INTRODUCTION
We’ve found it incredibly easy (at times) to let the Covid-19 (Coronavirus) isolation worry us. Assessing risk is pretty much part of my daily routine in my function of a project manager at JL Property Solutions, but this new risk is a total unknown. It’s very difficult, therefore, to analyse the risk, the potential implications and to provide effective downside protection. The reality is, we just have to keep going and keep doing our best.
I decided I’d take the time spent self-isolating to write ten blogs which deliver a warts-and-all insight into the life of a self-employed professional property investor. If nothing else, it’s 10 minutes to fill your day!
So, let’s get into deal number five! Deal number five that I’ve picked out to share was an off-market deal that we acquired landlord-to-landlord via an introduction from our letting agent, First4Rentals.
PROPERTY DESCRIPTION
This two-bedroomed, mid-terraced property in Merthyr Tydfil was the third property we added to our portfolio. Built in the traditional style of a Welsh Valleys property, stone clad and sturdy, the house had previously had a rear extension meaning the lounge was large and very marketable and there was a good-sized kitchen to the rear – albeit all in need of some TLC.
I knew from Rightmove, Land Registry and Mouseprice comparables that houses in the street would fetch between £80,000-£85,000 if refurbished to a good standard, with good rental yield and regular tenants (the property next door was also tenanted). There was very little negotiation with it being an off-market purchase. The landlord needed £53,500.00 and that’s exactly what we offered.
SOURCE OF DEAL
The landlord selling the property, which had been tenanted very recently, was retiring to take care of his sick wife. We were introduced by Matt, our Letting Agent, and we had a chat about what he wanted. The landlord had recently had new UPVC and a new front door fitted, which he showed me the receipt and warranty for, so I knew the house was well looked after – just slightly dated.
We picked up deal number four, our two-bedroomed mid-terraced property in Merthyr Tydfil, completed for the sum of £53,500 with the conveyancing done by our trusted family solicitor - Kenneth Curtis LLP.
FUNDING
This was another property purchased with a view to rental as part of our cashflow strategy under the JL Property Solutions company structure, meaning it was owned by the business. We were lucky in the sense that this property wasn’t the kind of jaw-dropping, back-to-brick refurbishment that you may expect. It was perfectly liveable as it was – but modernisation was going to be our ticket to asset-appreciation.
Our normal business model is to raise OPM (Other People’s Money). We work with sophisticated investors and high net worth individuals (HNWI) to secure private funding that we use to invest in property. For that privilege we create WIN-WIN deals that benefit us, the investor, local tenants, local trade, local letting agents – it’s a chain of winning. We pay investors between 5-10% depending largely on the deal. Find out more about investing here.
For deal number five, however, we had just received our remortgage proceeds from our very first investment purchase and we were able to self-fund the project. We had a mortgage via Precise for £40,125. The mortgage, as usual, was brokered by Morgan Financial Solutions).
REFURBISHMENT
As you will have seen from the pictures dotted around the blog, this house really was OK. If push came to shove, we could have stuck a tenant straight in and waited to do the refurb. However, with our Power Team was now well established, with all work carried out by Maintenance Solutions Wales, we were in a position to renovate quickly and add value.
The house needed the following:
· A full rewire
· Replaster ceilings and some walls
· Redecoration throughout
· New kitchen
· New bathroom
This refurbishment was rapid and, importantly, on budget. It was quite nice to be able to ‘tweak’ a property instead of smashing it to pieces and rebuilding it!
EXIT STRATEGY
As always, we made sure before entering this deal that we had our pre-requisite MULTIPLE EXIT STRATEGIES. With our own money at stake we knew that having bought below market value, we had the option of selling or renting. We chose renting to suit our cashflow strategy.
B – Buy below market value
R – Refurbish and add value & marketability
R – Refinance at the new market value, getting as much money out as possible
R – Rent to tenants who you look after and keep long-term
For deal number five, we got a tenant in relatively quickly because of the popularity of the area, via our lettings agent First4Rentals.
The tenant agreed to a rent of £450 per month which was slightly above average for the area.
The refinance valuation took us onto a mortgage with Aldermore, one of the fringe lenders, who valued the house at £82,000.
THAT’S A WHOOPING 53% INCREASE IN VALUE IN JUST SIX MONTHS.
THE NUMBERS
Purchase Price: £53,500
Deposit: £13,375
SDLT (Stamp Duty): £1,605
Legal & Broker Fees: £2,000
Original Mortgage: £40,125
Refurbishment: £10,000
Total Money Used to Buy: £26,980
New Value: £82,000
New Mortgage: £61,500
Less Original Mortgage: £21,375
Less Total Money Used to Buy: £-5,605
Total Money Left in Deal: £5,605
Rent: £450
Mortgage Cost (Per Month): £176.77
Agent Management Fee: £43.20
Insurance and Operating Expenses: £27.16
Monthly Net Profit: £202.87
That’s an annual passive income of £2,434.44 for a property we effectively paid £5,605 to own. The property will become cost-neutral in slightly over two years (which is nearly up!).
THAT’S A STAGGERING 43% RETURN ON INVESTMENT
CONCLUSION
This deal really was another great addition to the portfolio. It may have nagged on us that we didn’t get all of our money out but two years is brilliant to be cost-neutral (in terms of capital investment) so it doesn’t wrangle too much!
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