The return of the cow
21st May 2016
My teacher Mr Ali, at Copland High School, was a rare and great teacher. He kept things simple. There were a couple of things he taught me which still helps me to date. One thing was that mathematics is simple, even at degree level and beyond. It is merely a combination of four actions: adding, subtracting, multiplying and dividing. No matter how high and advanced you go, it can always be reduced to these four elements.
The same can be said of property. It is simple, it returns in only two ways: capital growth and rental income. In more simple terms you make money by the property going up in value and it can give you money month on month.
It’s been a while since money could be made month on month in good locations in London. The last time I saw this was in around 2009 when the councils were paying over the odds to attract much needed accommodation. The more central the locations the higher the amounts. They did not discriminate on the property. E.g. A ‘rubbish’ ex- council property would attract the same rent as a new build penthouse apartment as long as it had the same number of rooms. Therefore Westminster were paying the highest rents, being one of the most expensive boroughs to live in.
At this point you could buy a two bedroom, long lease, low service charge, ex council property in Westbourne Grove for £275,000 and expect a rental of £28,600 p.a. A 10% plus yield on your investment and a W2 location.
This seems too good to be true; I assure you non-believers it was true, we were collecting the rents.
The same flat now is worth £550k, seven years of W2 growth.
There has been a spurt in capital growth in recent years which means a reduction in yield. To give an example we purchased a property in Bryanstan Square, a beautiful property with high ceilings. It is a share of freehold flat in W1 which we bought for £1.3m, we spent around £100k refurbishing it. Now it has become a stunning two bedroom property overlooking the square, valued at £1.75m. However the rental achievable on this property is £850pw. This gives a yield of 2.5%.
As the price of the property goes up the yield will naturally decrease. This is a time of dampened values, given this event the yield of 2.5% is a little rich.
The market is uncertain currently. It is a little dangerous to purchase and commit to high level properties at the moment. Anything around £500-£750k is safe and is still flying off the shelfs. You cannot get enough of them.
Most people in this market stagnate, meaning they do nothing. Actually the time to move and go aggressive is now, not when everyone is in the market to purchase.
The key to unlocking this market now is to focus again on yield.
Remember there are only two ways to earn from property, growth and yield there is no third. Now is the time to focus on the latter.
Does this mean you should purchase in the North of England, where the yields are touching double digits?
No, the majority of the money in property is made from capital growth, and capital growth is driven by location.
So why focus on yields?
Because the capital growth of property above certain values is uncertain in the current climate. the ideal scenario now is to buy in strong locations where there are sound growth factors. BUT to focus on the yield. Therefore you’re earning money on the property on a monthly basis, come rain or shine.
This is the smart way.
There is an angle to being able to achieve this in a legitimate and legal way.
We have been working on a deal which we believe will generate a 8.7% gross yield. This is both achievable and even exceed-able.
The property in its essence is simple, however the things around it can get complex. This is why you need professionals around you to get the deal done and to get the investment producing. It involves being able to coordinate several different areas of expertise, funding, planning, architecture and the legals all have to come together and be singing from the same hymn sheet in synchronicity.
The location of this property is in Homerton, which is a posh name for Hackney. I know the area well having lived there for a year whilst at University. It is only a short bus ride to the City of London, in close proximity to Liverpool Street and Angel which is where my university was located in Northampton Square.
In a nutshell the property will be purchased for £800K, £400k will be spent on the property. Following which it will be producing £102k per annum gross. When the property is completed it will be refinanced assuming a valuation of £1.2m conservatively releasing £780k back.
To keep things simple we assume 50% in cash will be needed to do the deal, this means £400k upfront and another £200k spread over a six month period. The development will take six months.
After this the property will be rented and will be refinanced which will mean you will be able to extract £180k out of the deal. This means you should only have £420k in the deal.
This deal is a cash cow and is expected to generate an income of £28k after all costs. This has been calculated allowing for an 85% occupancy rate which is generous given the location, 5% on the mortgage interest and £15k pa for all costs as well as a 10% management fee.
When you’re getting a 6.7% return on the money invested, and you are in an area where there will be a strong uplift in price, there is not much more to think about.
Call now if this deal interests you!
The Real Deal
Prime St. John’s Wood Property Purchase Price: £450,000
- A large bright one bedroom flat in a prime location
- Long lease
- Probate sale
- After minor works we expect the value of the property to be around £695k
- Massive growth opportunity due to the prime location
- Excellent buy and hold opportunity
Call us now to reserve!!
!Tips of the Week
Decision making and speed are two characteristics which separate the investors who make money and those who do not. More people lose money by not making a decision than making the wrong decisions when investing in property.
While renovating a property, try to get multiple quotes. But always be mindful of not just the quotation but the time period as well, as the delay will be costing you in interest and losing you rental income.