I remember how exciting a 10% exchange deposit could be in a property sales office. Everyone liked a 10% deposit.
Why?
Because it made the property easier to sell.
More people could afford the initial commitment. The amount of cash required today was lower. The jump from enquiry to reservation and then exchange became easier.
None of that made the apartment itself a better investment.
That distinction sounds obvious when you put it like that, but I think it exposes something important about the way property investment is sold, particularly to people doing it for the first time.
A feature that makes an investment easier to buy is not necessarily a feature that makes the investment better to own.
“Invest with just a 10% deposit”
There is nothing inherently wrong with a 10% exchange deposit.
Quite the opposite. If I am buying off-plan, all else being equal, I would generally rather have 10% of my purchase price exposed during construction than 25%. There are separate questions around how that money is protected, who is building the development and how the project is funded, but simply requiring less capital before completion can be a positive feature of the transaction.
My problem is when the 10% becomes the advertising point.
“Invest in Birmingham with just a 10% deposit.”
Imagine you are completely new to property.
You are not stupid. Maybe you are a doctor, engineer, lawyer, business owner or senior executive. You are very good at whatever it was that allowed you to accumulate the money in the first place. You have simply never had a reason to know how buy-to-let finance or an off-plan purchase works.
Why would you?
People who work in property get so used to the mechanics that we start treating them as general knowledge. Of course the exchange deposit is not necessarily the total equity requirement. Of course there will be tax and legal costs. Of course a mortgage lender will conduct its own valuation at completion.
None of that is obvious if you have never done it before.
Take a £200,000 property. A 10% exchange deposit is £20,000. If the mortgage eventually available to you is 75% loan-to-value, you need £50,000 of equity in total, of which the £20,000 already paid at exchange forms part. So you would need roughly another £30,000 at completion, before we even start discussing tax, legal fees, mortgage costs, furnishings or any valuation shortfall.
If you obtain a higher-LTV mortgage, the number changes. If you buy with cash, it changes completely. That is not the point. If borrowing forms part of the plan, what is realistically available to you is something to establish with an authorised mortgage broker rather than infer from the exchange deposit being advertised.
The point is that £20,000 may be the amount required to commit to the transaction. It is not necessarily the amount required to complete and safely own the investment.
Those are very different statements.
The investor needs to be thinking: if this completes in two years and rates, valuations or my personal circumstances have changed, can I still comfortably complete?
The salesperson needs to know whether this person can reserve and exchange now.
Sometimes those interests align perfectly. Sometimes they do not.
That does not require the salesperson to be dishonest, malicious or even particularly aggressive. It is a structural conflict. They have a job to do, and their job is not necessarily the same as the investor’s job.
I should be equally clear about my own structure while I am saying this. I sell advice. I get paid for the work whether the conclusion is to proceed, renegotiate, wait or not buy the property at all. That does not make me a superior species of human being. It is simply a different incentive structure, and I think investors should understand the structure of whoever is advising or selling to them.
Sometimes the first “expert” you meet is the salesperson
This is the part people inside property forget.
We tend to imagine an investor arriving at a sales company after already doing all the sensible things. They have spoken to a mortgage broker, understood their borrowing capacity, thought about tax, worked out what they are trying to achieve, researched the market and then approached somebody to find a property matching a decision they have already made.
Sometimes that happens.
Quite often, they saw an advert.
They have £40,000 or £100,000 sitting somewhere. They know property has made people wealthy. They have heard enough about inflation, pensions, rental income and house-price growth to think they should probably be doing something, so they fill in a form to find out more.
The first person in the property industry they encounter may therefore be the person who calls them back from that enquiry.
Not the broker. Not the accountant. Not the solicitor.
The salesperson.
And to the investor, that person may not feel like a salesperson at all. They may be the first person who has ever explained yields, mortgages, rental demand, regeneration, capital growth, leaseholds or off-plan property to them. They may know far more about property than the investor does.
They can be knowledgeable. They can genuinely care about their clients. They can sell very good property and build relationships with investors that last for years.
None of that changes what has to happen next for their business to make money.
That is the bit I think new investors need to understand.
