. Needless to say, when the time came to sell I made a handsome profit.