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How much profit is acceptable?

Whilst recently on holiday in Marrakech I went to the local market, there amongst all the varieties of items for sale, from goat’s heads to second hand antiques, a freelance vendor tried to sell me a rock crystal for which I was only mildly interested. He quoted 300 Dirhams which is about £25, I said no and offered 20 Dirhams which is about £1.70. In all fairness some one from overseas would have paid the quoted price; after all he was selling a piece of natural quartz crystal which was still encased in it’s original round stone.

But I’m a Guju and I like bartering. Of course he feigned shock and surprise at my counter offer, so I told him I wasn’t interested and went back to my taxi to leave. He followed me back, offering me a lower price with each step, right until he was outside the taxi door. As I was getting inside the car he finally and unhappily said ‘ok 20 Dirhams’. We concluded the transaction whilst I was inside the car and he outside.

His point of view was: if you don’t ask you don’t get; and he could get 300 Dirhams from the right customer, perhaps a European tourist who would not dare to give a counter offer especially not less than 10% of the quoted price, as this would be unthinkable and insulting to the seller.

This seller was getting his goods from the mountains, as were many others who were getting the same stock, free of charge; presumably there are no taxes involved. His cost will be the labour involved in getting the items, this was clearly less than the 20 Dirhams I offered. Therefore his profit margin was into thousands of percent.

There is no reason for him to put a limit on what profit margin he can earn, yet many of us do.

Earlier in the week I sat down with an investor and showed him a lucrative development deal, a part completed site in a strong location in London, in a nutshell it was £2m in and £2m out within a 12 month period.

I showed him how, very conservatively, I had arrived at this conclusion, and took him thoroughly through the figure work. Surprisingly his main concern and drawback was it was too good to be true.

As far as he was concerned, you cannot get 100% profit within one year. He put this restriction on the deal simply because he has never experienced this level of return and so it cannot exist.

I explained that this is not at all incredulous and I gave him an example of a deal that does sound unbelievable, but is true: We had our client purchase 92 Shirland Rd, W9 for £1.1m and we resold it for £1.3m within four days, prior to our cheque for 10% even clearing. Moreover to do this we only put down £110k to make this £200k. We told him that he was welcome to contact the lawyer who had acted on the transaction with us if he wished to check the facts.

The investor rightly pointed out this was not a regular occurrence but a freak one which happens from time to time. I agreed with his opinion, this was the cherry on the pie.

In the same week I also had a client come and see me wanting to invest some cash money which he was going to receive from a sale of a property in India. I asked him what he would like to earn on his money, the purpose for asking this me is to always try and exceed clients’ expectations whatever they may be, however his expectations were very low in my opinion; he said he would be happy with a 10% return on his funds, which were just over £1m. I told him straight that this was not even a challenge for us, I was confident we will easily return more than this.

The reason for this is that we are able to purchase at below market value in a sector of the property market which has the good fortune to be still rising, and is still expected to rise in the future. Our exposure to the market is short and so even if there are fluctuations in the medium or long term we will not be exposed to them. This is one of the few positive outlooks in the UK, most people are dismal regarding the future of the UK economy.

There are many landlords who have purchased properties outside of London, simply because they live there or they appeared cheap and were offering a yield of 6 to 7 %; they feel they have a good investment, despite the underlying value of the property only going up minimally, if at all.

There are some who got very carried away during the Pre credit crunch times and invested heavily outside of London, turning hotels into flats and then reselling for a fat profit until their credit got pulled and the house of cards fell down. Exposing the market for what it was which is reliant on credit alone to fuel prices.

The level of gain from a property comes from only two sources, one is the value of the property and the other is the level of income you gain from renting it.

Due to current rates received in the bank most investors have a very low opinion of what their funds are capable of earning if put to good use.

It’s interesting that the Moroccan market trader thought he could make thousands of percent in profit in an instant and it was fine; yet here in the UK one of my clients has issues earning 100% in a whole year whilst the another has a low expectation of what his funds should be earning for him.

Perhaps this has been driven by the economy, the highest paying ISA is 3.05% per annum according to one comparison website and this is for locking your money away for a full 4 years! Even after you have done this your funds in real terms will probably have decreased; meaning you probably will be unable to buy the same amount of food and petrol as you did when you put the money in despite it earning interest!

This is the danger, if one does nothing in this environment chances are you will be decreasing you wealth; investing in banks does not seem to be an option to get a reasonable return on your funds.

Clearly the current returns offered by other mediums have dampened investors’ expectations of what is actually achievable.

We have just closed a deal at £240k for a client who exchanged with £24k on Friday, with the aim of reselling in the auction for £275k without completing the deal; thereby hoping to return a 100% return on funds within a couple of months.

You may be surprised to see what your funds can achieve when they invested in the right location at the right price and creatively. Why not come and see us and let us show you what can be done.

The Real Deal

Rare bargain with massive growth

  • Purchase price only £495k
  • A large one bedroom flat in the sought-after Hyde Park Estate
  • Property priced at £764/ sq ft, while properties in this area are priced above £860/ sq ft
  • Can convert this 648 sq ft flat into a two bedroom flat
  • We have sourced a flat in the same block for £500k and the price rose to £700k in just one and a half years
  • Massive capital growth potential in the future
  • Close to the beautiful open spaces of Hyde Park and shopping amenities

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Always have two exist strategies when doing a property deal, as things may not always go to plan.

Most expenses, such as repairs, agency fees, etc., can be off-set against tax, therefore  reducing your liability. Check the HMRC website, there is an amazing amount of helpful information on there.

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If you want to know more about how investing in Central London property can get you great results, then don't hesitate to give us a call.

LONDON
Sow & Reap

Meridien House,
42 Upper Berkeley Street,
London, W1H 5PW

T: 0207 993 0103
info@sowandreap.co.uk


INDIA
Sow & Reap

1008, Gala Empire,
Opp. Doordarshan Tower,
Drive-in Road, Thaltej,
Ahmedabad - 380052
Gujarat, India