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When the going gets tough

22nd January 2019

Currently, there is only one topic dominating the press.

As investors what concerns us is the effect on the market.  The effect is actually good……..if you’re an investor.

There are a couple of issues to be mindful of.  One is don’t expect to be in and out of the deal quickly.  The point being, you can go into the deal, but you may not come out very soon.  The truth is no one actually knows what the situation will be in the future.  We are all speculating.

Although, this is actually not as bad as it sounds.  A point of distinction needs to be clarified, what I am saying is the onward sale is unpredictable.  However, this does not necessarily mean your money is trapped.

Let me illustrate this with an actual deal.  We are in the process of closing a deal in Fulham.  The site comes with the benefit of planning for a few apartments and a commercial space.

Due to the uncertainty in the market place, this deal cannot be considered on the basis the apartments will be sellable at the anticipated price once the development is complete; the environment is likely to change.

In order to address this problem, we have turned the plan for this deal around from a buy and sell deal, to a buy and hold deal; with one proviso, the money should not be trapped in the deal, it needs to be released.

We will take this deal and go back into planning.  The new planning will be to turn this into a ten unit HMO.  This is expected to enhance the rental yields to about 10%.  We have had experience with this borough previously and have run this by our planner who has confirmed the viability of this plan.

As a hold and rent proposition this deal would ordinarily trap your funds in the property.  Most BTL deals in London are restricted in terms of what you can borrow, not by the mortgage product of the loan but the rental cover.  Mortgages have a stipulation of 145%, or some are more generous and use 125%.  This means the rental must be higher than the mortgage amount.  This is the ceiling when applying for a loan.

By turning it into an HMO your yields start touching double digits.  Then, instead of your cash being trapped in the property, you’re able to release it.  Your enhanced rental income allows you to refinance. You will be left with a cash cow, providing you with income for as long as you hold it.

Rentals are a lot more stable than capital values.  With rentals you’re in a market which is driven by a need.  The need for shelter.

This is actually an extremely good strategy.  There are investors who only focus on these kinds of deals with good reason; you’re largely insulated from the turbulence of the economy.  The current market forces one to think and act in a leaner and more creative manner.

Suresh Vagjiani

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