gave council tenants the “legal right to buy their homes”. Tenants were entitled to apply for a mortgage from their local authority. At this time, mortgage interest relief at source (MIRAS) was also in effect, allowing people a certain amount of tax relief on the interest payments on their mortgage. A subsequent act dealt with the problems that many new homeowners faced due to the substandard quality of housing stock. The Housing Defects Act of 1984 gave former council tenants who had unsuspectingly bought their homes only to find major structural problems, the right to apply for local authority grants.
A key feature of the Housing Act 1980 was that council tenants could pay a deposit of £100 for the right to buy their home at a fixed price for the following two years. If the tenant then went on to sell that house within five years of purchasing it, they had to share the capital gain with the local authority. (Remember this feature when we come on to talk about options!)
But it was the Housing Act 1988 that brought about the most significant shift of control in favour of private landlords.
Assured Shorthold Tenancy
Until the Housing Act 1988, tenants had significant rights in the properties they rented. If they continued to pay the rent, they couldn't be evicted. But if they didn't pay the rent, it was difficult to evict them.
The Assured Shorthold Tenancy gave landlords the right to give tenants two months notice to leave the property (after the first six months of the tenancy). This differs significantly from the Assured Tenancy, which gave the tenants the right to remain in the property unless the landlord was able to obtain an Order of Possession to evict the tenants. Any rent increases were also subject to review by a Rent Assessment Committee, as opposed to the ability, under the Assured Shorthold Tenancy agreement, of landlords to make whatever rent increases they want (although a tenant does have a legal right to challenge any increase they deem unreasonable).
Obviously, most landlords chose to use the Assured Shorthold Tenancy agreement, even though this often meant a high turnover of tenants. Again, remember this point for later, when we come on to discuss tenant responsibility.
Leases
Although this may seem like it should come before discussion of the Assured and Assured Shorthold tenancies, I've left it until last because it's the most significant concept I want you to remember. It will help you to understand the rest of this book, because it underpins many of the strategies I will be discussing.
Any tenancy is, by nature, a lease. A lease is simply a contractual agreement that is made between a lessor (the legal owner of an asset) and a lessee, which grants rights to the lessee to use that asset. Significantly, the terms of a lease can be whatever the lessor and lessee agree on. You could lease someone a tangible asset (such as a car, a phone or a property) or an intangible asset (such as a licence to use a software program or a radio frequency).
You can agree on a fixed-term lease or a periodic lease. You can agree that rental payments are to be made weekly, monthly or annually. But whatever you decide and agree on is fixed. You cannot change the terms of the lease unless both parties are willing to make a new agreement.
When a landlord and rental tenant sign an Assured Shorthold Tenancy (AST) agreement, they are bound by the terms of that standard agreement. But no one is obliged to offer or accept this type of agreement. Again, remember this … it will become significant anon!
Playing Monopoly For Real!
In the 1980s and 1990s, private ownership of property sky-rocketed. The rise of the “professional landlord” was a hot topic, and lenders even introduced the “buy-to-let” mortgage in 1996. Being in the property business as all this was happening, as investors were snapping up properties left, right and centre, must have been like seeing a game of Monopoly come to life! The recession of the early 1990s only gave savvy investors the ability to snap up more properties at reduced prices.
New Labour capitalized on the economic strength of Conservative policies while promising better management of spending. When Tony Blair took over as Prime Minister in 1997, the country was already fast climbing out of recession – indeed the economy grew fairly steadily until the big crash that began at the end of 2007, which was precipitated by the undermining of real assets by the subprime mortgage market.
The Aftermath
The aftermath of the global financial crisis was ugly in the property investment world. The collapse of some of the world's biggest banks and financial institutions, such as Lehman Brothers, and major US mortgage companies (Fannie Mae and Freddie Mac), completely destabilized the global economy.
Until this point, we had seen years of hay-making for property investors, as lenders fell over themselves to offer mortgages at ridiculously low rates; everywhere you looked, people were buying properties at inflated prices (speculating they would rise even further) and taking on huge mortgages. Ordinary people were able to invest in property. Never before in the history of Britain had so many people of every social class been able to own property. Teachers, doctors, window cleaners, plumbers and builders were becoming so-called “property millionaires” alongside the traditional wealthy classes.
The problem was that many investors soon found themselves mortgaged up to the hilt with what turned out to be toxic debts. When the housing market collapsed, many people found themselves trapped in negative equity (meaning that their mortgages became greater than the actual value of their properties). The debts were called in and many properties were repossessed. People learned the hard way that being a “property millionaire on paper” wasn't even worth the sheet of paper!
Put it this way: if you had 10 properties each worth £500,000 before the crash, and you had £100,000 of equity in each, you were, at that point, a “property millionaire” (i.e. you owned £1,000,000 of equity). When the property market crashed and each of your £500,000 properties collapsed in price to £400,000, you were suddenly worth nothing (and with £4 million worth of mortgage debt in your name). If those properties slipped even further down to £350,000 each, you now technically owed the bank £500,000 on top of the mortgage debt, i.e. you were in a negative equity situation. In commercial property, the bank does not allow you to be in negative equity (in fact you can only be in mortgaged debt up to an agreed loan-to-value, so you always have to make up the shortfall if the value of the property falls); in residential property, you don't have to give the bank anything as long as you keep servicing the mortgage. If you are unable to pay the mortgage on any property, the bank will repossess your property and come after you for any shortfall if they don't recover enough to pay off the entire mortgage; i.e. once they repossess, they can claim any shortfall from you. (NB: This only applies in the UK. In the US they cannot come after you for this shortfall, which is why so many people walked away from properties when they fell into negative equity and were unable to keep servicing the mortgage.) If you owe the bank money, you will end up getting a bad credit rating.
This process happened rapidly and left many people reeling. In fact it might be more accurate to call the “aftermath” a “bloodbath”!
If you want a really eye-opening and fascinating account of what led to the global economic crisis, watch Charles Ferguson's Oscar-winning documentary Inside Job. Also, Jacques Peretti's brilliant documentary for the BBC, The Super-Rich and Us, investigates the rise of the “super-rich” as a result of the crisis and challenges the theory of “trickle-down economics”.
But what we were left with (after the aftermath) was actually a potential goldmine for any investor left standing. All the people who'd bought their portfolios when the property market was on the rise, i.e. at the “top of the bubble”, had ignored the cardinal rule of value investing as decreed by the man known as “the most successful investor in the world”, Warren Buffett, who said you should always “buy low, sell high”. It was the savvy investor who knew this, that profited in the aftermath of the crisis by scooping up under-valued properties.
CHAPTER 2
Traditional Property Investing
Until recently, everyone seemed to accept that there were only two ways to become a property owner,