Perhaps it's not surprising that I’m hearing statements like this more and more. The most recent time was last week at a Spanish Tapas joint. I love Tapas because of the portion sizes. Plus, I’m a talker, and talkers don’t have time to eat much. We’re too busy talking. Tapas and a decent Rioja, therefore, hit the spot.
We’ve chosen to hole up in a house on a Spanish hillside for the summer holidays. When we emerge for essentials like water and restaurants, we inevitably end up bumping into other Brits.
Talk sometimes turns into business and if the subject arises, I’ll happily discuss investment property. Well, it is my favourite subject.
So when such a conversation led to that point, I got the latest response about how Buy-to-Let surely makes less sense due to rate rises. I like having the opportunity to convince someone otherwise, knowing what you know.
It’s not to embarrass the other party or prove them wrong. It’s to give them something for free. Some knowledge which may help them see through what they are force-fed by the press and find out more for themselves. Who knows; they may become a client, and it may help them become a bit wealthier one day.
I passed on what I know and I think my new friend left feeling more confident about investing his hard-earned into good old bricks and mortar.
Meanwhile, I’m sweating my proverbials off in the unusually humid Spanish heat, and I get news that an offer I’ve placed on a property has been accepted. I’m currently very excited about it.
The property is spitting distance from one I recently completed, which is my star investment in terms of cash flow and return on capital employed.
The difference is that this new one was bought for less than the asking price having been reduced. Now there’s a new phenomenon; about bloody time too. I know what you’re thinking: that doesn’t happen where I live and the figures wouldn’t stack up.
But here’s the thing: it may well do. Part of what I do in my consultancy work is to help clients find worthwhile investment properties, normally on their doorstep. They don’t always have the time or detailed knowledge to analyse what makes sense to buy.
I get to spend time researching and writing reports on potential property investments in areas that are sometimes hundreds of miles from my own patch. I’m often surprised at what I discover and how the numbers turn out. The work is interesting, and I even get paid for it.
So far I’ve deduced that almost everyone is close to an area that can be plundered for rental portfolio-building purposes.
To demonstrate this, the house I have just agreed to buy for £195,000 will rent for around £1,200 a month. This house was originally up for sale at £210,000 but was reduced because a tenant was in situ who refused to leave. The reduced price will help to offset the increased rate.
Potential buyers looking for vacant possession became disillusioned and went elsewhere, and the property was reduced as the vendor started to fidget. I made sure the agent had my details on speed dial for when the tenant left, and I viewed and offered on it the same day. The vendor snapped at my offer like a hungry labrador at a frankfurter.
The 75% LTV mortgage will be fixed at 4.29% over a 5-year period costing £528 a month leaving £672 of gross profit/cash flow. The gross yield will be 7.38%.
The property has a very good kitchen and bathroom, and although I didn’t see the boiler in action (because there were no funds left on the meter) experience tells me it’s fairly new and will operate as expected.
All this means that refurbishment costs will be less than £5,000 and the return on capital employed (RoCE) when taking into account the deposit, stamp duty, solicitors fees disbursements and development costs, will be 12.8%.
It also means that although rising interest rates can impact profits, they are far from killing off well-priced BTL opportunities. Just the plans of the ill-informed amateur who find themselves at the periphery of a market they don’t understand. Like any business venture, unless they are prepared to plan meticulously they should probably leave well alone.
Matt Cottle can be reached at www.propertyinvestmentadvice.co.uk
