There are three important differences between investing and trading. Overlooking them can lead to confusion. A beginning trader, for example, may use the terms interchangeably and misapply their rules with mixed and unrepeatable results. Investing and trading become more effective when their differences are clearly recognized. An investor's goal is to take long term ownership of an instrument with a high level of confidence that it will continually increase in value. A trader buys and sells to capitalize on short term relative changes in value with a somewhat lower level of confidence. Goals, time frame and levels of confidence can be used to outline two completely different sets of rules. This will not be an exhaustive discussion of those rules but is intended to highlight some important practical implications of their differences. Long term investing is discussed first followed by short term trading.
My mentor, Dr. Stephen Cooper, defines long term investing as buying and holding an instrument for 5 years or more. The reason for this seemingly narrow definition is that when one invests long term, the idea is to "buy and hold" or "buy and forget". In order to do this, it is necessary to take the emotions of greed and fear out of the equation. Mutual funds are favored because of they are professionally managed and they naturally diversify your investment over dozens or even hundreds of stocks. This does not mean just any mutual fund and it does not mean that one has to stay with the same mutual fund for the entire time. But it does imply that one stays within the investment class.
First, the fund in question should have at least a 5 or 10 year track record of proven annual gains. You should feel confident that the investment is reasonably safe. You are not continually watching the markets to take advantage of or to avoid short term ups and downs. You have a plan.
Second, performance of the instrument in question should be measured in terms of a well defined benchmark. One such benchmark is the S&P 500 Index that is an average of the performance of 500 of the largest and best performing stocks in the US markets. Looking back as far as the 1930's, over any 5 year period the S&P 500 Index has gained in price about 96% of the time. This is quite remarkable. If one widens the window to 10 years, he finds that over any 10 year period the Index has gained in price 100% of the time. The S&P500 Index has gained an average of 10.9% a year for the past 10 years. So the S&P500 Index is the benchmark.
If one just invests in the S&P500 index, he can expect to earn, on average, about 10.9% a year. There are many ways to enter this kind of investment. One way is to buy the trading symbol SPY, which is an Exchange Traded Fund that tracks the S&P500 and trades just like a stock. Or, one can buy a mutual fund that tracks the S&P500, such as the Vanguard S&P 500 Index Fund with a trading symbol VFINX. There are others, as well. Yahoo.com has a mutual fund screener that lists scores of mutual funds having annualized returns in excess of 20% over the past 5 years. However, one should try to find a screener that gives performance for the past 10 years or more, if possible. To put this into perspective, 90% of the 10,000 or so mutual funds that exist do not perform as well as the S&P500 each year.
The fact that 10.9% is average market performance for the past 10 years is all the more remarkable when one considers that the average bank deposit yield is less than 2%, 10 year Treasury yields are about 4.2% and 30 year Treasury yields are only 4.8%. Corporate bond yields approximate those of the S&P500. There is a reason for this disparity, though. Treasuries are considered the safest of all paper investments, being backed by the United States Government. FDIC regulated savings accounts are probably the next safest while stocks and corporate bonds are considered a bit more risky. Savings accounts are possibly the most liquid, followed by stocks and bonds.
To help you calibrate the safety and liquidity question, the long bond holders are comparing bond yields they now receive with next year's anticipated stock yields. Consider that next year's anticipated S&P500 yield is around 4.7% based on the reciprocal of its average price to earnings ratio (P/E) of 21.2. Yet the 10 year annualized return of the index has been 10.9%. Bond holders are prepared to accept half the historical yield of stocks for added safety and stability. In any given year, stocks may go either up or down. Bond yields are not expected to fluctuate widely from one year to the next, although they have been know to do so. It is as if bond holders want to be free to invest short term, as well as, long term. Many bond holders are thereby traders and not investors and accept a lower yield for this flexibility. But if one has decided once and for all that an investment is for the long term, high yield stock mutual funds or the S&P500 Index, itself, seem the best way to go. Using the simple compound interest formula, $10,000 invested in the S&P500 index at 10.9% a year becomes $132,827.70 after25 years. At 21%, the amount after 25 years is more than $1 million. If in addition to averaging 21%, one adds just $100 a month, the total amount after 25 years exceeds $1.8 million. Dr. C. rightly believes that 90% of one's capital should be allocated over a several such investments.
