Getting the edge 

It’s not easy to find a margin in property deals, as information is abundant and there are no barriers to entry.  On top of this, there is a strong faith in the UK property market, more so than most countries.    

Everyone is looking for an edge; one segment doesn’t even want that they are just desperate to close on a deal, having been unable to get their hands on one.  When these people enter the auction market they tend to over bid, then you throw in the builder who wants to keep his team busy, perhaps launder some cash at the same time as well; this results in a pumping auction market, which is what you have been seeing over the last few months.   

There are certain numbers which you cannot really squeeze, such as what a property will sell for, the finance costs etc.  Despite what some borrowers think, that you can go to the bank and negotiate the rates of finance.  You cannot.  They are set in stone.  I’m of course speaking about the BTL rates set by the mainstream lenders, not a bridging deal.   

Therefore, the angles remaining are things like the build costs, and the rentals. If you’re a builder you can save on the margin.  Another way to enhance your return is by upping the rentals.  One way to do this would be by converting the property into an HMO, offering short lets.  Depending on the post code, this can be a very lucrative proposition.   

By focusing on what actually can be tweaked we have managed to fine tune the parameters to obtain a rental yield of 8-9% in a strong location in London, this is by converting properties in this particular location into HMOs, in a very basic functional manner.  We have found a segment whose requirements are not being satisfied and therefore are willing and able to pay a premium above market levels.  What this means for an investor, is instead of a deal which simply washes its face, and you need to wait for a 5 year period for the capital growth to kick in, you have a situation where there is cash flowing in month on month, putting the investor in an enviable position.  Very important for the coming times, where cash will be King.   

Like all trends this will not stay around for ever.  If there is an edge to be had in the market, as knowledge spreads money will be attracted to this idea, and the initial high demand will come down.  This is not the stock market however, and the property market is notoriously slow in responding, and innovating.  Therefore, the first to move on this advantage will gain, and the rest will snooze and lose.   

The numbers are there, in stone, you’ll have a fixed rental, and you can hedge against a fixed BTL interest rate.  The only variable is what is the likelihood of the rent being paid and on time.  We are endeavouring to obtain an insurance policy to hedge this variable as well.  Leaving you with a deal where all the likely variables have been nailed down. 

If you wish to receive a cash flow on how this will look in practise, please get in touch with our office.   

Suresh Vagjiani
Suresh Vagjiani
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