Hit & Run Or Stay Put?
Our focus has been trading in properties which gives quick returns in short spaces of time. One example is a property we traded in March 2012 where we exchanged or £1.1m and resold 3 days later for £1.3m; hence made £200k from an investment of £110k. Needless to say this was a good return, however currently the value of this property is in the region of £2.25m.
Though the return at the time over the space of a few days was impressive perhaps in hindsight we were celebrating over mere crumbs and we let the cake get away. However hindsight is a wonderful thing. In all fairness the market has increased beyond all expectations over this period when many were calling the top in 2012 the market carried on rising to unprecedented levels.
The amount of money used is a little deceptive as it was always sitting in the account, £550k which equates to half of the purchase monies.
Therefore the question to ask is would it have made sense to leave the money in a property and enjoyed the natural rise of the property? Of course the answer looking backwards seems to be yes. The block of 5 flats has risen over £1m in less than two years. This equates to a rise of almost £10k per week. A good wage by any means.
The flip side is how many deals could we do by having £550k sitting in the bank ready for more trades, perhaps we would have pulled a few off over this period. In truth they don’t come all the time, that’s the bottom line. And after all isn’t a bird in hand better than two in the bush?_____________________________________________________________________________________________________________________________________
We’re in the middle of one at the moment where we have purchased a freehold house in Victoria for £1.85m and are looking to exchange shortly for £2m. Therefore from £255k we will be looking to make £200k within a couple of months.
Furthermore trades are easier to do when the market is supporting you i.e. meaning its rising; investors are falling over themselves to get stock, many even buy with the anticipation of a future price rise, they don’t even need a discount to the present value. Also you don’t even have to be that smart in getting deals, just organise a long completion date and the price will increase naturally!
The market currently is not rising in the exponential manner it was say six months ago, it is not a weak market by any means, however there is more hesitation before offers are put in and exchanges are done, the market is pausing for breath.
In contrast to this last year we had purchased a deal in Kilburn High Rd for £2.675m, the idea initially was as always to purchase and resell; a hit and run strategy. However in this situation the deal itself flowered in an unexpected way. A very kind housing association offered us over £500k free of cost to develop the property and in return give it back to them for a ten year period to rent. The property in total has been rented for £260k per annum and has been valued by Savills at £4.765m. This allows us to refinance and pull out the initial investor money and stay in the deal, and it will still be producing income every month. Furthermore there is another £1m to be gained from this lump of property through enhanced planning; we believe you can get six more studios on top of this property.
This property has risen £2m within one year, equating to a rise of £20k per week. A handsome return for those investors who had put £1.4m into the deal and they will still get income plus hopefully future uplift, both the natural uplift and through the enhanced planning we propose to do. In truth when I first saw the building I thought it was a dump, the rooms were pokey and small, they couldn’t be sold off individually as they would have been too small to qualify for a mortgage. We actually were not the best bidders, the deal dropped in our laps after the head bidder kept dragging their feet. We purchased at £299 per sq. ft., which really is a no brainer in an area attracting – at the time – £650 per sq. ft.
So it begs the question, is our method wrong in focussing on a hit and run strategy? Clearly from the above two scenarios it seems to at least be called into question. In many ways a hit and run type method goes against the natural grain of property which is to rise passively.
On the other side is that these examples are being looked at with the benefit of hindsight. If the market were to have dipped we would have been justified in our approach.
On the deal I mentioned at the beginning of the article we perhaps would have needed to do a trade deal five times in order to match the same level of return as the amount the property has risen by itself. With all the work and hassle which goes with doing these speedy transactions.
There are of course benefits of doing this, one is in terms of work to the property – it is non-existent, the property is bought and sold without it even being cleaned. The exposure to the market is limited therefore and downturns will have minimal effect.
The fund we will be launching for £40m will be focusing part in trading and part in holding on to stock and developing. The trading will ensure a strong cash return for our investors and enable us to return a targeted dividends of 7-9%. Whilst the purchasing and holding will ensure the under lying values will be kept strong and grounded.
Given the relative slowing down of the market it seems as if the rest of this year and the coming year will yield some good opportunities in the areas where the deals are more complicated and require development, as most buyers will be nervous of entering into these types of transactions, due to perceived future uncertainty. Therefore this is the time to enter, but remember to do your numbers correctly and there’s no need to rush, deals will start to flow hence forward. Those who purchased in 2009 have made the most in terms of rise in property values.
West Hampstead, London, NW6 Purchase Price: £1.3m
- A large three bedroom top floor flat
- Share of freehold
- Can be converted into a four bedroom flat
- Two parking spaces, a very rare find in this location
- Around 1,450 sq. ft. area
- Excellent buy and hold opportunity
Call us now to secure this deal!
Sow & Reap
A Property Investment Company
!Tips of the Week
Often people get carried away with terms like Below Market Value; remember this is not the main consideration, the potential for future growth needs to be there. A property may be cheap but that doesn’t mean it will increase in value in the future.
Property prices in good locations tend to be high, but these are the areas where you get the maximum capital appreciation. So it’s better to save or club together to ensure yo purchase a diamond.