12:24 PM, 26th February 2013, About 10 years ago 4
Two bedroom new build houses are my favourite type of property to invest into. They are easy to let, offer good rental yields and appeal to first time buyers when you want to resell.
I recently purchased the one pictured left at the price it cost the developer to build it.
The majority of the development has been sold to owner occupiers who paid considerably more than I did.
It has two bedrooms, it is linked detached, has two parking bays and came with all flooring and a fenced rear garden. It was turnkey ready for a new tenant. The property will let quickly at £475 a month and cost me £70,000. That represents a gross return of just over 8%.
My typical net cash on cash returns after 75% financing and after deducting all associated letting costs and mortgage interest are significantly better than I would ever get in a bank but that’s not my primary concern. What I’m really interested in is how much I could make on the property, even if values don’t change, based on selling it a couple of years later, or perhaps even a couple of decades later if I decide to retain it as a pension. Remember, at some point both rents and values will go up but my mortgage will never get any bigger 🙂
Whenever I invest I always make sure there is at least enough cashflow to accommodate interest rates going up a couple of percent. Most lenders base their borrowing criteria on rents being 25% more than the mortgage interest. That’s far too bullish for me so I don’t usually invest unless the rental income is double the mortgage interest costs. Anything less than that is a recipe for disaster in my opinion, especially if you don’t have a substantial surplus of income from other sources and let’s face it, how many of us don’t live to our means if we are totally honest with ourselves?
I have found that there are two windows of opportunity every year to pick up bargains. This is when National House Builders are approaching their half year or full year end and need to meet their targets. This tends to be June and December (but not always) so the bargain hunting season is usually late April and late October. There will always be exceptions to this of course.
If sales targets are not being met developers will sell some properties to their trusted contacts for as little as cost price to keep the development moving and to keep up appearances of strong demand. They can’t advertise these discounts of course as that would undermine the future value of the development, however, I can assure you this does go on.
Please don’t get the impression that you can walk into a show home at the right time of year and get these deals though. I have been building up my contacts at Director level with developers for years. I have earned their trust and they know when I shake hands on a deal it will be completed 28 days later.
I have never been into this no money down financing, my strategy is value investing. I put down a 25% deposit and look to have an overall 60% LTV gearing based on the discounts I achieve. If I need to raise cash to fund deposits, over and above what my property cashflow generates in terms of savings, I either sell a few properties or remortgage, but never for more than 75% of value. I don’t like selling properties or remortgaging but I do so occasionally if I come across deals which are just too good to refuse. However, my preference is to reinvest accumulated cashflow, i.e. money I have saved up. Using this strategy I have built a portfolio of 85 very positively cash-flowing properties.
It is not uncommon for a developer to call me and offer me a dozen or so units at a fantastic price if I can buy them all. I have never been able to buy that many in one go and the developers do not allow me to advertise these deals for fear of de-valuing their entire development. That’s where my network of contacts comes in useful and I’m now looking to expand that network.
The developers I work with know that I fully check out the investors I introduce to them. I make sure these investors have the ability to complete quickly and are not trying to pull a fast one such as fooling a lender into financing 100% of purchase price or have plans to put the property straight back on the market. In simple terms, I only choose to share these deals with people just like me. The reason I share these deals is that it enables me to buy properties for myself at massively discounted prices.
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