Choosing The Ruler
There are many ways to invest in property; everyone has their own levels of comfort, strategies and whatever else. I have had some clients who only invest when the Muhurat is right, others who only buy certain numbered property and avoid others.
There are, however, more fundamental measures of analysing property deals, such as, return on investment, return on cash, internal rate of return, cost of capital etc.
We have sourced numerous deals where the focus was purely on short term capital return. Trading deals sometimes within 3 days from exchange, meaning properties were exchanged and sold on prior to completion, undoubtedly these attracted a lot of interest when the market was in a growth phase, and nowhere was this more aggressive than in Central London. When we calculated the numbers for a fund manager, the numbers were actually too high, to the point where they seemed ludicrous, though they were actually correct. The calculation used was based on the cash, and return on this cash. As these were very short time periods, where the return was often double or treble or even higher, the annual rate of return was driven extremely high; so, we had to use another statistic just to dumb the numbers down.
Nearly all went well, a couple went south. However, this is not a strategy to follow in this market, neither does it give freedom to allow the property to work for you, which is what property does best. In fact, the wheels have to turn pretty fast in order to facilitate these kinds of transactions.
Our strategy has evolved, and the formula used now to measure a deal is different. The ruler we now use to assess a deal is based on when the investor will get their seed funds back – or at least most of them, whilst keeping the asset long term, whilst generating a solid cash flow. At the point the money is returned to the investor, the return on cash invested is infinity, as there is no money left in the deal and you are getting a return month on month.
So, when analysing a deal, we have two parameters, one is when are we expecting the seed funds to be returned to the investor, and the second is what will be the positive cash flow once this has been achieved.
The first aim can only be achieved if one is able to add enough value to the asset in order to be able to extract the initial investment in a short space of time. There are usually two ways to achieve this, One is to add more space, the other is to change the usage class of a property. The latter can have the effect of turning lead into gold.
In practise one would use a combination of the two depending on how best to maximise the asset. The order in which strategies are implemented is important too. Doing things in the wrong sequence can invalidate planning.
The above information is by no means conclusive, it only serves to get you to start thinking about how you want your return by investing in property; this will be unique to you, where you are in life and what’s important to you.