The importance of the three R’s: Reselling, Remortgaging and Renting
A week ago a husband and wife team of accountants came to see me, they had invested in several places around the world, from Romania to India, as well as in the UK. They have over 30 years of experience in dealing with property and were reluctant to come and see us, simply because they couldn’t see what possible extra benefit we could add to their wide and variegated experience of the property market. Furthermore our fee would be a slice of the cake as well.
I like these sorts of clients, it’s a challenge for me; especially when I ask what’s the highest return you have ever made on your investment, and if they answer honestly we aim to beat whatever returns they have gained.
Initially when we started sourcing properties it was mostly ex local authority properties in strong locations such as Maida Vale, St Johns Wood and Paddington too; those who didn’t have the time to go looking for properties themselves and wanted a hands free type of investment would use our services. Even those who did have the time used us because of the discounts we could get.
At this time the government was paying a large amount of rental for these properties. For example a three bedroom can be bought for £350,000 and the rental payable was £800pw, this equates to an income of £41,600 per annum. After mortgage and other expenses were taken off you would be left with a net income of £23,000, equivalent of a modest salary. With only 25% deposit required plus expenses, £100,000 would have been your total input into the deal. This was a no brainer and even a run for two to three years would be worth the investment. Even if the rentals drop afterwards you would have got most of your funds back from the strong rental yields.
This however was a honeymoon period, and a honeymoon is only there for a short time.
The environment changed and there were two changes in the market. First what happened was the bankers lost their jobs; penthouses which would have been occupied by this segment of the market disappeared, this hole was filled by DSS tenants believe it or not, they had an allowance for £1050 per week for a four bedroom property and £1500 per week for a five bedroom property and they were now taking up new build penthouses and other prime properties in Westminster. This meant ex council properties were no longer desirable as now they could command prime properties.
The final nail in the coffin was when the government put a cap on the rent it would pay; this was done to reduce their expenses and this was an obvious target just waiting to be shut down.
These two events meant this is was no longer the best way of doing property in Central London. However do not misunderstand, there is no doubt it is still a very good investment to purchase and hold this type of property as the yields are still higher than many places in London.
What’s most appealing is not the yield but the level of capital growth; an example is a property we purchased on behalf of a client for £325,000 in Burlington Close in January 2012, it is currently on the market with Foxtons for £450,000; this is an ex local authority three bedroom property in Maida Vale.
However as time has gone on we have got cleverer with the way we invest in property. One indicator is the calibre of investors we are attracting. Our investments are not just from the investors who have very little time and want to find a good home for their money, but from even those who are well versed with property and have been in the game long before Sow & Reap even came into existence. Investors who are accomplished business men and have a good understanding on the property market are using us to rotate their funds from one deal to the next. When we get money from this segment of the market we feel as if it is a stamp of approval on the way we operate, and of course the bottom line is the returns we are able to get for them. Ordinarily many business people make the highest returns in their businesses and then park their money in property to diversify their income; somewhere to turn to, to keep them safe on a rainy day. The reasons why many of the investors are investing through us is not to keep their funds safe for a rainy day but to make their money work aggressively on par with returns they gain from their businesses.
Cash is king in the current market, and to put all your funds in one property and wait for it to rise is a good way of making money, but not the quickest way. For one your cash will be trapped for a couple of years, or however long your mortgage product is for, a better way is to ensure it comes back out so you can trade again. This is a more aggressive and more profitable way where we are taking short term views of three months and even less.
You can afford to be aggressive with property and get away with it. Property by nature is not a volatile investment, it does not swing up and down like the stock markets do. What people term as a crash is when London property prices decrease by 15%. Our properties are sourced at least this much cheaper, in strong locations where prices are rising month on month and so the chances of experiencing a loss is slim. To date, on trading property in Central London, we have not incurred a loss; this has been verified by a leading London Law Firm DAC Beachcroft.
Holding property has its place, but so does trading property. It’s important to predefine what your requirements are prior to just letting the first deal define what shape your investment will be.
I met a businessman who had purchased a HMO with some of his partners, it was giving a strong rental yield. With HMOs this high yield is often at the expense of future capital growth. In many boroughs it is very difficult to get rid of this label as they actually like having these kind of properties in the borough as it allows lower income earners to live in expensive places where they ordinarily could not afford to live. It encourages a more diverse population in the area.
As this investor was on a high income already I asked him why they had decided to purchase such an investment as half of their income was going straight to the government; he had no answer. They would have been better off focusing on capital growth and not the income.
Investing in Central London has many benefits besides the obvious one, which is your money is growing strongly. There’s a good saying which is: you should grow your flowers where you can water them. In investment terms this means you are in an environment where you can resell, remortgage, or rent your investment easily within one to two months; there’s always a way out, there are multiple exit strategies. Investing overseas is often not so easy to realise your investment, most countries do not have a financially mature economy as we do in London.
Wembley, London, HA9
Purchase Price: £370,000
- Prime development opportunity in North Wembley
- Requires total modernisation
- End value expected to be £500k to £550k
- Probate sale
- Rare to find such a deal in this street
- Close to all amenities, Wembley Park station is only minutes away
- Wembley is earmarked for massive regeneration which is already well under way
Call now to purchase!!
Sow & Reap
A Property Investment Company
!Tips of the Week
It is essential to determine what you want from your property investment – quick gains (buy and flip) or a consistent second income (buy to let). If you are not sure consult an expert to know what would suit you best.
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.