Now that you've allocated 90% of your funds to long term investing, that leaves you about 10% for trading. Short to intermediate term trading is an area that most of us are more familiar with, probably due to its popularity. Yet it is significantly more complex and only about 12% of traders are successful. The time frame for trading is less than 5 years and is more typically from a couple of minutes to a couple of years. The typical probability of being right on the direction of a trade approaches an average high of about 70% when an appropriate trading system is used to less than about 30% without a trading system.
Even at the low end of the spectrum, you can avoid getting wiped out by managing the size of your trades to less than about 4% of your trading portfolio and limiting each loss to no more than 25% of any given trade while letting your winners run until they decrease by no more than 25% from their peak. These percentages can be increased after there is evidence that the probability of choosing the correct direction of a trade has improved.
Intermediate term trading is based more on fundamental analysis which attempts to assign a value to a company's stock based on its history of earnings, assets, cash flow, sales and any number of objective measures in relation to its current stock price. It may also include projections of future earnings based on news of business agreements and changing market conditions. Some refer to this as value investing. In any case, the objective is to buy a company's stock at bargain prices and wait for the market to realize its value and bid up the price before selling. When the stock is fairly priced, the instrument is sold unless one sees continuing growth in the value of the stock, in which case he moves it over into the investment category.
Since trading depends on the changing perceived value of a stock, your trading time frame should be chosen based on how well you are able detach yourself from the emotions of greed and fear. The better one can remove emotions from trading, the shorter the time frame he can successfully trade. On the other hand, when you feel surges of emotion before, during or immediately after a trade, it's time to step back and consider choosing your trades more carefully and trading less frequently. One's ability to remove emotions from trading takes a great deal of practice.
This is not just a moral statement. An entire universe of what's called technical analysis is based on the aggregate emotional behavior of traders and forms the basis of short term trading. Technical analysis is a study of price and volume patterns of a stock over time. Pure technicians, as they are called, claim that all pertinent news and valuations are imbedded into a stock's technical behavior. A long list of technical indicators has evolved to describe the emotional behavior of the stock market. Most technical indicators are based on moving averages over a predefined time period. Indicator time periods should be adjusted to fit the trading time frame. The subject is far too large to do it justice in less than several volumes of print. The lower level of confidence involved in trading is the reason for the large number of indicators used.
While long term investors may use only a single long term moving average with confidence to track steadily increasing value, traders use multiple indicators to deal with shorter time frames of oscillating value and higher risk. To improve your results and make them more repeatable, consider your expectations of changing value, your time frame and your level of confidence in predicting the outcome. Then you will know which set of rules to apply.
Selasa, 29 Desember 2009
Selecting Rules for Investing and Trading
Short Selling for Investors
Shorts. Let's see. If there are shorts there must be longs. Which is best? Longs or shorts?
If you are trading in the stock the stock market experts like longs better than shorts. If you are "long" that means you own stock and that is "good". If you are short you have sold stock and that is "bad". At least that is what Wall Street preaches. And why do they want to make you believe this and is it true? Let's examine the facts.
Today I hear stories on the financial news and there are articles in the paper that people who are "short" driving the market down. They have sold more stock than they own and this is causing the market to collapse. I even hear that Congress is trying to pass a law that will not allow people to sell short. They are blaming hedge funds who are allowed to sell short. The basic flaw in this concept is when a short sale is initiated it must be done on an up tick. That means the stock must be going up in order to make a "short" sale. No short sale may be made to pressure the market down. That is a fatal pin in the balloon of that lie.
