Investing in property Pt2.

Property investment Pt2. – Live-in Refurbishment

 

Probably the most affordable and common form of property investment is what I call “Live-in refurbishment”. It isn’t for the faint at heart, or those hoping to live in a palace at all times, but it can propel your net worth, while at the same time minimising your tax bill.

To put it as simply as I can, Live-in Refurbishment investing is to buy a property which is either in poor condition or otherwise undesirable. The purchaser will live-in the property as it is being improved (usually over an extended period) and eventually sell or re-mortgage what will then be a more expensive property.

Live-in refurbishment is the most common type of property investment for individuals who are hoping to get their foot on the ladder and increase the value of their investment over the period that they own it. It was my first type of property investment, and a number of my friends have had similar success with this method.

 

The first step in this journey is to know how far your finances will allow you to stretch your budget. Speaking to a mortgage broker can be invaluable. A good mortgage broker should be able to break down not only your affordability but also your possible costs for the upcoming, potential purchase. Once you have a budget in mind, you can start on the hunt for your purchase.

 

Location, location, location!

 

It is worth keeping in mind that unlike with almost every other type of property investment, you are going to be living in the property that you choose. So make sure you will be comfortable living there for a minimum of six months, but most likely a year or two. A mistake that many people make is to buy a property on the basis of it being a good deal, without thinking about the ramifications of residing there. If your personal or social life becomes affected by your choice of location, it is likely that you will feel disenfranchised with your investment which could cause you to make rash decisions during the refurbishment and eventual sale. If your work life is affected and it puts your bonus, commission or employment in jeopardy, then you could lose more than just your initial investment.

Once you are set on a location, it is time to do some research and identify keys areas that you would be interested in investing. Using the helpful tools on Rightmove and Zoopla, you will be able to find historical sale values along with property pictures and floor-plans. After a couple of hours’ of research, you should be in a position to pick up the phone and talk to local estate agents with some level of authority. You have your mortgage broker, you know your budget, and you have a reasonable grasp on what you can with your property. It is important to make it clear to the estate agents that you only want to purchase a property which you can add value to. Most estate agents are inherently hard of hearing, but the better the relationship you build; the more effective your search will be. As Sales Negotiator, the best developers (meaning the most successful) that I knew came into my office to chat with me at least once every couple of weeks. They knew me by name and would ask me how things were with me in the business as well as the market in general. Their approach meant that they were at the front of my mind when a good ‘deal’ came along. And as I had a long list of investors registered with me at any one time, their approach to me proved invaluable. This tactic wasn’t solely used by property investors; it also worked with domestic purchasers. Despite most opinions and stories that you will hear, estate agents do have emotions other than greed. So when a connection is formed with a potential purchaser, it is entirely possible the estate agent will work that little bit harder for them. If that fails, then there is always bribery!

 

After a few days and weeks, it is likely that you will stumble upon a potential purchase, property in a reasonable location with ‘potential’. It important at this stage to come to terms with what you are willing to live in, properties with ‘potential’ can range from a tired premises in need of a lick of paint and a new bathroom or kitchen to full refurbishment jobs that are barely habitable. Typically it is advisable to go with the former, especially if it is your first investment, but this depends on a few factors, chief amongst them is budget. If you can afford to spruce up the property while living elsewhere, and then move in and finish the job, then that is fantastic. But if you are like I was and on a shoestring budget, then you need to be able to feel comfortable moving straight into the property or possibly –also like me- moving back into your Mother’s house for a time.

 

The ultimate aim of this purchase is to make a profit, so we have to take a cold, hard look at the figures before making an offer and moving ahead with any purchase. It was all too common for purchasers when I was a Sales Negotiator to effectively overpay for a property because they wanted a ‘project’. A rough example of this would be a property on XYZ Road in good condition selling for £500,000 and a purchaser buying a ‘project’ on the same road for £480,000 even though it requires £40,000 worth of refurbishment to bring it in line with the property that sold for £500,000. If this is purely a commercial venture, then we have to be strict with the numbers. Always leave yourself a monetary buffer for unforeseen circumstances that may arise. The most seasoned professional is cautious of potential unaccounted for costs, and so you should be too.

To help you get a ballpark idea on your build costs, it is essential to call in a few professional tradespeople. It will almost certainly work out cheaper to have individual specialists in rather than a contractor who oversees the whole project. It is also much more likely that individual tradespeople will be comfortable with you helping them out while they are working. It may not be glamorous, but the goal is to keep your costs down and maximise your return, so keep yourself busy.

 

It is important during thing stage to not spend money where it is not needed. It is very easy to fall into the trap of spending money where you believe it should be spent, rather than where the ‘market’ would want to see it spent. I once met a budding developer who spent £10,000 on a kitchen work surface in a £300,000 flat because a developer he knew and admired did the same. It turns out that the developer that he admired was renovating a £2,000,000 family home in one of South West London’s well-known property hotspots. There is no better way to eliminate your profit margin then to spend money frivolously where it is not needed. Don’t be afraid to ask your newfound estate agent friends for their advice during this process, they will be highly motivated to provide you with free advise as you would have made them aware that you will be selling the property in the not so distant future. And that means more commission for them!

