Recently we completed on a deal in the South East of London. The purpose of this investment is as a long term buy and hold.
The client didn’t have the deposit to close the deal by himself, and so he paired up with a family member to club together the deposit. They set up a company and purchased the property within the company, after taking advice from an accountant.
The aim was to ensure a savings pot was brewing for their children into the future.
When you’re taking a long term view, getting a discount at the point of purchase is not necessarily the defining factor of a deal.
For example, if you get a 20% discount on a property, this may seem attractive at the time of purchase, but if the property is stagnant for the next decade then crudely speaking you have the equivalent of a 2% growth per annum. Which is not really attractive.
Therefore, when buying to hold, the question that needs to be asked is where is this area going to be in the next 5-10 years and why?
What drove this investment was the location; the first principle of property investment, not discount.
We have been focusing on this particular location in South East London for many years now, and our in house research points to a long term sustained growth in this location.
This spot we believe will be one of, if not the, fastest growth spots in London.
This is the main factor which drove the clients to invest. However, we were able to ensure two further components to this deal, to sweeten it even further. One was a discount going in, and the other is the property will be producing a positive cash flow every month.
Ideally, every investment should have the above three elements; with the location being the primary driving force.
The property was originally bought by the seller as a residential. They refurbished the property to that end. This is an important point, generally in this situation most people furnish the properties with emotion, therefore they tend to over spend. Their plans then changed and it turned into a Buy to Let, later again their circumstances changed and they had to sell.
We sourced this property for our client and managed to get a £35K discount on it. They ended up purchasing it for £265,500.
The mortgage product we sourced for them was a fixed rate at 3.09%, fixed for 5 years. This equates to a payment of £517 per month. Against a rental income of £1,200 this leaves an income of about £685 per month. So, £8,200 roughly per year.
This alone beats what the money would have earned sitting in the bank, without taking into consideration the discount or the future growth rate.
Once the dust has settled on this investment they will be looking to replicate this formula again and again.
The way to consider this deal, or any long term investment, is to try and see what it would be like in ten years’ time, and change your perspective to looking backwards on to it. Most probably the discount and the monthly income would pale into insignificance, and the amount its grown by would override everything.