How We Select Properties – Part Two
By Suhail Nawaz – Chief House Hunter at The House Crowd
There are undoubtedly large and often fairly quick profits to be made from development deals; if they are done properly and the money is spent wisely, the property can be sold quickly for the right price.
We have all seen the Sarah Beeny shows on TV, where amateur investors purchase a property and spend far too much money on the refurbishment (to Sarah’s absolute horror) and yet, miraculously, still make a profit when they come to sell it. The reason they are able to do so is that in boom times the market can grow very quickly and therefore can cover up the mistakes developers make. Most of the time it does not work like that.
In a more stable market, it is all about crunching the numbers and budgets must be tightly controlled in order to add maximum value for the minimum possible spend.
The key to the success of this strategy is buying properties at the right price and in the right area, i.e. where there is a strong demand from home buyers as opposed to investors.
We recognise that there are many opportunities to make profits from an uplift in value to a property through refurbishment works. When we first started we were persuaded at the time by our investors to try and do this. This went against our better instincts as the market was flat and there was no margin for unforeseen costs especially at the end of the market we were dealing with at that time (as we were only able to raise money for properties at the cheaper end of the market). We did make reasonable profits on the properties we have sold although not as good as we would have liked in some cases.
The main problem with the exit strategy at that time was that is was (and still remains to some degree) difficult for many owner occupiers to get mortgages.
We now have a substantial investor database and are more confident about undertaking development projects at a higher level of say between £300,000 and £500,000, especially in more salubrious areas where properties move more quickly as the residents are usually better off and can obtain mortgages with greater ease.
We will be promoting such investments when we can.
Capital growth due to market forces
I’m pleased to say that the areas in which we purchased our first cash-flow properties (Salford and North Manchester) are increasing in value year-on-year. The growth is not as spectacular as you will find in central London but it is gaining momentum. (And in the meantime you get a much higher return on your investment). But as with many things this is a two edged sword and we’re now finding it harder to buy properties in our core areas at the low prices we need to achieve the high yields we have previously paid out.
If it were the situation that we had mortgages and those mortgage rates went up or we were otherwise having to subsidise these properties in the expectation of capital growth, it would put undue pressure on us to sell and we may have to do so at a time when we can not achieve the best possible price. But as we have positive cash flow on these rental properties, it gives us the ability to pick and choose the best time to sell them.
Off-Plan/New Build Investments
Many people in around the early 2000s invested in off plan and new build property as they believed they would simply buy the property, sit back and do very little but make large profits from capital growth.
Even though the rental income on these properties produces low yields they took a view that they would look to the future and even subsidise mortgage payments on these properties in the short-term if need be. Unfortunately for many people it proved difficult to later sell these properties on to a buyer at a price that would enable them to make any sort of profit.
Further more they were often basing their calculations on discounted mortgage rates that only lasted two or three years. Once these rates went up they were subsidising the properties even more heavily and many people could no longer afford to do so. In fact, the more properties people purchased, the more trouble they found themselves in. That is one of the main reasons there were so many repossessions after 2008.
The main benefit of buying a good quality new build to rent is that if your agent vets them carefully you will rarely have a problem tenant. The service charges can be high but other than those you will have very little in the way of maintenance costs and it may still be possible to achieve 5% yields in Manchester or Birmingham, for example, after all costs. That coupled with the potential for capital growth makes these type of investments attractive for a lot of people.
So we have looked at a number of off-plan property deals and have, to date, offered a few that we thought had a sufficiently good upside to warrant the risks. We will continue to research property in this niche area as we know it is attractive for many people.
What the future holds
We will continue to offer properties with as high yields as possible, but these are invariably properties at the lower end of the market and so we will continue our process of diversification in order to provide different sorts of deals for our investors such as purpose built student properties and other alternative property based investments.
We are also looking at short term development opportunities both in the more affluent areas of South Manchester and in London and, as our client base grows ,we will also be looking at larger projects such as the conversion of buildings to flats and, in time, building houses from scratch.
Exciting times ahead!