Although not in our patch, we purchased a studio in Harrow for £103,000 which is extremely cheap. The location of the property is a stone’s throw away from St George’s, a shopping centre in central Harrow. The property is the top floor in a conversion with many flats which were also appearing in the auction. The whole deal occurred within a 24 hour period as many deals do, sometimes it’s just a question of making a quick decision which gets you the deal.
I spotted the property the day before the auction whilst casually browsing though the catalogue and contacted a client whom I previously told we will unlikely be able to help because of the limited size of her deposit.
Due to the time constraint involved neither myself or the client had a chance to see the property. However a quick look at the land registry showed it had been sold in June 2012 for £140,000 which was a good sign barely six months ago. This means it still is probably worth around this level at least, as prices have increased during this period.
Purchasing blind means you must expect the property to require full modernisation, if it doesn’t need it then this is a bonus; and if it does need it then you have allowed for this contingency. There is only so much you can do in a studio flat so even if we allow £10,000 it’s still a good deal if we manage to get it around the guide price of £90,000. We were prepared to go to £115,000 for this property; luckily for some reason it never reached anywhere near this level which was surprising, normally you would expect to see Gujaratis wanting to purchase this purely because they live around the corner from the property.
It was expected there would be problems with the funding because it was a studio, not many lenders lend on studios, and those that do may have an issue in completing the deal on time; this was further compounded by the fact that the current seller was reselling the property within 6 months of owning it.
In auction purchases you have 28 days to come up with the rest of the funds from the point of exchange, which is the fall of the hammer. Then notice is served and you have a further 10 working days; after this you lose your deposit – and maybe more.
With this is mind we anticipated a normal mortgage lender will not be able to fund this flat, this is one to be funded by bridging finance. The client has £50,000 to invest and therefore the remaining £53,000 will be provided by the bridging company. Surprisingly even with the relatively high interest charged by the bridging company this property will still yield a positive cash flow. The bridging company charges us just less than 1% which is actually cheap as far as bridging companies go, but even if we work on 1% the monthly payments will be £530 per month. This property can generate £750 per month in rental income and so it will leave about £150 per month net of charges, not terrible for an investment of £50,000; certainly more than the bank is currently paying. This however is not where you make the bulk of your money, the money is made on the capital value; you have purchased a property 40% cheaper in a prime location of Harrow. So there is £40,000 already on this property if you wished to resell it.
Once the property has completed we will wait 6 months, and close to the end of the period we will look to refinance at a lower long term rate around the 5% level. The interesting thing at this point will not be the rate but that you can pull out all the money you put into the deal. The property will be valued in my opinion at £150,000. If you assume a 75% loan to value remortgage this will release £112,500, this means you will have all your deposit back plus money for all your expenses and a little extra. Assuming a 5% interest rate the new payment will be £5,625 per annum with a rental of £9,000 coming in.
The positive cash flow after paying the mortgage and management charges will be roughly £2,500 p.a.
In a nut shell you will have a property free of charge which is generating a positive cash flow. None of your money is in the deal and you have extracted the initial funds along with a little extra.
Even after having done deals like this many times during the pre credit crunch I still find it remarkable; it is a magical feat. Only magicians can produce something tangible and real from thin air; this is what you’re doing by following this system. You have produced a stream of money until the day you die and beyond from thin air.
Many people have a real problem accepting this, it is too much to handle. For them there is the day job of working hard for a wage, they need to work in order to feel they can earn money.
But for those investors who have seen this and implemented it there is another dimension, they see there is no limit to what can be done through property investment.
We have purchased properties with no money in our pockets and received cash backs of sometimes up to £40,000 instantly, pre credit crunch, of course the game has now changed and the time period extended. But the principle is still the same.
In the above example it is not the figures which are important but the formula; it can be replicated with any number. A formula works regardless of the number you put in, whether it is 1 or 1,000,000.
- Rarely available buy and sell opportunity
- Two bedroom flat on a well maintained block moments from station
- Long lease of more than 170 years
- Purchase price £250k, only 1% stamp duty
- Property can be resold for £275k within a short time
Sow & Reap
A Property Investment Company
!Tips of the Week
There are only two numbers in property which make you profit: One is the buy in price and the other is the sale price. We help to make your Buy in price low.
Look for properties which have a problem such as short lease unknown tenancies. It’s rare a property deal will be given to you on a plate, often you need to work the deal.