Location: East London // Type: Personal Property (40% Shared Owner)
Strategy: Rent a Room (Lodger) // Property: 2 Bed Flat (+Gym & Concierge)
This is my personally owned property in London, with the spare room rented out this also generates a healthy rental income to cover the high costs of a London flat.
Location: South Yorkshire // Type: Light Refurb & Buy to Let
Property: 3 Bed Semi-Detatched // Purchased Using: BTL Mortgage (Own Capital)
This is a great little project, in the middle of a really hot market. I purchased this property for £106k after a light refurbishment and costs it will return £8500 profit on day 1 and a 20% return on investment. For this particular project, I purchased using a standard BTL mortgage rather than a bridge with an intention to hold the property for 2 years for capital growth, the downside of this is locking in funds however is planned and intentional due to the property being in a great location near 2 primary schools and a street away from the main secondary school. If I was to bridge this, refurb and sell it then the project would be 20% return on cost and 6% return on GDV which is quite low, so the decision to hold onto it for 2 years drastically changes these figures.
Due to a strong market where this property is, the uplift in the small refurb and the rental income. The aim after 2 years is for the property to generate £8500 uplift after the refurb, £7704 net rental income after costs (20% dedicated to voids and maintenance) and a hopeful 4% property value increase per year giving a GDV of £140,000 in 2023 creating an extra £10,000 equity.
On the assumption of the figures and values over 2 years the project will generate a net profit of £26.2k which would be a total of 62% NET return on initial investment over 2 years, or 31% annualised with all figures and assumptions added. All property investors work out ROI a little differently, so it’s hard to compare like for like. To clarify, this ROI figure includes rental profit & equity increase over the 2 years as this will be re-invested back into the business and I see this as a 2 year project and what I could make in 24 months time from this deal.
2 Year Exit Strategy
If the market remains strong and it gains 4% value a year, the aim will be to refinance this property. At 75% LTV this would mean pulling out £25,450 and leaving in £16,500. Alternatively, I could sell the property which would unlock the £50,500 of day 1 equity (£130k GDV – £79.5k Mortgage) + £7704 net rental income from the 2 years + £10,000 value increase & equity, putting £68.2k back in the bank to recycle onto the next project.
Understanding and managing risks is crucial when working on any investment. By understanding the risks, I appropiately try to mitigate each of them to lower the chance of a risk materialising into an issue during the project which will help ensure the success of the end to end project. This is important as I look to work with investors in the future, I can ensure my experience can help keep investor money as safe as possible on each project.
Tap below to explore each of the risks and how they are mitigated
The lender may believe that the property is not worth £130k Gross Development Value after the initial refurb.
Take advantage of the hot market at the moment and lock in the funds for 2 years, this reduces the reliance on a refinance after the small refurb and enables the project to grow over time after the initial uplift. If the GDV is correct, anything above this over 2 years is pure profit.
As a new property investor, my figures may be slightly off or I may not account for everything required during a refurbishment.
This is a small project to minimise risk meaning that room for error is smaller. A 10% contingency has been added to the project with additional money available incase of larger issues. The project also has a 20% return on investment (cost) on day 1 meaning any additional spend on the refurbishment can be covered by lowering the profit & ROI.
Property prices may not grow as strongly in the area as anticipated over the 2 years. The current prediction is circa 4% a year. This would have an expectation for the property to be £140k in 2023.
A down valuation versus the expectation in 2 years would eat into potential profit, however the total project over 2 years is expected to return 62% on the initial £41k investment. So any down valuation would still return a very healthy profit.
The property on initial viewing and purchase requires an estimated £8500 – £9000 light refurb, most of the work is cosmetic however a new bathroom is required and the kitchen can be salvaged. However once work begins on the property, additional problems may be found which incur additional cost which may exceed the refurb budget.
There is circa £8500 profit after the refurb assuming a GDV of £130k meaning there is room for overspend with the project still making a profit. Secondly, with the intention of holding this for 2 years to increase the return over time, this would absorb any overspends in the project. An independent level 2 RICS survey is also being undertaken prior to purchase to rule out any larger issues that may be costly and destroy the budget of the project.
As the property is not being bridged during the refurb, the lender will only allow circa 4 – 6 weeks to complete the refurb before giving a nil valuation. The property isn’t in a terrible condition to begin with, however it’s of a very low standard which needs improving. The lender could down-value the property or give a nil valuation if they didn’t think it was suitable for a Buy-To-Let.
The lender is aware that a £10k refurb is planned at the start of the property, taking a few weeks to bring the property up to a livable and high standard for a family. This includes new carpets, paint, re-skimming some walls, new bathroom and refreshed kitchen to bring it up to a high standard for the area.
If issues arise with the lender, then the backup option is to bridge the property during the refurb.
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