The refurb is nearly finished but we can’t yet sell to a mortgage buyer as there still is no management co. in place. I love buying leasehold flats as I can get great deals because they are far more prone to title issues than freehold houses. But then I have to resolve the issues and sometimes that’s not as easy as expected. You need at least 50% of the flats in a block to set up a Right to Manage co. (RtM co.) and there are four in the block, so we need two minimum.
In this case the landlord of the two flats upstairs doesn’t want a RtM co as he’s hoping to buy out Madelaine, owner-occupier of the other downstairs flat. Having no RtM co. means she could only sell to cash buyers and he wants to pick it up cheap. I don’t think he’s allowed for human nature though… being difficult over this and other issues means she’s unlikely to sell to him at any price!
Madelaine wants a RtM co, but not yet due to ongoing divorce settlement negotiations, if her flat to shows an increase in value that might the outcome.
We need to sell for at least £55K to break even and that’s about the most we could hope for from a cash buyer so why sell now? The figures (approximated as I haven’t finished the refurb yet) look like this:
Purchase price £36.5K
Spend on materials and other trades approx. £6K
My hours approx. £5K.
Notional value of business partner’s finance £5K.
Estate agent fees £1K
Legal fees and other misc. costs £1.5K
The full market value when the RTM co. is in place is probably £60 – £65K. It’s amazing how what looked like a 30% BMV deal suddenly looks less appealing when you add everything in. Amateur investors and some property ‘gurus’ are inclined to overlook many of the costs above and claim much higher profits than they really make. Finance can be the killer when using bridging or a light refurb mortgage with high setup fees. Also it’s unrealistic not to cost your own time.
I wouldn’t have done this deal except my new business partner suggested it would be more profitable to do many deals for small profit, than just one or two deals a year with massive profit. It makes sense – but only if you actually make a profit! The refurb has gone over-budget from £8K to £11k, partly because we did extra work soundproofing the ceilings and partly because my original guesstimate was a touch optimistic.
The other disadvantage of more marginal deals is they are more risky. The smaller the profit margin, the easier it is to make a loss. The old truism that high profit = high risk is wrong. The reality is high profit = low risk and low profit = high risk, unless you work in sufficient volume to play the averages and can afford to make a loss on the odd deal.
Another part of my strategy is always to buy properties that stack for both selling and letting. I’ve learnt this from observing the mistakes of others. I know several landlords with portfolios of over 100 units who were buying with no-money-down (NMD) finance before the credit crunch and a primarily buy-to-sell (BTS) strategy. After 2007 suddenly the value of their stock fell off a cliff so they couldn’t sell to get their money out. Since much of their stock was low-yielding it was no good for letting either and they were stuck with a massive monthly spend servicing their loans and insufficient funds coming in from sales and rents. Some went to the wall, some of the cleverer ones adopted strategies like selling lease-options to tenant-buyers to increase cashflow and are now doing well. All have been helped by low interest rates. The lesson for me was never to buy low-yielding units even if I intended to sell them, as you never know what the future holds and you might get stuck with unsellable units on your hands.
So on Friday I put an ad in Gumtree for a tenant at full market rent of £425 and got a reply the same day! A working tenant which we want as everyone else in the building is working, and she’s viewing tomorrow. A newly refurbed flat is a bit of a USP and she sounds perfect on the phone, but it’s unusual to get the right tenant first try. We’ll see.