By the time this article is out we will hopefully have exchanged on a property we have spent the last few weeks focusing and researching on. The property is due to come up in auction on Thursday 26th May 2016. This means by the time you’re reading this article the deal would have or not been done.
The property is in E9 and has a guide price of £650k. In truth the price will go to £750k and even a touch higher. The guide price is often kept low to attract interest and therefore ensure the property sells for well in excess of guide price on the day.
The property is freehold and looks like it’s made up of three flats. If a case can be made that we are purchasing three flats, we will benefit from a saving in stamp duty. This relief is known as Multiple Dwelling Relief and in my experience is often missed by lawyers, this would save about £20,000 in this scenario.
In this business it is important to have good professionals, but never just let them get on with it, they need to be overseen. Their interest is not you, it is them. They therefore ensure they are protected first and they are able to charge you well.
The beauty of this deal is the long term strategy. This property is not being purchased just on the basis of future capital growth, it is being purchased so it can be turned into a cash cow, giving a good yield every month.
As mentioned in last week’s article the big money in property is to be made in its capital growth, this is driven by location. It is of course great to have a cheque in every month but these are the extras and not the main objective. The property will no doubt rise strongly in value, as it’s in a ‘up and coming' location.
I know of a couple of property developers, both Jewish, who never sell. They purchase for the yield however this is done within the shelter of a strong location.
This means they make money regardless of the weather, come rain or shine the cash pours in. They should know how to preserve and increase wealth. One of the parties has been lending money since the time of Jesus I'm pretty sure. They come originally from Persia, now Iran, and they have been lending money for generations.
What’s interesting about this model is it is very hard for them to lose money. They lend out bridging funds and only on properties in London, and only to people they know. Their clients are property dealers and developers. This means they are purchasing the properties for cheap. If for example a property is purchased for 25% off the market value, so a £100k property is bought for £75k, they would lend 70% on the £75k purchase price. This means they would lend £52.5k. Their exposure would only be on 50% of the open market value.
In the 2007/2008 crisis property prices in London dropped only by 20% at the lowest point, so the money lent by these bridging companies is totally safe. This is almost a risk free exercise, this is why they have been doing this for generations. They make about 10-12% per annum. I once asked why they do this given they are property developers too and they make more money in this area. They disclosed to me this is just their offshore money which earns no interest any way.
The other activity I discovered they are into is ownership of freehold blocks. This is another great way to preserve wealth. When you own the freehold you make money in a number of ways. Firstly each flat has to pay you a ground rent; secondly you get a premium when lease holders renew their lease; thirdly you can manage the block and earn from the service charges.
This again means you will get your money regardless of the market conditions. Everyone has to pay their service charge and ground rent. If they do not, you simply write to the mortgage company and they will pay it on the leaseholder’s behalf and add it to their mortgage. Whether the property market goes up or down this money will be coming in. Every so often you will be able to get a large lump sum when a leaseholder decides to increase the length of their lease.
You also have the option to purchase short lease properties for yourself and then sell them on with the benefit of a long lease.
When I purchased a property on behalf of a client in a purpose built block I discovered that the bridging lender I knew was also the freeholder. This was helpful when it came to extending the lease shortly after purchase.
Their business is not simply to make 20% - 25% on a development project, but to invest in property in a way which insulates their wealth from fluctuations in the market.
Hence I for one pay great attention to what angle they focus on when investing in property. Currently their focus is on attaining high yields, which will make money regardless of the state of the market.
In this regard I have been given a deal close to Seven Sisters, which after development will give a yield of 8.9% on costs. This is very, very high for anywhere in London, furthermore this is a location where property prices will still rise.
The investment should yield 116% with a year assuming a 50% borrowing. So not only do you have a massive value add, you have a great yield and brilliant future growth prospects.
This is a deal from all three angles, a rarity. Call the office for more details.
