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10 Property Deals in Detail: Deal Number Three

INTRODUCTION

Whilst the Covid-19 (Coronavirus) pandemic rumbles on, aside from keeping safe with Laura and our son, Bobby, the JL Property Solutions team are facing down the challenges the virus is presenting. Will there be tenants in our student HMO’s come September? Will there be any kind of sales market for our flip projects? Will our current tenants have employment if there is a prolonged period of uncertainty?

The fact is the only certainty now is the constant uncertainty. Our thoughts are with those affected by this outbreak and our thanks go out to the people who are fighting on the front line. The NHS, the cashiers in supermarkets, the postal workers, the delivery drivers, the volunteers and support workers – thank you to each and every one of you.

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, seeing as the British weather has turned sour, it’s 10 minutes to fill your day!

So, let’s get into deal number three! Deal number three that I’ve picked out to share is a property that really took a lot out of us and caused a huge re-think into how we were going to operate JL Property Solutions moving forwards.

PROPERTY DESCRIPTION

Thanks to our investment in our education during our Asset Academy training we now know that this property, purchased 23/03/2018 should have been procured as a Lease Option. This was a two-up-two-down terraced property in Merthyr Tydfil, located in a quiet area that backed onto a playing field with great views of the Mynydd Cilfach-yr-encil.

Why should it have been a Lease Option? Well, had we have been a little bit more seasoned we would have seen all the signs. Although it was listed on Rightmove the property was being sold by British Homesellers – an agency who specialise in quick sales. Key flag there – a vendor who wanted a quick sale. Extremely motivated.

What’s more, it was only the vendor who was conducting viewings whenever he could get a break from his job working at Trade Centre Wales. Another flag – this was a direct-to-vendor opportunity. We met the very pleasant guy selling the house and his predicament was laid bare to us within ten minutes of free-flowing chat.

“His wife was expecting baby number two and they couldn’t feasibly live in a two-bedroomed house. The pair had gone out and bought their dream family home BEFORE they sold this property because his wife had fallen in love and simply had to have the house. Therefore, he was paying two mortgages and was ‘in trouble’ in his words.”

Why should this have been a Lease Option? Well, the buyer didn’t need the capital to move on because they already had the new house. His pain point was the fact he was paying two mortgages. We could (and should) have offered to pay his mortgage for him and agreed a 3-year Lease. The property was marketed for £55,000 and we could have offered him that price in 3 years’ time, getting us into the deal for as little as £1. But, it just goes to show the power of experience and education.

We offered £47,000 for the property and it was accepted.

SOURCE OF DEAL

For this third deal, as I mentioned, this property was listed on Rightmove and sold through a specialist ‘quick sale’ agency - British Homesellers. There was virtually no competition for the property because (as you can see from the picture) it was unmortgageable due to the lack of kitchen facilities. Market data suggested with a relatively cheap refurbishment we could get this revalued at £85,000 so the numbers worked.

We picked up deal number three, our two-bedroomed mid-terraced property in Merthyr Tydfil, completed for the sum of £47,000 with the conveyancing done by our trusted family solicitor - Kenneth Curtis LLP.

FUNDING

This was the first property we purchased under the JL Property Solutions company structure, meaning it was owned by the business. Because it was unmortgageable that meant we had to be a bit more creative with finance and we utilised a mixture of angel investment and a bridging loan to get into the deal.

For angel investment we utilise 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 three, we secured a bridging loan from Romaco SPV Ltd for a gross loan of £35,250 with interest retained for 6 months meaning we didn’t pay monthly during the first six months. That meant, however, that our net advance was £29,551. It’s a really good tip for anyone looking into bridge finance to take into account your net advance WON’T equate to 75% LTV, however your redemption statement WILL (in this case, £36,824.80). We raised £30,000 in angel investment from a family member and paid a 5% rate of interest. The mortgage, as usual, was brokered by Morgan Financial Solutions).



