The art of creating an eternal income
We are soon due to complete one of our projects which we purchased in July 2013. We purchased the property because someone buying it for a far higher price wasn’t moving quickly enough, so a second contract was issued.
When this happens often a slow seller and solicitor turn into superman and get focused about what needs to be done to get the deal over the line, so we knew the clock was ticking.
It was a big block, and we purchased it for £2.675m, we had to take assumptions on certain issues which our lawyers made us aware of. I was under no illusion – no bank would fund this, we were looking at a bridging company which charges high rates for short periods. What’s more is we wanted a lender who will not take personal guarantees on this project, since the credit crunch many lenders do not consider this as they want to see some hurt money in the deal.
A housing association chased us down as soon as they realized someone had purchased the property. Their proposition was too attractive not to take up: a £500k grant in exchange for a rental of £180k per annum going up with the rate of inflation every year for a period of ten years. This is for only part of the building, not even the whole lot. If you add the other rental we are looking at a total income of £260k per annum. And this still leaves us free to play with the other part of the property.
The property consists of 18 self-contained studios which the housing association will be taking and also five self-contained flats in another block which will be rented on ASTs.
The project will be completed in the end of May 2014. We are currently looking to refinance the deal with a high street lender with less extortionate terms. There is plenty of money coming in to service the interest.
What started up as a quick break up and resell has been changed to a buy and hold. We set up a company on the advice of lawyers to purchase this property in, the company was supposed to be in existence for only 5 years as we anticipated this property to be resold and all the money given back plus profits.
However looking at the figures this looked like too much income to be giving away, especially as this is the kind of project where the investors can get their funds back and have an income for the rest of their lives. Based on a refinance value of £4.5m and a loan to value of 65% the loan will be £2.925m which means most, if not all, of the initial deposit of £1.4m will be released.
The amount of mortgage payment at 5% will be £146,250 p.a.; this means there will be a surplus of £114,000 income per annum without any money stuck in the deal.
However this is only my speculation and future plan. The bottom line is what the valuer states it’s worth, and what terms the banks are happy to offer.
We have had a valuer come in and value a building we purchased for £5.2m for only £3.1m and they were from Knight Frank. What’s more is we sold the building a few months later for £6m and there was another offer for £8m after we exchanged on it from someone wanting to use it as an embassy.
Many banks do not like the idea of all the initial money being taken out, they like to see what they term as hurt money in the deal.
This is more likely to be so in this case as the loan will be on a non –recourse basis.
On the positive side a lot of lenders like the deal due to the level of income being generated, the lending market is getting warmer in response to the rising house prices. Therefore we can use this situation to play one lender off the other, I have no issues spending extra money on valuations and legals so that we end up in a position of power rather than being at the mercy of one lender.
The investors too will need to agree to change this model from what we went into it as to what it will become. The figures speak for themselves and I’m reasonably sure we will have a unanimous vote to agree to keep this deal as a perpetuity, meaning something which produces income eternally.
With the first project completed the chances are we will use the extracted funds again to replicate the success of this deal. Each property is unique and therefore will have its owns particular challenges and investment shape.
Having this property in the background however will mean another project can be engaged with which is lumpier in return, as this property will be providing the monthly income to cover another property’s outgoing whilst it is being developed.
The story is not finished on this project, there seems to be a strong possibility of gaining planning on the upper floors of this property as well. There appears to be space for two more floors on top of the building. To the rear and the side there seems to be no obstruction. I estimate about £1m can be added through only planning permission. We will apply for this after the property has been rented and there is income coming in.
Engaging in a project like this means the individuals who invested can get returns that they may struggle to get by themselves. They also have the security of an independent and audited firm of accountants dealing with the finances and the property has been bought using a company which gives them security as well as setting the terms out very clearly. The property itself is in a very strong location, which in addition to ensuring it is always rented will also ensure the price goes up. In addition to this no personal guarantees will be given, so after the money has been pulled out they have a risk free investment earning money for them; whereas a normal mortgage means they will be personally liable if there are any issues. Most people don’t realize this; no one sees issues when the markets are going up, it’s only on the way down. You don’t know who’s swimming naked until the tide comes in… The last credit crunch was a good example of what happens when the tide comes in.
Currently on a similar scale we are looking at a similar size deal in a site not far from this one. If you’re interested in coming into this please call the office.
Wallace Court, Old Marylebone Road, W2
Purchase Price: £380k
- Worth more than £500k
- Share of freehold
- Separate kitchen
- Ideal rental investment
- Great local amenities & transport links
Call us now to secure the deal!
Sow & Reap
A Property Investment Company
!Tips of the Week
When investing in property you must forget your whims regarding investing where you may want to live or close to where you live, and instead follow the sacred property mantra Location, Location, Location!
When renovating a property always be mindful of not just the quotation but the time period, as the delay will be costing you in interest and losing you rental income.