“The story of a Value Investor” part 2 – The Property Maverick

“The story of a Value Investor” part 2 – The Property Maverick


9:05 AM, 23rd November 2011, About 12 years ago

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Another important factor I like to consider is the “Equity Return on Cash”. Ideally the smaller the deposit, the greater the Equity Return on Cash. Today 15% deposit is almost a thing of the past, 25% deposit is now the norm. Unless its apartment new build and then it’s a whopping 35% deposit. Let’s now look at a financial example for both schools of thought.

Low Cost Purchase and Return Example (costs excluded)

Capital Appreciation = £40,000Equity Returned = £50,000

Purchase Price = £40,000 Deposit (25%) = £10,000
Sold say 5 years later = £80,000 Mortgage = £30,000

Equity Return on Cash = x 5 / 500%

High Cost Purchase and Return Example (costs excluded)

Purchase Price = £200,000 Deposit (25%) = £50,000
Sold say 5 years later = £275,000 Mortgage = £150,000
Capital Appreciation = £75,000 Equity Returned = £125,000

Equity Return on Cash = x 2.5 / 250%

You get the picture? The above is just an example. Sometimes returns can be higher or lower depending on deposit percentage used. Today the costs to purchase can have a detrimental impact on the lower cost purchase model. Gone are the days of free survey and no arrangement fee, in are the days of expensive surveys and high arrangement fees. The lenders that are still lending are taking advantage of the lack of competition.

From the example above you can see the equity return on cash is greater on lower cost properties compared to higher cost properties. This is especially true if you purchase properties at a substantial discount to market value. Generally it is easier to negotiate a higher percentage discount on a lower priced property. Owners of lower priced properties can be more motivated to sell below market value than higher priced property owners.

In Cape Town from 1999 to 2002 I built up a portfolio of some 12 properties, a mixture of apartments and houses. All were sourced and purchased based on the “Value investing” philosophy. One of the keys to finding property bargains before others is to form relationships with estate agents. Visit as many as you can and find the ones that you most connect with. Connection is important, let them know your property plans, and treat them to a coffee or lunch now again. Make sure you are the first person they call when a property bargain or a desperate seller comes along. This is how you can pick up some great rental and renovation properties before others. You must be proactive and build lasting relationship with estate agents, your suppliers!

Another key is to know your chosen property patch or area very well. Narrow your search to a given town, city or area and regularly study the property prices in the newspaper and estate agent windows. Monitor what is selling and what isn’t, and keep a property log so that you can refer to it later. Also do your property price comparable checks using historic house price sold data on websites such as www.nethouseprice.com.

In 2002 I became aware that the UK property market was rapidly starting to move. So I returned to England in 2003 to stake my claim on some UK property. Investigating areas in various parts of the country I eventually decided on Grimsby in North East Lincolnshire. Grimsby a historic fishing town not dissimilar from the town I was born in and it had sufficient property stock at very low prices. Compared to other coastal towns 100 miles down the coast such as Lowestoft, the houses were 40% cheaper. It was apparent that the wave of property price appreciation was yet to hit Grimsby.

Within a short time frame my first Grimsby property was purchased, a small two bedroom terrace house needing a little work but costing only £22,500. It rented out at £65 per week if my memory serves correct. That same property today is currently valued at close to £60,000 and achieves a weekly rental of £100.

At first, establishing relationships with local estate agents in Grimsby was difficult. My South African accent mixed with hints of “Oooh Arrh” Norfolk farmer accent made me sound Australian. Consequently they thought I must have had a few too many Fosters and got lost. At times I did feel lost, almost alien. The gloomy streets of Grimsby were a far cry from the sunny outdoor lifestyle and spectacular scenery I was used to.

Within a few months to really get going I relocated to Grimsby. “If you can’t find what you need on your doorstep be prepared to move”. “You must do whatever it takes”. Remember the price of success must be paid in full, and it must be paid in advance.

Moving to Grimsby enabled me to visit all the local estate agents on a daily basis. Strike while the iron is hot was my motto. Soon I knew what streets to avoid and which estates were on my side. Eventually some estate agents would ring me before a property was even market listed. And soon I had more property bargains than I could personally buy. The solution was to charge introduced investors a sourcing fee for every property I sourced. It’s a good idea if you are doing property full time to create both income and equity. You must source some for yourself and some for others.

Within three years I had created a portfolio of some forty Grimsby/ Cleethorpes properties. The creation of such a large property portfolio was achieved using the “Property Snowball Effect”. This is something we will discuss in the next episode of the “Property Maverick”.

At the time the average purchase price was around £30,000 to £35,000 with the gross rental yield varying from 10% to 14%. But within three years those prices more than doubled, and some of the purchases even produced an Equity Return on Cash of 800%. By now gross rental yields had fallen below 7%, and as a yield that may not sound too bad.

However when we are talking 80 year old terraced houses you generally need a greater rental yield to cover the extra maintenance costs. Remember that older houses can be financially draining!

Read Part I
Read Part III

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