We have just closed a small deal for a client in South East London.
The cash flow is very interesting. The purchase price was £225,500 for a 3 bedroom ex-council property. The property is a spacious duplex, with even some outdoor space. Being ex-council, the service charges are very low and include the building insurance.
The client raised the full funds by way of a remortgage. The cost of the remortgage is 2.2% fixed for 5 years; this means the cost of raising this money is under £5K per annum. The expected rental according to LHA rates is going to be £15K. If we allow £3K of expenses you have an income stream of £7K, almost by magic.
The property too was purchased cheaply; it is about £30K below market level.
The three most important factors when investing in property are location, location and location! This property was bought in a particular area of South East London; an area which we have dug into deeply. We have carried out an inhouse investment analysis on this location, and we believe there will be strong long term growth in this location, for a sustained period.
The client lives in the Midlands somewhere; far away from the property. This was purely an investment decision, and taken with the report in mind. He purchased the property blind.
Many investors have an unexamined criteria, where the property they purchase must be close to where they live. Of course this is helpful when works need to be done and on going maintenance, especially if you will be managing it yourself.
However, saving a little money on building works is not where you make your money in a property. Money is made on the capital growth of the property, this is driven primarily by the location and how and why it will be lifted in the coming years.
This needs to be studied and incorporated into investing. We have 18 pages to say this particular area that we have targeted will lift.
One reason is that it is one of the last remaining boroughs in London, where the average price is below £300K, demonstrated by this very purchase.
This puts it within reach of the average couple, who earn the average wage of £25K each. Put together, a couple can borrow £250K. London is being priced out for first time buyers. They are having to leave and instead look at commuting options.
Another strong point is a station will be opening which will put Canary Wharf within 11 minutes train ride and Bond Street within 25 mins.
The area is a sleepy area which I have visited many times now, and it seems to be unaware of the kind of growth it will experience in years to come. And if we are completely wrong there is still the positive cash flow which will hopefully increase in time.
Buying an investment property in the current climate requires a lot of caution. Here there are not one but three sound reasons behind this investment.