Questions from a property speculator

Hi James

Wow, where do I begin?

Let's assume that your figures are correct. You seem to have done some research and due diligence and I particularly like that you have used comparable sales to justify that you really are getting a good deal. Far to many people use asking prices as their starting point. I just hope the comparable evidence of sales you are using is recent.

Now let's look at the numbers.

First, if you let the properties you will no longer be responsible for the Council Tax. If we assume that's say £1,500 a year for each property then you stand to save £27,000 on that alone over the three properties over a 6 year period.

Then let's consider the rental income, i.e. £875 pcm X 60% to factor in your maximum costs = £525 pcm net. Multiply this by 3 properties over 72 months and you can add another £113,400 to your bottom line before tax.

Now let's step this up a level.

Just suppose you use finance to buy the properties.

If you borrow 50% of the value then you will be able to purchase twice as many. If you let them all you will also have double the rental income and no Council Tax to worry about.

If you do this you will have mortgage interest to pay too. Let's just suppose you could get a 5 year mortgage at a 5% fixed rate. Based on 50% borrowing and buying twice as many properties you would need to borrow £549,000. Over a six year period this amount of finance would cost you £164,800. That's slightly more than your rental income but not much more. Given that you have already budgeted to fund Council Tax you can decide for yourself whether the negative cashflow makes sense.

Perhaps the key reason for letting the properties and using the rental income to fund the associated costs is the potential for doubling your gain.

Instead of making £164,700 gross return on the projected capital uplift you would stand to make double, i.e. £329,400.

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Personally, I'd prefer to buy 3 properties cash, and rent them out.
It's a split strategy, so doesn't have all my eggs in one basket. I'm guaranteed the rental income (which will be higher than your estimate, but I understand the figures), which hedges against no price rise.

It comes down to how you evaluate the risk.
For me, the risk of only having the price rise as my ROI is greater than the risk of renting, probably because I'm a letting agent.
Mark's strategy is the highest risk, as you're now adding debt to the equation. If there is no growth, and the rental income is used to pay the debt, you've got no return on your investment.

Obviously no growth over the next 6 years is unlikely, but has to be considered. If you're comfortable that's not a risk, then it changes the evaluations I've made.

If I were you I'd buy them for cash rent them out then sell them after 6 months and take the money and run. Ive bought off plan before with large discounts and then sold it to someone else on the day of my completion. There's no guarantee the market will rise, what if it crashes? Buy them BMV then move them on at a profit within 6 months and take the profit , then do it again.

Reply to the comment left by "Rob " at "15/04/2014 - 14:30":

Hi Rob

James said he's speculating over a 6 year period. When you factor in the costs of buying and selling it really would have to be one hell of a deal to be able to come out with a profit after 6 months, especially in the current market on a new build project.
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What's the % discount your getting James? When I was buying new build I always got 15-20% discount sometimes 30% plus stamp duty paid especially if it's year end which always made selling on profitable. If all your getting is a 5-10% discount then your probably buying at market value as new build are always overpriced anyway.

Reply to the comment left by "Rob " at "15/04/2014 - 15:19":

List prices of these particular units are £217,000 but land registry sale prices have been recorded in the last 12 month in the £190's to £200's. Not all the apartments are identical though so without seeing the plans for all the units and going into them it's difficult to say which if any are identical to the units I'm looking at. Location within the development has a bearing on owner occupiers too so I'm not convinced there are any absolute comparisons to be drawn. One must consider why these are the last of the units to have been sold. Maybe it was the higher list price, perhaps it is something else which isn't immediately obvious to me, realistically I will never really know. All that said I'm happy with level of discount I have negotiated, especially with the furniture packs thrown in. If I could have negotiated a better deal I would have done so but discounts at the level you are talking about are not readily available in my area - South East. In the last 12 months I have looked into several deals which claim to have been discounted at the levels to which you are referring, mainly they are in the North or the Midlands and they are never as good as they make out when I dig into the detail. My experience has been that the asking prices are inflated or the comparable evidence is based on 2008/9 prices achieved.

Hi James
Consider that you could rent them to another Landlord at a lower but guaranteed rent. They would have the hassle of being a Landlord etc but you would retain your capital and get an income from it.

Also there are income tax benefits from having mortgages and rental payments associated with them so you ought to factor these into your figures to get better comparables.

There has also been press talk about Councils tackling property owners who buy and lock up their empty properties so those types of actions also need to be given consideration because it may happen during your ownership.

Hi James,

You also have to consider how much the properties will deteriorate when left empty. Damp and condensation destroy everything if left unlived in sometimes for just a few months just think about 6 years. Oh and vermin love empty properties.

Reply to the comment left by "Peter Hindley" at "15/04/2014 - 16:45":

What is the positive angle you would associate with letting to a landlord who would presumably sublet as opposed to letting through a properly qualified letting agent? I can only see downsides, i.e. no PI insurance, no client money protection etc.

If I do decide to let it would be through an ARLA or RICS qualified agent with a strong balance sheet and local reputation to protect.

Mark's suggestion of gearing the assets is appealing given that my strategy is based on capital growth.

I may well use one of the properties, possibly all of them at different times, as my main home over the period in order to be able to claim PPR relief and lettings relief should I decide to let the properties.

I have no requirement for extra income as I already pay tax at the highest band, hence I am targeting capital gains and plan to use CGT allowances for both myself and my wife to reduce the tax burden when we do sell. The sales may be staggered in order to achieve this but that will depend on my reading of the market closer to the time.

Thanks for all your advice so far. I am now erring more towards the letting and gearing model.

Reply to the comment left by "James A" at "15/04/2014 - 18:01":

Hi James

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