There are reasons people will make the sale of a stock. If you own it you may just need the money now or if it is going down you may not want to lose money should the downward trend continue. There is on old saying in the market - "the trend is your friend". If you see a stock that is declining you may want to sell it first and when it declines further you will buy it back at a lower price later on. This actually puts a floor under that stock because some time in the futures you MUST buy it. Whoever is doing the shorting does not matter whether it is an individual or a hedge fund. They are actually doing two things that are both good for the market. They are providing a future buy to support the price at a lower level that keeps it from going lower and they are providing liquidity to the market.
When you buy long you want it to go up so you can sell it later at a profit. When you sell short you sell it now with the idea of buying it back after it declines. Both are driven by the profit motive. How can one be good and the other bad? It is like saying there is good electricity and bad electricity.
If company CEOs don't want people to short their stock I suggest they look in the mirror to find out who is at fault. The CEO is not running his company properly and that is why the stock is declining. No outside person or group can drive a stock lower that is making a good profit. There is a good reason for the price decline.
Buying short does not put the market down. The ultimate outcome of a short sale (covering the short) is very positive for the market.
High Volatility Investments
Penny stocks and options are high volatility investments that attract both the trader and the long term investor because of the small amount of capital required to make substantial gains as compared with less volatile higher priced stocks. The long term investor buys a stock believing that a company's value will increase over time and the stock price along with it. When he buys an option it is usually to reduce the risk in owning the underlying stock. The short term trader looks at things a little differently. Typically a trader looks for large percentage price movement over a short period of time. Large percentage, short term price movements can be found both in options and certain penny stocks.
Penny Stocks are often defined as stocks priced below $5. It is often implied, but not necessarily the case, that penny stocks are also micro caps with capitalizations of less than about $250 million. Penny stocks can be found across the full range of capitalizations from micro caps to large cap stocks. For example, Sun Microsystems (NASDAQ: SUNW) met the definition of a penny stock for much of 2004, trading between $4 and $5. In late 2004, trading between $5 and $6 per share, its capitalization was over $18 billion. The price of a large cap $18 billion stock would rarely be expected to move by a large amount over a short period of time. The largest percentage daily price gainers, of say 50% or more are typically stocks that started from $5 or less. But they are typically micro caps.
As a group, micro cap penny stocks are avoided by large funds because prices are too easily affected by sizeable buy and sell orders and capitalizations are too small to affect a large fund's bottom line. Buying more than 10% of a publicly held company carries with it certain insider responsibilities. Large funds must wait until stock prices rise typically above about $20 before they can become seriously involved without moving the price and still have price movement impact their financial results. The small investor has a distinct advantage over large fund managers when he takes an early position in a good micro cap penny stock.
Short term options are best suited when the underlying stock has a higher price, say above $50. While it is more likely that a micro cap penny stock will gain 50% in a single day than it is for a higher priced stock, the typical 5 or 10 to one leverage that options provide makes it only necessary for a higher priced stock to move 5% to see a 50% gain in the corresponding option price. There are several additional considerations involved in choosing an option. Not the least of these is the market environment. When chosen properly, options for higher priced stocks provide the same large daily price movements of penny stocks. Lower priced stocks need to move by a larger percentage in order to see a similar percentage move in the corresponding option. They are only likely to do so if they are micro cap penny stocks.
Maniac Investment
Let's first understand what maniac means. According to Webster a maniac is "mad; raging with madness; raging with disordered intellect". You don't know anyone like that, do you?
There is a book that is still in print today that was originally published in 1841 with the title Extraordinary and Popular Delusions of Crowds by Charles Mackay. He explains in rather horrific detail how people were caught up in the madness of buying property in the South Seas in 1720, the numismatic coin craze of 1980 and the tulip bulb trading in 1637. You wonder how people could have been so gullible to have bought a single tulip bulb or land they would never see for huge amounts of money. Could anything like this ever happen again?
I was floor trader on the commodity exchange in 1973 when the Hunt brothers drove silver from $2.00 per ounce to $54. That mania lasted a few months and quickly tanked to $6.00. I took part in that mania. I was one of the maniacs.
When it was taking place it seemed like the thing to do and very few questioned the sanity of those participating. In fact, if you weren't part of the crowd there was something wrong with you. When there is a stampede it is best to run with the herd or be trampled to death. However, there were a few who were not mesmerized.
