Surely I am not the only landlord worried about new EPC requirements?9:44 AM, 17th February 2021
About 2 weeks ago 125
This question was recently asked on a property forum and inspired me to write this post.
A spreadsheet could be written to crunch the numbers and I will explain how I do this further into this post.
Experience has taught me that numbers alone should not form my decision. Over the years I have learned to trust ‘gut feel’. The numbers only tell part of the story because they are just numbers. They do not take account of local markets or micro economies. Intuition can be developed through experience. The more deals you do the more intuitive you become. Sure you will make some mistakes but you will learn from them. If you don’t have financial reserves then the answer is more likely to be that you should take the bird in hand and create financial reserves. When you have a liquidity fund you will be in a better position to afford to take a few more risks.
Having said all of that, the rule of thumb that I use if I decide to hold is that I want to be able to refinance my entire investment out of the property if I am going to hold it. I stack the numbers based on an interest rate of 6% (go higher if you haven’t got substantial cash reserves) and then calculate insurance, maintenance, voids and management costs into the equation. If the rent breaks even at these figures I usually hold. If there is a profit I am more likely to hold and if there is a loss I may still hold if I truly feel there is a good reason that the property will increase in value in a given time period.
The following is an example of a property I decided to sell:-
Purchase price £ 88,000
Purchase costs £ 1,000
Refurb costs £ 23,000
Sale costs £ 3,000
The rental value of the property was only £550 pcm. Based on my criteria the maximum mortgage was only £88,000. However, it was a lovely little bungalow in a village about 6 miles out of Norwich, ideal for an older couple or a first time buyer. It’s in an established and very tidy little cul-de-sac. I sold it for £144,950 thus turning a nice profit of £34,950.
This is a deal that I decided to keep:-
Purchase price £63,000
Purchase costs £ 1,000
Refurb costs £ 5,000
TOTAL £69,000 + Freehold purchase £18,000
The rental value of the property was/is £675 meaning that I could raise a mortgage of £93,300 based on my criteria. The value of the property is currently £135,000. The reason that I managed to pick up the property so cheap was three fold. First, it was in an auction and being sold by the mortgagee in possession. Second, it was very scruffy. Third, it was not mortgageable as the freeholder of the block of the five flat development had gone bankrupt. It took me 18 months of dealing with Crown solicitors to purchase the freehold. In the meantime my cash has been tied up because I couldn’t remortgage it back out. However, I have obviously been able to let the property and enjoy very positive rental cashflow.
My patience has paid off though as I’m now £6,300 up on the deal (without factoring in rental profits) and I still own £41,700 of equity in the flat plus the freehold of the block. I also believe the potential for capital growth is good on this property. It is very well located close to the sea front in Portsmouth. It sold for a whopping £249,950 back in 2003 – I still can’t work out why it sold for that much and why it’s only worth £135,000 now but that’s the figures on HM Land registry and the opinion of Countrywide Surveyors now.
What I haven’t said is that three of the units were in the same auction. I was outbid on the other two. The other investor also wanted to buy the freehold but hadn’t got the cash. He’s happy now though as his properties are also mortgageable now. Do I wish I had purchased the other two properties? I’m not sure. I’d have had a lot of cash tied up in the deal if I had. My exposure risk would also have increased. That said, I would have been up on those deals too but I trusted my intuition. Did I make a mistake?
The other thing I haven’t said is that six weeks of due diligence went into that purchase. I bid on 30 properties in that auction and purchased just one. How much luck do you think was involved in this deal?
Would you have had the patience?
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