 

A note on purchasing costs.

 

As this is an almost complete commercial venture, it is essential to be realistic with yourself and take account of every pound spent when making your purchase. Stamp duty and solicitor’s fees are often the most considerable outlay, but there are also costs involved when arranging a mortgage that a lot of people don’t account for until they read their redemption statement upon selling the property. Be aware of any deferred costs and early exit charges that come into effect when redeeming your mortgage. One way to avoid early redemption penalties on your mortgage is to port your mortgage. This process involves selling your original property and simultaneously purchasing a new one. There may be an arrangement fee associated with this process, it should however pale in comparison to a redemption penalty.

 

 

As always, this is a basic overview of some of the aspects of this investment strategy. Some purchasers prefer to live in their completed project for a while to enjoy their hard work, and others choose to move on to a new (hopefully larger) venture straight away. Please feel free to get in contact if you require any further information, my social media accounts can be found on this page, and I will be happy to try and assist.

 

Patrick Henry

08/2018

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Property, our government and secondary problems.

Why can’t the government manage the property sector?

It is an interesting set of affairs when a conservative government chooses to increase taxes in any sector, but something doesn’t sit right with me when such a huge sweeping tax is brought in within the property sector. In an attempt to quell the purchases of multiple properties by budding investors and professional landlords a 3% stamp duty tax was introduced “if buying a new residential property means you’ll own more than one home”. There are ways around this tax if you ultimately sell your first home within 36 months of your new purchase, but the principle remains. It seems that our government is yet again dealing with secondary issues rather than the root cause of our problems. The heavily quoted line is that we are creating “generation rent”, baby boomers and those with inherited property wealth are gobbling up a disproportionate amount of properties and pushing prices up beyond what the average working person could ever hope to afford. One would assume that this would be a very simple challenge to tackle until it is counterbalanced – or rather unbalanced – by the fact that rental prices are too becoming unaffordable! My aborted attempt at an A level qualification may have come to an abrupt end before I reached the Advanced Structural Modelling module, but I made it through long enough to achieve an infantile grasp of ‘supply and demand’. It seems certain ministers and policy makers were not afforded the same prestigious education that I was in Merton College (not the one in Oxford).

Why would you focus your time and efforts on penalising buy-to-let investors who fuel the rental market and help to keep rental prices down or at least in equilibrium with sales prices, when your attention could be spent focussing on the fact that in London only 39’000 new homes were built or created and in 2016/2017 and the average population growth sits at around 150’000 annually over the past ten years. More broadly in the U.K. throughout 2017, 200,000 new homes built, but our population growth is averaging at somewhere around 500,000 per year. These figures make it clear that whilst the problem is intense in London, it is still also a problem –albeit a lesser one- nationwide. So improved transport links in and out of the city like the ones currently underway could help with the stress levels we are experiencing but it could hardly be deemed a lasting solution.

I had the underwhelming privilege of asking our then Housing Minister (now Conservative Party Chairman) Brandon Lewis in 2016 what we could do about the lack of houses being built and the stranglehold that local councils have on new developments. After the expected platitudes and politician garble the nuts and bolts of his solution was that “we are looking into the potential of ‘flat pack’ houses”. I was left wondering two things; does this minister have shares in IKEA and secondly does he even understand or realise the importance of my question? In reality our government is doing more than just simply “looking into flat pack houses”. The most recent interventions have been in a bid to make it easier for first time buyers to get onto the property ladder and make their first house purchases, these intervention have come in the form of Property ISAs and the Help To Buy scheme. The latter has seemed to work rather well, especially in London where the average first time buyer’s deposit is reported to be four times the average national wage. The Labour party have proposed Rent controls as their solution to the issue of rising rents but surely when you couple expensive purchase costs (assuming they would keep the additional 3% stamp duty) with capped rents we will see landlords flee from the market as their yields are decimated and capital growth is suppressed. Moreover this will leave a shortage in rental stock levels and force the government and local councils to increase the amount of properties that they are currently building. Now I’m not sure about your thoughts on the matter but that sounds like too much of lurch towards socialism for me and ultimately poses the question “where does the money come from?”. Neither of these options actually take control of the underling issue that we just simply do not build enough houses to sustain the population growth of this country.

Earlier when I mentioned Brandon Lewis’ response to my question I didn’t mean to single him out, as previous and subsequent housing ministers haven’t been able to tackle the question of how we tackle the property market’s perils either. But when you couple this apparent lack of action with the actual action that we are taking it seems as though we are wondering into a systematic attempt to tackle the sprawling branches of our problems rather than dig away at the root.

Patrick Henry

July 2018