Today we are participating in one of those manias only now it is called a bubble and still is not being taken too seriously. Yes, it is the stock market mania. Many are still trapped in the madness of the crowd of the 1990's who believe the "market always comes back". They are clutching their tulip bulbs, sorry, stock certificates, and refuse to let go of them because they know their value will grow back to what it was 3 years ago. Stock owners have become mad with what - greed? fear? denial?
When something, almost anything, drops 50% in price it will take a 100% increase in value to get back to "even". With today's economic and world conditions that could be a long time and maybe not in our lifetime.
Years ago I heard a story about how they used to catch monkeys. A small hole just big enough for the monkey to slip his empty hand inside would be drilled in a coconut and candy and fruit would be put in it. The coconut was tied to a stake in the ground. When the monkey grabbed a fistful of goodies he would not let go even when the hunter came for him. Greed holds him in an invisible grip.
Many investors today are like those monkeys. They refuse to sell what is remaining of the stocks and mutual funds they own even though they can clearly see the major trend continues down. They became mad with greed and now fear of loss entraps them.
Until this madness is recognized investors will continue to see their portfolios become smaller and smaller. They must learn to let go.
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By Albert W. Thomas
Trading For A Living
In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder.
More Costs!
Let's move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you're relying on a 100Mhz Pentium II and a dial up service, you're setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too - expect the unexpected.
Many traders make the mistake of saying "This will do me whilst I start out, and I'll get something better when I make some real money". This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn't enter the Indy 500 in a go-kart with the intention of buying a better car when you've won a few races, and the same thing applies here.
Earnings
When you've added this all together, you have a pretty good picture of how much money you need to generate from your trading in order to live. Does your past performance suggest you will be able to meet this target? It's tempting to say "When I go full time I'll make much more", but how do you know this is the case? Perhaps you can take a couple of weeks holiday and try it out - if you don't make enough in that two weeks then you're not ready. A few weeks really isn't enough time to know if you're going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.
The option of part time work is a luxury many of us don't have however. So does it have to be all or nothing - trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practising is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening.
There are other try before you buy options open to the day traders who want to practise trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour. Other vendors have similar offerings, and if you have an IB account you can use AutoTrader to record tick data during the day for playback into a demo version of SierraCharts or QuoteTracker for free.
The bottom line here is that before you take the plunge, you need to have done everything in your power to prepare yourself for what lies ahead. It will still be harder than you ever thought, but it will be nigh on impossible with no preparation whatsoever.
Other Considerations
There are a few non-financial aspects to consider before going full time with your trading. If you have a family, how will the change impact them? Do you have the space to work uninterrupted during the day? It's important that the family don't assume that because you are at home you are automatically available to take the kids to school, or walk the dog. Make sure from the start that everybody knows the ground rules and that you can separate your working time from your free time effectively.
Consider also the social impact of leaving your full time employer. Again, if you have a partner or family are you going to drive each other nuts being in the same house all day? Relationships can be tested to the limit! Or if you live alone, are you going to drive yourself nuts being on your own all day? Trading full time can give you enormous amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot - I've seen it happen and it's not pretty.
Is It Worth It?
Nobody can tell you if trading for a living is for you, it's something you have to find out for yourself. I've seen traders go through highs and lows to challenge those of any stock chart, but for most it has proved to be a good move. The long list of benefits are all there for the taking, as with any change of career or indeed any major life change, as long as you go into it with your eyes open, and above all prepare, then there is no reason why it cannot work for you.
By Geoff Turnbull
Trading Systems
A trading system consists of a set of rules for viewing markets and making trades. The advantages of trading systems can be hidden when they become associated with trading platforms involving trade order submission and processing. A clarification of their roles can help explain the benefits of using a trading system. This can be done without identifying a particular platform or system. Once the platform infrastructure is isolated, a brief look can be taken at why a trader can benefit from a trading system.
