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Auctions are now for selling rather than buying property

On Monday 6th February 2012 PropVestment paid a visit to Barnard Marcus residential property auction at Grand Connaught Rooms in London. We were in for a surprise as we were there as a buyer but soon found auctions are now for selling.
This was the first major property auction of 2012 in London. Thus it was pack out, many experienced and new property buyers in the hall.

Auctions are for buying not selling now

Lot 1 had guide of £800,000, a four bed house in Battersea, it went for £1.28m + 2.75% fees. This was the story of all the first twenty or so lots.
All the first 23 lots were in London, the average winning bid was over 30% above the guide price, taking out 5 where even at this level the Reserve was not met, the other 18 properties sold at over 36% above guide price.

A few other key high lights from this auction:

  • Most land only deals did not sell, reserve not met
  • A piece of land without planning permission for a possible 8 units went for £860k, that’s insane for the area, almost £110k land cost then planning then construction.
  • Most of the lots on by order of Mortgage companies got bids over guide however did not sell due to Reserve Not Met (RNM). This can only be the case as the lenders have over valued in the past and now face negative equity. Failures.
  • Properties in North England and Wales were the hardest sale, many RNM and a few with highest bids well under guide prices.

PropVestment Conclusions: Auctions are now for selling

Property Auctions have changed now, its a much more public affair and it seems that its no longer a place where you can pick up a bargain. The sellers use it to sell properties that otherwise will not fetch a similar price through traditional means such as local agents. This tell us something about the quality of the properties and legalities of them. There were many amendments to the information provided with particular importance on certain higher rentals, those properties were on the day changed to vacant possession. Therefore the guide rental was incorrect, how is one to know what the real rentability of a property is without doing thorough research.
Due to these pit fall, an auction is no longer a place for inexperienced or first time buyers to find a property to buy. Auction are now for selling.
Rather it is a place where landlords can easily offload not so good properties and rely on the ignorance or lack of research of bidders.

PropVestment Auction Advice
Buyers – Do your thorough research and get someone to look at the legal documents prior to bidding.
Sellers – Use auctions to sell unwanted properties, especially in London, everything sells

Have a read of our observations last year at Savills here

How to calculate your REAL return on Investment: 5% becomes 35%

The REAL Return on Investment

Traditionally property return on investment is calculated by rental yield, especially when it is being compared to returns of other types of investments. However I believe it is a much more exact science, and can vary significantly depending on specific properties and on how the investor structured the deal when purchasing the property. A traditional yield of 5% can actually be 35% if the deal is right.

Let me start with a simple example. A two bedroom flat, bought with standard Buy-to-let 75% finance, at 5% interest only for £200,000 that is renting out for £10,000 per year. Traditional yield will be 5% (rent/value=10/200=5%). Under the way I calculate it, the rent less the mortgage interest divided by initial money in, therefore for this deal ((£10,000-£7,500)/ £50,000) so its 5%. The “real” return on investment is still the same.

But wait, what about capital gains, this is still a form of returns even though they may only be realised at a much later stage when selling and that will be liable for Capital Gains Tax. Well that is not strictly true, if the investor remortgages again after a year with similar terms, 75% of the capital gain can be realised. So if we make a very conservative and modest assumption in present gloomy market conditions of a 5% increase in value that is £10,000 and if we take 75%, and add it to the surplus cash from earlier that is a total of £10,000 return, effectively 20% return on the deposit paid. That is an amazing return, which I can’t see any other form of investment where the risks are so low and the investor has so much control over the asset.

There are certain things we have not considered like remortgage costs, legal and stamp duty, maintenance, and tenants. These will of course change calculations. Also the reason I simplify with a interest only mortgage, because if it was repayment that add to the capital or equity of the property so in effect cancels out the cost, although in realisation it will only be 75% realised when remortgaged.

Let’s be a bit more adventurous now, and add a few more clever changes to the model. We have to cap the borrowing at 75% LTV because that is the realistic maximum in the current lending condition. Let’s say the purchase price was 15% BMV (below market value) but the Mortgage was LTV, and the investor used a £10,000 personal loan at 10% compounded with capital and repayment due in two years, to part gather the deposit. So the initial investment in, is £10,000, the rest is the personal loan and the BMV saving. Assuming rent is steady; let’s look at the situation in 2 years time.

