Following on from last week’s article…..
We originally bought the property 308 Kilburn High Rd (made up of 18 self-contained studios and one bedrooms) along with 50 Palmerston Rd (5 large flats) at £2.675m, which was several thousand pounds less than the offer which was going through. We managed to close the deal out of speed and commitment and beat the other party.
We managed to get several investors in on the deal and therefore had to make sure there was a proper structure in place to protect everyone, and everything had to be predefined in advance. Actually the structure ended up being more complicated than the deal; property I understand, clever corporate documents I do not.
We were advised that the best vehicle to do this deal in was a limited partnership. Not just this but three other companies had to be involved in order for this to be compliant with current rules governing collective investment schemes.
And each had to have a document defining the relationship between each other as well as the operating company which would look after all the monies invested.
This was a steep learning curve with little time involved to understand it all. However we did not compromise on the advice we received, we use done of the best fund management lawyers in the country, currently they are setting up funds for the UK government. I may not fully understand this corporate side but I’m pretty sure they do.
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One thing I have learnt is you cannot compromise on the foundations, which in this case are the documents which define and bind the deal together. Then you can concentrate on the deal and not be distracted by other side issues.
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When the structure was set up we went out to the market to try and get funding in place in time for completion. This however became problematic for two reasons: one was the structure, it was too clever for most lending companies on the market, they just didn’t get it; for many it was a learning curve; the other reason was all the lenders had a point blank policy of wanting Personal Guarantees.
I thought the second reason was simply unfair. We had bought this property at roughly half price, and we were only asking the lender to lend 50% of the purchase price so it has a very low exposure to the project. The investors are not in charge of the project we are, so how can they insist on a personal guarantee? I did not even propose this to the investors to consider. If the lenders really wanted the business then they would need to step outside of their box and take an intuitive decision on the deal. Many chose not to.
However one agreed and luckily they used a strong legal firm who were able to understand the structure and reasons why it was set up in this way.
We went with this lender, along with another one who was happy to go along without the personal guarantees as a backup; much like an insurance policy.
So we had two separate valuations done. The first company gave us a valuation of £3m as it is, this was very surprising as the first objective of a valuer is NOT to value the property, but for them to cover themselves for any future liability claims, the same goes for lawyers. Normally they do not extend themselves further than the purchase price. The fact they did shows they really did believe in the deal; this was a strong confirmation we had caught a good deal. Not just this they stated the breakup value on this deal if we were to sell it piece by piece was £4.2m.
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It would be very difficult for each of the investors to find a deal which is basically half price individually, through the power of the collective this kind of deal can be executed; with the right structure and protection in place.
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The lenders had their own lawyers who progressed fast on the deal, however our backup lender’s lawyers didn’t get very far at all they had trouble understanding the structure and basically didn’t move on from first base! Luckily they were only our back up lender.
The initial aim was to break up and resell. However the more I looked at the deal the less I was inclined to resell this property, the reason being in addition to it having a lot of equity in it, it is a cash cow. Normally in property there is a trade off, in either equity or capital growth. This one seemed to have the best of both worlds.
Rather than looking to resell as soon as possible and cash in there is another way, and this is to refinance; pull out the original injection of funds, and then hold on to the asset.
The rental we discovered was in the region of £260,000, net of management costs. Once the property is tidied up we can look to refinance at the valuation of the property and not the purchase price. If we go by a valuation figure of £4m – which is not unreasonable, a high street lender will lend 70% of the valuation, this equates to £2.8m which is roughly the purchase price allowing for costs. Allowing 6% as an interest rate the cost of funding will be £156,000, this will mean the investors will get all / most of their money back and then enjoy a passive income for the rest of their lives. Perhaps we never sell this asset and keep refinancing it say every 7 -10 years, and simply enjoy the passive income.
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If this asset increases even 5% per annum this equates to an uplift of £200k, this is after the initial money has been extracted from the deal.
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A housing association is desperate to get their hands on this deal, they have grant money to throw at us in exchange for taking this property on for a period of ten years. Normally housing associations and councils area pain to deal with and require constant chasing, with these guys it was the other way around; they were hounding me to the point where as soon as we completed they were there at the property within an hour of completion, this being their fourth visit to the property.
I feel it is prudent to give only one of the buildings to the association rather than both of the buildings, this way the other one can stay open and flexible, so if we wish for whatever reason to resell we are able to. The blocks can be vacated within 6 to 12 months, so if for example we have any issues raising finance in the future this part can be disposed of easier and the other be held in cash with no funding.
This is not all there is to the deal, though even if it was this would be enough. But we are greedy people and this is what we get paid to be. We see a possible planning angle in this; we feel the property has not been fully utilised, there are another two floors to be got from this building, and the front part can be brought out to the street level.
We also aim, by hook or by crook, to purchase the freehold of the property. This will be via a nice request, if this is not reciprocated our lawyer has already etched another plan to extract the freehold from the current owner using what’s called collective enfranchisement.
The future planning will add at least £1m to the building. We will focus on this more once the building has been let and refinanced.
We were able to get this level of discount due to our ability to move fast and raise funds. It made more sense for an individual investor to enter into this type of collective deal rather than go alone as there is power in being part of a herd. This means there is more money for each of the investors than what they could have achieved going alone. Also this has all been done without personal guarantees, which means your investment will never effect your other assets. This is not the case when you sign your own mortgage form; many people do not realise that even if they are purchasing a BTL property they are giving a personal guarantee.
We are currently working on a similar investment, so if you like what you read please give the office a call.
The Real Deal
Rare opportunity in Ealing, London, W5
Purchase Price: £650k
- Residential building in prime location
- Can be converted into three flats
- Refurbishment costs will be approximately £60k
- We expect the end value to be £900k
- Close to proposed Crossrail station
Call us now to reserve!!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
People are often surprised with how much property they can purchase; £100,000 can buy you £400,000 of property, this is through the principle of gearing. Also, if you join a team your purchasing power will increase further, remember unity is strength.
The speed with which you make decisions and commit to them will ensure you get deals time and time again.
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