An online trading platform consists of the infrastructure for viewing market prices and making trades. While platforms make use of user provided hardware and the internet itself, platforms consist of software linked to a database while displaying price quotes, enabling order entry and routing orders to an exchange. A platform of software and order routing services is provided by many brokers. It often includes programmable charting software that allows a user to select from an array of formats for price, volume and technical indicators. Links to real time databases are used by day traders while free delayed quotes are quite adequate for position traders who analyze data after the markets close to minimize the emotional stress of changing prices. Platform software saves time and reduces errors by automating repetitive tasks.
Some platform tools have become quite sophisticated, allowing a user to add his personal rules for making trades. Rules tell the software which set of indicators and prices to monitor and the levels at which traded instruments are to be bought and sold. Automated systems trading software are preprogrammed with trading rules enabling them to make trades with minimal user input. These software modules, designed by third party vendors to operate under existing platforms, are based on algorithms that identify price trends and market turning points. Since their accuracy is limited by the presumed market volatility, an algorithm is needed to recognize when market volatility falls outside the envelope for which the software rules were designed. The quality of a set of rules can be estimated from historical back testing on past market prices stored in a database. It is often pointed out that back testing lacks the realism of real time emotional stress and that past performance is not an indicator of future performance. While the latter is valid in all cases, the nature of trading system rules reduces emotional stress to the degree that the rules are consistently followed.
In any case, it is the rules themselves that comprise the trading system. In their purest form, trading systems take the form of a compact set of rules written on paper.
The ability to consistently make error free decisions amid changing prices in an environment of fear and greed is unlikely without the discipline that rules provide. It does little good to have all the price monitoring, charting, order submission and routing infrastructure if one does not have a consistent set of rules for making trades. Most of us find this out the hard way, judging from the statistic that only about 12% of stock traders are successful. For futures traders the number is closer to 5%. It is not just a coincidence that the percentage of traders that rely on a proven trading system is near these same levels. The consistent use of a proven trading system can be most beneficial to traders with all levels of experience.
Seeing the difference between trading systems and platform infrastructure makes the characteristics of a good trading system more obvious. A good trading system explains when trading should not be attempted, thereby, avoiding forced trading under inopportune conditions. It should specify how to independently generate a strong watch list of candidate trades to eliminate the need to chase after the latest hot tip from an advisor. For obvious reasons, a trading system should be easy to use, totally objective, take little of a trader's time and make consistent profits. It should also avoid large draw downs and give clear trading signals.
A trading system is best learned from a master trader who remains actively engaged in teaching. The master can help the student tailor the system to his personality, financial means, risk tolerance and skill level. The next best approach is to simply read what has been written and adopt it to one's personal situation. But under no circumstances should one try to wing it without the support of a set of trading rules. The advantage of rule based trading systems lies in their objectivity and consistency. When followed consistently, emotional trading and its associated errors are removed from the equation. As an investment, trading systems more than pay for themselves, not only in profits gained, but also in the amount of capital preserved. This is true not only for advanced automated trading systems but also for a compact set of rules on paper.
How to Buy to Let
Find out everything you need to know about buy to let. Learn what to buy, where to buy and what not to buy. All this information about buy to let won't cost you a penny.
buying
? If the area is full of buy to let property investors the supply of property to let might outweigh tenant demand and create pressure to reduce rents.
? Consider established areas with good communications links
? Research tenant demand as your highest priority. Find a letting agent to discuss this.
? Consider ongoing costs, e.g. maintenance, service charges etc.
? Be prepared to buy tired investment properties and refurbish them.
? Build a team of reliable tradesmen so that you can react quickly.
? Find a good buy to let mortgage provider. Finding the correct buy to let mortgage is crucial to your success when you are buying and selling investment property.
To Buy or Not to Buy an investment property for sale?
? As soon as you find a property you would like to buy, run a To Let advert in the local press. If the phone rings a lot buy it. If not walk away.
? A variation on the theme would be to run a display advert "Seeking long term tenants" I am a portfolio landlord. You find your perfect property and I will consider buying it and letting it back to you"
Demand and professional guidance
Find a letting agent and discuss the demand for properties in the areas you are interested in. They should also be able to indicate the level of rent you could expect to achieve and what type of tenancy is more suitable for the property and area.
