Buying a property to rent it is one of the most popular financial instruments for capital raising around the world. Especially now that the UK rental demand is up by 6%.
For buy to let properties you are looking to use the money to purchase the property, refurbish it and rent it out to an individual who would want to make it their home. Whilst in the meantime for yourself you want to make a profit on the capital invested.
With buy to let properties there are obvious factors to consider, budget, location, what type of property…etc. But on top of that there are three core things you have to consider:
1) Below market value (BMV)
BMV are the properties which are for sale at a price which is below the current market value. You need to consider that the person who is selling a property is going through the pain of selling a property and is looking to solve that problem. Therefore for them the main focus might not be financial. This can be due to their financial situation, relocation, divorce…etc. However things such as short leases, structural problems can also decrease the price of the property. For example, let’s say the house is worth £80,000 and you get it for £72,000 that is a £8,000 BMV or 10% below market value.
2) Opportunity to add value
After you managed to get a property BMV you want add value to the property to gain capital growth. This will help you to make sure in the future you can either sell it for more money or use it for growing capital. Usually it is possible to increase an assets cash flow through refurbishment, e.g.- building extensions, reinstating walls to create a new bedroom, new kitchen…etc.
- Purchase Price: £70,000 but it was valued at £80,000 (you got it BMV!)
- You pay some fees, such as stamp duty, legal fees, let’s say that will cost £5,000
- Refurbish the property for the £15,000
= totalling it all up: 70,000 + 5,000 + 15,000 = £90,000
You managed to add value to the property, now you can refinance it at a higher value.
- Let’s say it is now worth £120,000. You refinance at 75% loan to value which means £90,000 will cash out.
- You stress test interest at 5% which is £4,500 over a year.
- You rent this property for about £650 p/m which is £7,200.
- Then extra cost such as managements, which let’s say is about £900PA.
From this property you will make:
7,200 – 4,500 – 900 = £1,800
3) Great capital appreciation or growth prospect
Over time properties potentially rise in value. The term ‘capital appreciation’ is the increase in the value of your rental property over time and how much you get for your rental property if you sell it. To get power of capital growth you need to consider what area you do this, as you don’t want to do this where nobody wants to buy and everybody has to rent. The best areas are where people are renting but they are aspiring to buy a property. This is because if people keep searching online to buy a property in the area, this creates higher demand which increases the price.
Let’s look at this example:
- you have the £1,800
- + the equity from your property, the money which is in the property, in case if you sell it. With our example:
Property is worth £120,000 minus Borrowed money as mortgage £90,000 = £30,000.
£30,000 + £1,800 = 31,800
Let’s say the property increase for 5% per annum. In your case it will be the growth on the value of the property (£120,000) this will be £6,000.
Therefore in year 2 you will get:
£6,000 + £1,800 = £7,800 <- you have
Now your property is not worth £120,000 but it is £126,300 as it has increased in value. So 5% of the 126,000 will be £6,300.
So: 6,300 + 1,800 = 8,100
As you can see year on year it increases. But for that you need to make sure you are able to get the property BMV, add value to the property and most importantly make sure the property is in the high demand area. This will help you in the capital growth and maximise your return and profits.
If you want to know more about investing in property then check out: Jamie York on Youtube.
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