This week we completed on a three bedroom flat close to the prettyLittle Venice canal. The property required refurbishment, but at£325,000 the price was very cheap.The comparables around the area gave indications of the pricesbeing around £395,000.The property is currently being refurbished at a cost of £16,000. Aproperty in this location can pretty much be rented in any state and within days.
The main customer of this type of property used to be thelocal authority. Then it did not matter the condition of the flat as beggarscannot be choosers, all you needed was a gas safety certificate inplace. Now this sector of the market is not offering competitive rents, athree bedroom according to the LHA register generates only £340pwway below the private market rental.
Now the rentals are swinging back to the private sector,so it pays to spend money and have an attractive property.The aim of the refurbishment is not just for looks but alsofor a hassle free five year rental period.
This was a pharmacist who purchased the property. Many of ourclients currently buying property are pharmacists, probably because nomatter what the economy does the two things which will not decreaseis people getting ill and dying. However they are all complaining thingsare not as they used to be, and regulation has shaved their profits.Hence the reason why many are now ploughing their profits into propertyas they see theirs as a dying business.
Most run their own business and consequently will not be able to soforever, as the business will collapse without them running it there andtherefore the income they have been used to will cease. Often it doesnot justify to sell the business as it will only achieve a fraction of whatit is worth to the owner. As a small business the business success isbased upon the owner, without the owner the business will start todecrease.
Property has two attributes, one is it does not require the owner to spend his timeon the property to generate money. It produces two types of income one is a monthlycash flow and the other is the value of the property increases over time. Over amedium to long term property prices always increase.
This is in stark contrast to running a business where when theowner is taken out the monthly cash flow decreases and the value of thebusiness comes down.
This is why property is a good investment to ultimately substituteyour business one day.
Looking at a recent purchase, the property and the refurbishmentcost comes to £340,000 but the property is worth we estimate at£400,0000. In order to expand the portfolio these funds need to beextracted. There are two ways of doing this, one is to sell and realise theprofits. This would incur agent’s fee. The cost of purchasing this propertywould have been high, stamp duty is 3% + legal fees and sourcing
fees. About 8% of costs would have been incurred in purchasing andselling the property. Another way is to refinance this as 75% of the gaincan be extracted leaving only 25% buried in there and the property stillincreasing in value for you. Therefore £56,250 can be extracted fromthis property after a six month period without the need to resell. Thiswould go towards purchasing a second property.
If you sold the property the selling and purchasing costs comeroughly to £30,000, leaving you left with £45,000 and no property.
So in this case it makes sense to keep the property. The locationensures good capital growth and upward pressure on the rental.
Very few of our clients want to purchase one property and then sitback down. Most have dreams of building a portfolio. It is our role tosee how to get them from where they are at to where they want to go,with what they have. We make very conservative assumptions andalways keep an escape route in place.
We never consider the property as the main goal but a working relationshipis our goal.
Suresh Vagjiani
Managing Director
Sow & Reap
A Property Investment & Financing company.