University Lettings
Talk to Student letting officers - build rapport so they promote your property above others. They too can give you good advice on demand, i.e. where, why, how much etc.
Buying Privately
* With more and more people turning to the internet to source suitable investment property for sale and for sellers looking to save on selling agent fees, more people are having the opportunity to buy and sell privately. The main difference being that you will liaise directly with the seller of the property. This may be via email or telephone. Viewings will be arranged directly between the buyer and seller and the negotiations regarding the price will be dealt with directly between the buyer and seller. However, you will still need to both appoint a solicitor to act on your behalves.
Buy to Let Mortgages
Finding the right buy to let mortgage is crucial to your success as a property investor. Unlike other forms of property investment, a lot of the capital you invest into a buy to let investment property is likely to be borrowed. Over the last few years, the buy to let mortgage market has boomed, with more and more lenders bringing out products making borrowing money to invest in this way even simpler than before. There are a number of different buy to let mortgage products available from fixed rates, discounted variable rates, base rate trackers to name a few. It is worth remembering that different products may be suitable for different investment properties.
However it is very important that you get the correct guidance with your finance. Questions that are worth considering when finding a suitable buy to let mortgage:
1. Do they have access to lots of different buy to let products in the market place?
2. Do they have the ability to create a long term investment property strategy for you?
3. Are they able to secure exclusive buy to let products?
4. Are they able to arrange buy to let mortgages within 10 working days?
Most lenders will offer a maximum loan of 85% requiring you to fund at least a 15% deposit. The buy to let mortgage industry is very competitive with new products being launched on a very regular basis.
Some brokers may charge a brokerage fee up to 2% to arrange the buy to let finance for you but don't let this put you off because if they do have the ability to secure exclusive buy to let products for you, it could be very beneficial to your cashflow as a landlord. Plus, if they are able to reach formal mortgage offer stage in a very short space of time, this could result in you being able to secure investment property at very competitive prices if you have the ability to tell the vendor that you can have the deal completed within a matter of a few weeks. Find out more about buy to let mortgages, landlord inventories, tenancy agreements, landlord insurance, landlord tax, furnishing your buy to let and credit checking your tenants and see how you can start your investment property portfolio.
There are a few simple steps to remember:
? Make sure you have done your research
? Source a good buy to let mortgage provider and make sure that your own personal credit file is clean.
? If you are unsure, then you can request a copy of your personal credit file on a number of different websites which allow you to download a copy instantly.
? Once you have agreed an offer for the buy to let investment property for sale with the vendor, you will need to appoint a solicitor and exchange solicitor details with each other.
? At this point your respective solicitors will then begin the necessary legal work on your behalves to arrange the legal ownership of the investment property to transfer to the new investor.
? Contact your buy to let mortgage provider and confirm the purchase price and loan amounts required.
? A surveyor will then need to visit the investment property for sale to carry out a valuation of the property and a rental assessment. Some buy to let mortgage brokers can arrange this on your behalf. Other buy to let mortgage companies will advise you when this will take place. However, it is worth bearing in mind that if a buy to let mortgage provider is a fully packaging company then they may be able to reduce the timescales that it takes for your formal buy to let mortgage offer to be issued.
? Whilst waiting for the valuation report on the investment property for sale to be returned, use this time to complete all the legal paperwork that your solicitor will forward to you for completion and the application forms which will be forwarded to you from your buy to let mortgage provider.
? If the valuation report comes back and is satisfactory, you should then receive your buy to let mortgage offer shortly afterwards. On occasions, you may be requested to obtain specialist reports which may include a structural engineers report, damp and timber report and coal mining report.
? A copy of the buy to let mortgage offer should go directly to you and your solicitor.
? Your solicitors will then liaise with each other regarding suitable exchange and completion dates and will arrange to do the necessary completion paperwork for you on your new buy to let property.