REFURBISHMENT


Upfront I said that this house took a lot out of us and it genuinely did. For Deal Number One I told you about the long periods away from home and the toil of doing a lot of work yourself. Rather than abandon that approach completely, on Deal Number Three I was still down in Merthyr Tydfil from Monday to Friday but we thought bringing in a cash-in-hand labourer and other trades would do the trick. The long and short of it is that it didn’t. Trades were unreliable, the workmanship in some cases was poor, the house itself was littered with unseen problems and then there were the rats…more on that to come.

The house needed the following:

· A new bathroom – poorly done, had to be re-done

· New flooring throughout

· A full rewire

· Replaster throughout, including ceilings

· A new kitchen

· Redecoration throughout

· Fencing installed outside

· Soffits and fascias redoing

· Work to repair the roof on the kitchen extension

This refurbishment should have been a nice, easy £6,000. We ended up spending £10,000 largely due to having to re-do work. My kitchen fitting (even if I do say so myself) was fine! A cheap B&Q kitchen that I put together in a couple of days…that’s the only thing that went smoothly. The plasterer would turn up one day then not be seen for a week. The bathroom was so badly done that we had to strip it out and do it again. They had even put a 30mm waste pipe off the bath…it HAS to be 40mm. As a result, water and foul-smelling substances flooded back into the bath when you ran the basin or kitchen sink. There were unseen damp issues which meant floorboards needed replacing. The decoration work was shoddy, so I had to re-do it.

The rats! It turns out the roof for the kitchen extension was poorly fitted, leaving gaps. As a result, the house was a rat-run. The first few nights I spent on an air bed on the floor, all I could hear all night were the scratches and scurrying of rodents. The council came out and sorted the problem after three or four visits, but a lot of the wiring had been chewed…so a full re-wire was due!

The silver lining was that we discovered Maintenance Solutions Wales. They now look after all our refurbishments and property maintenance and I only ever go down to site to sign things off. The experience taught us that no matter how much money we thought we were saving by doing it ourselves – it was a poor operational strategy.

EXIT STRATEGY

As always, we made sure before entering this deal that we had our pre-requisite MULTIPLE EXIT STRATEGIES. With £30,000 of OPM at stake we knew that having bought significantly 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 three, we actually had a tenant lined up to rent before we finished the refurb. We passed his details to our lettings agent First4Rentals to do the relevant background checks and he agreed to sign an AST before carpets had been laid.

We had a long, drawn out refinance because of various issues with lenders. The house should really have been valued at £90,000 but the Precise Mortgages valuer came in at £80,000. We had the option to appeal, but we were approaching the end of our bridge term and it just wasn’t feasible so early in the business to cover the monthly cost. So, we took it.

EVEN SO, THAT’S A WHOOPING 70% INCREASE IN VALUE IN JUST SIX MONTHS.

The tenant agreed to a rent of £425 per month and we were on our way.

THE NUMBERS

Purchase Price: £47,000

Deposit: £17,449

SDLT (Stamp Duty): £1,410

Legal & Broker Fees: £2,000

Original Mortgage: £36,824.80

Refurbishment: £10,000

Total Money Used to Buy: £30,859

New Value: £80,000

New Mortgage: £60,900

Less Original Mortgage: £36,824

Less Total Money Used to Buy: £-6783

Less Angel Investor Interest: £-8283

Total Money Left in Deal: £8,283

Rent: £425

Mortgage Cost (Per Month): £163.99

Agent Management Fee: £40.80

Insurance and Operating Expenses: £26.06

Monthly Net Profit: £194.15

That’s an annual passive income of £2,329.80 for a property we effectively paid £8,283 to own. The property will become cost-neutral in 3.5 years.

CONCLUSION

This deal was, in my mind, a failure. We didn’t get the valuation we wanted, and we ended up personally subsidising the deficit of £8,283 to make sure our angel investor was paid out properly. That said, to own a property for such a small amount and to be cost-neutral in 3.5 years – a lot of people would jump at the chance!!

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