A Discussion with a Developer from Long Bennington continued
If you remember, last time I talked about helping people, after I had a conversation with a developer from Long Bennington. He was looking for some buy to let properties to fill in the gaps in his development business. The plan was to buy properties that needed some work, with cash and renovate them quickly in order to let out. In this way he would add value to the properties and give additional “development” work to the other side of his business. Then, he wanted to mortgage the properties on buy to let deals, using the increased value to release the maximum equity.
How might this work in practice? Well for example, if he bought a property at £80,000 and spent £5,000 on renovations, it might now value for mortgage purposes at £100,000. The property could be put on a buy to let mortgage, typically allowing 75% of the valuation figure to be drawn down as cash, leaving the lenders required 25% equity “in the property”. In the above example, the total outlay was £85,000 (plus fees and expenses) less the £75,000 released in cash from the mortgage, giving £10,000 capital employed. If you wanted to buy this property in the finished condition, valued at £100,000, you would have to come up with £25,000 deposit (i.e. 25% of the valuation), so the attraction is obvious.
Buy to let mortgages offer us mere mortals, without a great idea, fancy business plan or business degree and CV to match, the opportunity to go into business, the “Property Business”. Where else in life can we go to a financial institution and borrow 75% of the asset value, in this case a property. This is known as “leveraging” and the above example is simply an extended form of this. Some investors have built huge property portfolios using this principle, employing as little of their own money as possible.
So were we able to help our developer friend from Long Bennington? Well in short, yes and yes, though perhaps not in the way that he had hoped. “Cash flow is king” is one of the first rules you learn in business. The problem with the scenario above for him is the ownership requirements for mortgaging properties. If a property is bought for cash, generally most lenders require a property to be owned for at least 6 months before it can be mortgaged, precluding his quick “renovate and run” approach. This generally applies equally if he wanted to sell the property within the 6 month window to a mortgage buyer, as they may struggle to obtain finance also. This has happened to buyers at auction, who find they have bought a property which, has been bought only a month or two before and has been returned to auction. This shows that it is vital to read the legal pack prior to bidding at auctions!
Our developer friend decided that this buy to let sideline, would tie up his working capital for too long and it was better employed in the development business for now. The above decision took us a bit of discussion and him some hard thinking, but that time was possibly the most valuable he had spent in a long while. As I say, this “property business” is all about choices, exciting choices and a new choice, many of us will soon have is the freedom to choose what to do with our pension pots, not just buy an annuity. Why not consider getting into the property business? If you would like to discuss the above or any other aspects of property investment, letting and management, then please get touch.