Property value in two years is now £220,500, so a refinance would raise an £15,375, less the loan that needs to be paid back (£12,100), plus £5,000 rent surplus which means £8,275 cash inflow, or 82.75% over two years on what was invested, so that is 35% return on capital invested per year.

There are incredible deals available; you can look around yourself, internet sites, auctions, personal contacts. If all else fails, contact us, info@PropVestment.com. You have to be clever with the way you invest, market condition are against us so we must beat the system and be innovative in our thinking.

Please take caution in tricky deals and do all your due diligence, the figures I use are fictional but are close to what is really possible.

How do you calculate your return on investment?

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HMO: Huge Money Opportunity?

Although Multiple Occupancy can achieve huge rewards in the form of rents, in particular student lets, Landlords must take the required legal procedures to ensure it is all above board. In our experience it is easy to gain over 50% premium on rental income under HMO. There are now professional agents that can take care of the managements and legalities but here are some basics you must know. Licenses are only £335, so get them and don’t risk fines or prosecution when the outlay is so small.

The returns can significant, raising the ROI above any other residential investment, letting are very easy through university listing or sites such as www.spareroom.com.  Please get the relevant advice and don’t take short cuts in the pursuit of profits.

After reading this nitty gritty we offer a fantastic investment opportunity at the bottom of the article.

Here is the Basics

What is an HMO?

HMO stands for House in Multiple Occupation and generally refers to one of the following:

  • A house split into bedsits
  • A house or flat share where each tenant has their own tenancy agreement
  • Students living in shared accommodation Read more

How to calculate your REAL return on Investment: 5% can becomes 35%

The REAL return on Invetsment

Traditionally property return on investment is calculated by rental yield, especially when it is being compared to returns of other types of investments. However I believe it is a much more exact science, and can vary significantly depending on specific properties and on how the investor structured the deal when purchasing the property. A traditional yield of 5% can actually be 35% if the deal is right.

Let me start with a simple example. A two bedroom flat, bought with standard Buy-to-let 75% finance, at 5% interest only for £200,000 that is renting out for £10,000 per year. Traditional yield will be 5% (rent/value=10/200=5%). Under the way I calculate it, the rent less the mortgage interest divided by initial money in, therefore for this deal ((£10,000-£7,500)/ £50,000) so its 5%. The “real” return on investment is still the same.

But wait, what about capital gains, this is still a form of returns even though they may only be realised at a much later stage when selling and that will be liable for Capital Gains Tax. Well that is not strictly true, if the investor remortgages again after a year with similar terms, 75% of the capital gain can be realised. So if we make a very conservative and modest assumption in present gloomy market conditions of a 5% increase in value that is £10,000 and if we take 75%, and add it to the surplus cash from earlier that is a total of £10,000 return, effectively 20% return on the deposit paid. That is an amazing return, which I can’t see any other form of investment where the risks are so low and the investor has so much control over the asset.

There are certain things we have not considered like remortgage costs, legal and stamp duty, maintenance, and tenants. These will of course change calculations. Also the reason I simplify with a interest only mortgage, because if it was repayment that add to the capital or equity of the property so in effect cancels out the cost, although in realisation it will only be 75% realised when remortgaged.

Let’s be a bit more adventurous now, and add a few more clever changes to the model. We have to cap the borrowing at 75% LTV because that is the realistic maximum in the current lending condition. Let’s say the purchase price was 15% BMV (below market value) but the Mortgage was LTV, and the investor used a £10,000 personal loan at 10% compounded with capital and repayment due in two years, to part gather the deposit. So the initial investment in, is £10,000, the rest is the personal loan and the BMV saving. Assuming rent is steady; let’s look at the situation in 2 years time.

Property value in two years is now £220,500, so a refinance would raise an £15,375, less the loan that needs to be paid back (£12,100), plus £5,000 rent surplus which means £8,275 cash inflow, or 82.75% over two years on what was invested, so that is 35% return on capital invested per year.

There are incredible deals available; you can look around yourself, internet sites, auctions, personal contacts. If all else fails, contact us, info@PropVestment.com. You have to be clever with the way you invest, market condition are against us so we must beat the system and be innovative in our thinking.

Please take caution in tricky deals and do all your due diligence, the figures I use are fictional but are close to what is really possible.

How do you calculate your return on investment?