The New Way To Invest In Residential

The New Way To Invest In Residential

[vc_row][vc_column][vc_column_text]Residential investors are still stuck in their habits of the old buy-to-let investing model. Many have even abandoned buy-to-let investing for other asset classes saying that the good deals are no longer or there are no more opportunities. Andrew Walker and Warren Brusse of UK Property Partners who I accompanied on a mind-blowing tour of West Midlands and North East United Kingdom (UK) opens your eyes to the massive investment opportunities that are just not available in South Africa. Andrew Walker has been operating in the UK space for 10 years already while Warren with his 3 years UK experience has also been successful in South Africa property investment.

Here are some of the lessons I learned on the investment research days:

The biggest change in your investment strategy is the fact that:

  • We can no longer rely on capital appreciation alone
  • We cannot rely on easy credit and multiple mortgage bonds
  • We cannot get a never ending supply of motivated sellers
  • There is not a functional market of buyers and sellers all the time
  • We cannot rely on zero money down

The new way of investing is:

  • We buy in areas of high demand
  • We put down our first lump sum and our money where our mouth is
  • We create massive value with the property with refurbishment
  • We create high levels of cash flow
  • By default we start creating our own capital appreciation
  • We pull out a portion of the capital after refinancing the property
  • Massive cash flow profits of 20% per annum plus per property

Buy-to-let versus House of Multiple Occupancies (HMO’s)

The profits from HMO’s are clearly higher than buy-to-let in the UK simply because the HMO’s have multiple sources of income versus once source of income. A property is defined as a house in multiple occupation (HMO) if both of the following apply: at least 3 tenants live there, forming more than 1 household, you share toilet, bathroom or kitchen facilities with other tenants.

Here are the twelve key stages of HMO investment

1    Set up your Limited company based in the UK
2    Open your bank account
3    Deposit your upfront investment
4    Find the right location with tenant demand
5    Find the right property that works the plan
6    Calculate a practical refurbishment plan for a workable HMO
7    Crunch the numbers and overall running costs
8    Make the offer on the property
9    Co-ordinate the core refurbishment issues with the right team
10  Find the right tenants and fill the rooms
11  Create a positive cash flow profit machine
12  Refinance the property with bank within 12 months

UK HMO INVESTMENT CASE STUDY INVESTMENT BREAKDOWN

Property type: Mid terrace
Location: Isaacs Hill, Cleethorpes, South Humberside
Size: 7 Bedrooms; 2 bathrooms/shower room and kitchen, 2 bedroom flat

PURCHASE INFO

Initial Market Value                                  £235,000
Purchase Price:                                       £225,000*
Refurbishment                                        £25,000

* Includes Fees, Stamp Duty, Refurbishment, Appliances & Furniture

Expected End Valuation         £250,000

PROPERTY COSTS

Down payment/deposit                            £225,000
Buying costs                                          £7,000
Initial improvements                               £25,000

FINANCE OPTIONS

Option 1: £230,500 Cash upfront needed for first investment
Option 2: £245,000 Cash upfront plus Short-term Bridging Finance loan (available @ 9% over 8 months)

MORTGAGES
(assuming cash upfront scenario)

First mortgage (70% TV)                      £175,000
Equity realization (30% LTV)                £75,000
Actual investment after refinance          £50,000

-Once refurbishment is complete 2 – 3 months later
-Loan-to-value ratio can change depending on your personal criteria

MONTHLY INCOME

Total number of units 7 rooms plus 2 bedroom flat

Average cost per unit                              £33, 572
Total Gross rent monthly                         £3,272 per month

**The room rents will vary between £85 and £95 per week depending on the size of the bedrooms. There are 2 smaller single rooms, which would attract £85 per week, 5 larger double rooms that  would attract £95 per week and a 2 bedroom flat that would attract £110 per week

MONTHLY EXPENSES

Monthly operating costs                    £2,315
Less voids (vacancies)                      £327 (10% of gross rent)
Mortgage                                        £875 (@6% per annum)
Property Management fee:                £393 (12.5% of gross rent)
Insurance                                      £40
Maintenance                                  £160
Council tax                                    £120
Utilities                                         £400
(Gas, Electricity, Internet, Refuse & Water)

*This depends on which product we select but we tend to work on 6% per annum (interest only) at 75% Loan To Value (LTV)

NET PROFIT                                    £957 per month
NET PROFIT                                    £11,484 per annum
RETURN ON INVESTMENT                 £11,484 /£55,000(21% per annum)[/vc_column_text][/vc_column][/vc_row]

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