When we were located in Southwick Street we came across a shoe repair shop also based in Paddington, our connection was he also does key cutting; and we often needed keys copied.
He often asked the question: how’s business? and what do we do? Having explained what we do and how business was he would often remark he needs to come and see us and sit down with us. After about two years of this he finally came and actually arranged to meet.
By this time I think we had even moved location.
After digging into his affairs it was obvious if he carried on doing what he was doing and nothing else he would be living a hand to mouth existence. The easiest way to convince a new client to see the importance of investing in property is to get them to look at their own home, when and how much they had paid for it compared to what the property is worth now. The chances are the property would have gone up more than they have saved. This will - hopefully! - demonstrate how property will increase in value going forward in the same way.
The problem was he had very little deposit, not enough even to put down for a small value property of £250k. He did however have equity in his main home, which was the only property he had invested in.
I mentioned we could extract the equity from his main home by way of a remortgage and then use this as a deposit for this purchase. Instinctively most people do not like the idea of refinancing their main homes. Most first generation Indians have worked hard to drive their mortgage down, as whilst they have a mortgage they perceive it to be a burden and something to get rid of. So as they are trying to eradicate debt from their lives, they become quite naturally averse to the idea of refinancing their homes again.
After much nervous discussion the couple agreed, apprehensive and full of doubt. You know this when people keep saying ‘we are trusting you’, several times over. When people say this it means they are not prepared to take responsibility for what they are doing but handing it over to someone else.
However they made the move and got the refinance done, the money was taken on an overdraft basis. This means they do not pay the interest on the extra funds until they choose to draw the funds down. This is ideal, as if you take the funds you’re paying for the interest and you’re not utilising the money.
We managed to find a one bedroom ex local property in W2, with a slight view of the canal. Interestingly the canal was simply built to use as a means of transportation with horses on either side being used to pull the barge. When the train network was expanded in the 1840s and 50s, the cost of transportation was decreased, as a consequence so was the use of canal and sea routes. Around the same time there was an increase in more modern methods of making bricks, cement and glass which led to a prolific activity in house building. Hence to date there exist a lot of Victorian built properties.
When this occurred the canals became dumping grounds and open sewers. So it actually wasn't a good thing to be close to one. However in time they were cleaned and became attractive places to live. Any property which is close to a canal or has a canal view now attracts a premium.
We purchased this property in September of 2012, for a shade under £250k, to keep the stamp duty to 1%. We actually tried to purchase this property previously, about a year before but there was some issue with the paperwork, apparently the lawyer for the seller hadn't done the paperwork properly and therefore the property could not be sold on.
After this was tidied up and the seller was ready to do the deal, naturally the agent approached us again.
At that time the property was cheap, but more than this it was simply difficult to find anything priced at this level. Now it’s not difficult, it’s impossible.
The property was purchased and a small amount of work was done to tidy it up and then it was promptly rented for £350pw.
The property was recently valued at £375k. This means the couple have got equity of £125k more in the property. They have not saved this amount during the last three years.
From doubters they have been converted into believers, they wish to replicate this again. However the market has changed. The ‘ease’ with which they had done this nearly three years ago is not the same anymore. At that time £62,500 was required to enter this one bedroom property, now the entry fee is £93,750. An uplift of 50% not to mention the added stamp duty involved.
So the game is getting more and more expensive to enter. People who are not in this circle will be priced out altogether.
They have at least now decided to take another step, not only this they have also taken the wise decision to involve their children too. Having seen the value of property investment they wish to pass this knowledge on to the next generation so they do not miss out as they did.
The next step involves refinancing the existing BTL to take out whatever they can and use this as a deposit for another property.
One of their daughters has a well-paid job so it makes sense for her to be involved in the purchase. Typically one can borrow up to five times your annual income as a loan. The deposit required in this case will only be 10-15% of the property value.
So we have been given two instructions one to make some use of the equity they have gained in the BTL property and the other is to procure a property which will make use of their daughter’s wage. This is a little back to front, but doable though probably not in Central London as the budget given comes to only £180k. This will have to be on the outskirts of London, the discount is not likely to be a strong one, therefore particular attention has to be paid to getting the right location. There are many around London which are likely to spike up over the next few years.
