Buying property without borrowing on a mortgage, why you should start buying property whilst property prices are still falling and potentially make larger profits

My 22 year old son took a working sabbatical and has saved about ten grand in the last ten months before going back to university. The idea was to help fund his education but he is now looking at buying a property. He doesn't qualify for a mortgage and would be a fool to take a mortgage on anyway, so I have come up with a simple solution.

Start of article about property prices.

Previous page about the banking crisis.

We are buying a property together. His ten grand will buy a percentage of the property in direct relation to the money that my wife and I will be investing ourselves. He will receive a percentage of the net profits derived from the rental income, which we expect to be higher than he will receive in interest from the bank.

If we can find the right property and get it at a knocked down price he can expect some capital growth once the property market starts to pick up. This effectively gets him onto the property ladder and gives him a number of options for the future. He can repeat the process as often as he likes, every time he has some money to invest. He can sell his share in the property, based on the valuation of the property at that time; to me, my wife or anyone else if we decline the opportunity. Or he can buy a greater share in the property from us to obtain a greater equity in the property. He will not be moving into the property we will be renting it out.

WHY YOU SHOULD START BUYING PROPERTY

The most important thing is that he will have got onto the property ladder; got his money out of the banks where inflation and relatively low interest rates will not help him and into something that has the potential to make money. It will also stop him blowing the money away over a period of time. Not that I think he would because he knows the importance of not going through life burdened with debt and credit.

So he will own part of a property that is unencumbered, and given a little time could end up owning a percentage of several properties or a large percentage of one. If we buy a property that can be converted into a few apartments, and I envisage him effectively owning at least one flat without a mortgage and never having paid a penny in interest repayments.

Not having a mortgage to pay every month means he can accumulate money much quicker and being prepared to work hard he will achieve this aim with a little patience and within a reasonable time frame. I will have helped him but I wouldn't have handed it to him on a plate. He will have got into the property market at the right time, bought at the right price and be generating a small income.

PROPERTY PRICES ARE STILL FALLING

My son has the advantage in having a father who understands the property markets. Property prices are still falling but that gives us the best chance of picking up a bargain. We may take a hit initially but as explained earlier, not having to pay a mortgage means we can afford to sit back and wait. I'm not worried about taking a loss of 20K on paper if the potential to make 200K in five years time is achievable. I am worried about waiting too long and getting back into the market when prices are on the up. It is simply a matter of finding distressed sellers and or the odd bargain. It is just a matter of finding the right property and getting it at a knock down price. He fully understands the maths and sees the possibilities. Now I have to persuade my other children to do the same thing so that I treat them all equally.

The thing is not to rush in and buy the first property you see. My best guess is that property prices are going to fall for at least another twelve months and more properties are going to come onto the market. However, understand, that the longer this goes on, the more cash investors will be moving in and competition will start to push prices up, especially if you are buying at auction.

BUYING PROPERTY WITHOUT A MORTGAGE

Now all this got me thinking. There must be hundreds of thousands of people who would like to invest in property or get onto the property ladder but either don't have enough money to do this or do not qualify for a mortgage like my son. And I would assume that there are few parents who could afford to do what I am doing without putting their names on a mortgage deed which would defeat the purpose of the idea and be an incredibly foolish act in the current property market.

My understanding is that only four people can put their names to a mortgage and my advisors tell me that if I were to set up a property company, the FSA (Financial Services Authority) would look at this as an investment company and as a regulated activity and would need an Authorised Person (such as a stockbroker) and they don't come cheap. So that option is dead in the water before you start. However, there are alternatives.

Having worked in the financial services sector and watched the FSA oversee the destruction of the life assurance industry and stand by whilst the banking sector went into meltdown, I wonder if anyone actually want to get involved in any business that even remotely has anything to do with the FSA. However, where there's a will, there's a way of getting round these things.

Setting up a property investment company.....