This morning we were hoping to grab a property in Kilburn for a client who has bought and sold from us several times over many years.
The property in question is Lot 1 at the Savills auction. This property is a lower ground property consisting of approx 800 sq. ft. This information was not on the auction details, we got this from the EPC which is by no means accurate but does give an approximate figure.
He is the perfect client. He has already purchased one from us on the same road. The property he bought was purchased about ten doors down from this one. The property was purchased in September 2009 for £300,000. The client had attended one of our seminars and agreed to buy it there and then, blind. At this time the property was a one bedroom and since being purchased it has been converted to a two bedroom and is currently getting a rent of £1,600pm which gives a healthy yield of 6.66%.
The bulk of the money has been made in capital growth; the property has risen strongly it is now worth £585k, nearly doubling in value in only three and a half years. This is more than the client has saved over this period of time and certainly more than his business has made over this period.
Originally the first transaction we had done with this client was a little flat in Luton which was purchased for £38k from memory. It was cheap to buy and gave a good double figure rental yield; this was many many years ago, pre credit crunch times when you could get 85% LTV, meaning on a transaction like this you only needed to put £6k into the deal.
We originally purchased several of these flats in the same block, attracted by two things, one was the ability to pull out whatever money we put into the deal plus a little more straight away, and the other was the cash flow was positive. So even after all the money had been extracted from the deal you were left with a positive cash flow.
However initial looks were deceptive. The type of renters this property attracted was just unbelievable. There’s a saying: if you give out peanuts you get monkeys. The hassle factor involved in owning these types of properties is not worth it even if these properties were given free of charge.
We however coached him through all the issues he was having as we were facing the same, and he disposed of the property a short time down the line at a price similar to what he paid. It was good riddance.
Though the deal wasn’t the best experience, the client knew our intention was good, even though at the time in retrospect perhaps a little naive.
The next property he purchased with us was in Kilburn which was discounted from the market value. The mortgage rate we got for him at the time was better than what was generally available on a BTL basis, we managed to secure a 85% LTV mortgage at 3%. This meant he had to put very little into the deal.
There was a time when the client’s main business was not doing too well and he wanted to sell the property to cash in and again purchase another property and do the same again.
We advised him not to do so, if he sold there was little chance he would have been able to purchase another property at that time. The mortgage environment was getting tougher and to take out a new mortgage in his name would not have been easy. Furthermore the costs of coming in and out of a deal, even of this size, isn’t cheap it’s roughly in the region of £20 – £30k.
There is no blanket rule to whether it is better to resell or hold on, you would need to look at your personal situation and the environment as well. In this situation the advice we felt was correct as the property is in a location which is being lifted as a consequence of its proximity to Hampstead and St John’s Wood as well is the ripple effect from the West End. As prices rise in the centre of town, this rise is rippled outwards. Though Kilburn looks like a rundown area, due to its location prices of £850 per sq. ft. are being achieved and they are still rising.
Whilst looking at this client’s financials (as it’s prudent to check prior to bidding), we discovered his income isn’t quite what he had thought. Many lenders require a minimum income in order to obtain a mortgage. This wasn’t the first time we have come across this. Many self-employed are confused about how much they actually earn. Some think what their company earns is what they earn, others think a dividend is a salary. So it was no surprise when we looked at the source paper work we discovered the paperwork didn’t quite match the perception of the client.
The property we were looking to purchase also was in a rundown condition, which meant it wasn’t lettable and therefore it wasn’t mortgageable. We had little option except to go for a bridging loan. This meant we had to reduce our bidding level accordingly. We reduced it from £525k by £25k to take into account six months of bridging costs.
This was a slight blockage but certainly not a deal breaker, it does mean time becomes expensive and so if the project is not tightly controlled it could spiral out of proportion. Work should start on the property at the point of exchange. Many things can be arranged prior to completion, including applications for any permissions required. The monthly cost on a bridge for this would be £3,150. This can be saved by using this time to prepare.
On this occasion we were not successful as the price went to £506k and looked like it was going to go even higher. However the preparation to get to this point is valuable and leaves the client poised to strike at another deal as the ground work has been done.