Buy to Let Insurance
? Insuring your buy to let property is just as important as insuring your own home. As a landlord you have certain liabilities so make sure you get the necessary cover that your investment property needs. There are a number of different options available depending on the type of investment property you have for example if it is an apartment, block of flats, commercial property etc. But do shop around to make sure you secure the best buy to let insurance product.
Preparing to let the investment property yourself?
? This is an investment and cashflow is the key factor. Stick to neutral colours that will go with anything. For example, a red sofa might not match a green carpet, however, all colours look good on beige.
? Carpets - light beige looks great when clean. Light colours make room look lighter, brighter and bigger. They also encourage cleanliness and are easy to justify cleaning when a tenant vacates. Look for felt backed bleach cleanable carpets which do not require underlay. Replace carpets every 3-5 years, clean every tenant change and debit from damage deposit.
? Check with the local letting agent whether there is more demand for furnished or unfurnished property in the area.
Join your local Landlords association
? This is the easiest way to keep up with legislation and to obtain advice on getting your paperwork right.
? Other landlords in your area will be keen to share good and bad experiences. Learn from their experiences rather than making your own mistakes.
Tenant Application form
? Obtain full details including names, addresses and contact numbers of referees and emergency contacts. Also obtain previous addresses, NI numbers, employer details and proof of earnings. This makes life easier if you ever need to track down an absconding tenant.
? If possible, fill in an application form at the prospective tenants home. This will at the same time allow you to see how they look after it.
Credit Check your Tenant
? It is now possible to credit check your tenants on-line. Just because they are of smart appearance and drive a nice car doesn't guarantee that your rent will arrive each month. We all know how easy it is to get credit these days so it is important that you have peace of mind that your tenants have the genuine ability to pay.
Fees
Charge a fee to tenants of around £100 for completion of tenancy agreements, referencing, inventory etc.
Deposit-take 5 - 7 weeks rent plus one months rent monthly in advance
Tenants often cancel standing orders on the month prior to final payment - if this happens you still have some money to cover damages
Landlord Inventory
Get prepared. As much as we all like to think we can trust everyone, it is very important that 'buy to let' landlords protect their investment property as thoroughly as possible. Having an inventory in place will protect you against unnecessary costs and ensure that you are maximizing your profit at all times. For example; if your teaspoons kept going missing and the curtains kept leaving the poles when the tenants vacated, this could start to add up. Imagine if you had freshly decorated the buy to let property in a very neutral magnolia colour throughout to discover that your tenants had become creative one day and turned their hand to a bit of decorating to brighten the place up! Not only will this cost you in paint, but could potentially lose you income on rent whilst you are having to leave the investment property empty whilst it is being redecorated. And most importantly how can you prove that the property was that colour or condition in the first place. Its simple. A Comprehensive Landlord Inventory.
? Purchase a Landlord Inventory On-line Now - include everything including starting colour, condition of walls, ceilings, doors, fixtures & fittings etc and get it signed so you can prove damages when the tenant vacates. The more detail the better, even include the colour of light switches and door handles and what they are made of. Comments like "carpets have just been professionally cleaned" or "walls are freshly painted" will also help to prevent disputes on checkout.
? Ensure that you arrange a check out inspection and make sure the tenant is present - get them to sign to agree to any damages and/or required repairs.
? Complete utilities meter checks and ensure the incoming/vacating tenant signs to confirm meter readings.
? Inform the utilities companies and local authorities in writing of incoming/outgoing tenants and any applicable meter readings
Tenancy Agreement
You will need to purchase a tenancy agreement. This will protect you and your tenants. There are a number of tenancy agreements that can be purchased off the shelf but it is important that you check the tenancy agreement to make sure it is suitable for the type of tenants you have. For example whether it is a family let or a property being let to sharers where they could be joint and several liability. A good solicitor would be able to draw up a suitable agreement and for your own peace of mind, this small investment could be a very worthwhile exercise.
Look after your tenants - They are a valuable asset to your investment property!!
Happy tenants will respect your property and will refer other potential tenants to you.
If the above is not cost effective or convenient for you then you should seriously consider employing the services of a property/Lettings manager.
Find out more about buy to let and how you can start.