Being busy is not an investment objective
You see the same structural problem when investment recommendations are built around lifestyle.
A common line is that investors ask what the best investment is “for them”. That sounds like the beginning of a fairly substantial piece of work.
What capital do they have? What do they already own? What return do they need? What is their time horizon? How important is liquidity? How much leverage are they comfortable with? What risks can they actually afford to take?
Then the recommendation becomes something like specialist supported housing because the investor is time-poor and wants to reclaim their freedom.
Hang on.
How did we get from “you are busy” to “this is the perfect investment for you”?
Being time-poor is a perfectly sensible reason not to spend your evenings chasing builders around a half-finished terrace. It tells me almost nothing about where your capital should go.
You can be time-poor and need your money back in three years. Time-poor and already massively exposed to property. Time-poor and sensitive to capital loss. Time-poor and reliant on conventional mortgage finance. Time-poor with £50,000. Time-poor with £5 million.
Those people should not automatically receive the same recommendation.
“I do not want another job” tells us something useful about how you would like an investment to operate. It does not tell us what the asset is worth, who should owe you the rent, how strong that counterparty is, what happens if the operating model fails, or who is likely to buy the property from you afterwards.
A lifestyle preference has quietly been turned into an investment recommendation.
Conveniently, it tends to be a recommendation for something available to buy.
Outsourcing complexity does not make complexity disappear
This is also why I have a problem with the way “hands-free” investing is sometimes presented.
There is a perfectly valid argument that somebody making good money in another profession should not spend every Saturday looking around damp terraces, finding builders, ordering kitchens and trying to work out why a refurbishment that was supposed to cost £35,000 now costs £48,000.
Your time has value. Outsource things.
Most investors should outsource plenty. Solicitors, brokers, managing agents, surveyors, accountants, builders and advisers exist for very good reasons. Doing absolutely everything yourself is not some badge of investment purity.
But outsourcing the complexity does not make the complexity disappear. It relocates the judgement.
Instead of needing to work out whether you can manage a refurbishment, you now need to work out whether you can evaluate the person selecting and managing the investment for you.
How are they paid? Who else pays them? Do they earn the same amount whichever property you buy? Does what they make change depending on which developer, mortgage, furniture package or management company you use? Do they make anything if they tell you not to buy?
What happens if their honest conclusion is that the best thing you can do for the next six months is absolutely nothing?
Those questions do not prove somebody is giving bad advice. They tell you something about the environment in which the advice is being given.
“Hands-free” is an operating preference. It is not a risk assessment.
Some risks disappear when you outsource. You may no longer have to find the property yourself, deal with contractors or manage the tenant. Other risks appear because you are now relying more heavily on the judgement, incentives and competence of the person doing those things on your behalf.
You have not removed the need to make a good decision. You have changed who you are trusting to make parts of it.
What has to happen next for this person to get paid?
The most useful question in property investment is often not whether somebody is right or wrong.
It is: what has to happen next for this person to get paid?
That does not automatically invalidate anything they say.
A BMW salesperson can give you completely accurate information about a BMW. They may know vastly more about the car than you do. They may own one themselves. They may genuinely believe it is the best car for you.
But you would probably process their opinion on whether you should buy a BMW differently from the opinion of somebody whose income remains exactly the same whether you buy one, keep your existing car or decide you do not need another car at all.
Property has developed a strange habit of pretending this distinction barely exists.
The salesperson becomes the educator. The educator explains what strategy suits your lifestyle, which market you should consider, why doing it yourself is difficult, how much time they can save you and how little money you need to get involved.
Then there is something available to buy at the end of the explanation.
Again, that does not mean the property is bad or the recommendation is wrong. It means the investor should understand the context in which the recommendation is being made.
Who pays this person? What has to happen before they earn anything? Does their income change depending on what I buy? What happens financially to them if I walk away and buy nothing?
And the question I would probably keep above all the others is this:
Would the person recommending this still reach the same conclusion if there were nothing for them to sell me?
If you are about to speak to someone selling you an investment, I put together Ten Questions to Ask Before You Reserve Anything. It is free, and that is exactly what it is for.