As per my previous article, I am a big believer in investing in publicly traded companies in low cost funds via a SIPP and ISAs. For low-risk long-term wealth building and compounding they look like a good option and I will continue investing this way. However with dividend payments very low, they don't provide the monthly income stream I desire outside of earned income.
Within my overall strategy, property plays the role of being able to give me the monthly income I desire outside of my earned income but also has longer term capital growth potential. There are a few elements to my overall property investment strategy that I will share in another blog, but here's an insight into this part.
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My Strategy
My strategy is to buy, refurbish and rent 2/3 bedroom houses in areas that can give a 15-20% return on the money left in the property. In theory this only works if the house is bought at the right price, an uplift in price is seen during the refurb and the house is in a good area for renting.
While this strategy does require money to start with, I think it is reasonably low risk and with the right team is reasonably hands off (ideal if you are time poor). Worth noting I am no expert on this and will keep you posted on how the strategy develops and plays out (showing the good and the bad).
The Numbers
These are the rough numbers: *I am sure there will be some oversight/errors here by me, but time will tell. Once completed I will do another posts with how it played out, hopefully it's not too far off.
To own the property:
Purchase price: £56,000
Refurbishment: £10,500 (extra 10% set aside for contingency)
2 x solicitor fees + searches: £1,709
Stamp duty: £1,680
Sourcing / project management: £4,500
Total price to buy and refurb to a high standard: £74,389
(This can be done cash or there are other ways to finance this)
Aiming to get the property re-valued at £80,000
(Similar properties on the street have recently sold for this)
With a 75% BTL mortgage this would mean a total investment of: £14,389
(£74,389 - £60,000 that's borrowed against the property. There are risks attached with a 75% BTL mortgage which is worth understanding before doing this.)
Monthly costs and cashflow
Mortgage payments (at 3% interest): £150pm
Management fee (at 12%): £60
Maintenance and voids (at 10%): £50pm
Insurance: £20pm
Total monthly expenses: £280
Monthly rental income: £500pm
Monthly income - monthly expenses: £220 (cashflow per month)
Return on money left in
Money invested: £14,389
Total yearly income: £2,640
Return on invest: 18.3% ( (2640/14,389)*100 )
While £220 per month might not seem much money for the effort involved, compounded over 20/30 years and it starts to look more attractive.
Again the actual return vs predicted might be slightly off with finance set up costs and other costs I am yet to encounter. But for me, even with a number of possible other costs, plus stress testing the numbers, it still works for what I am trying to achieve (as long as I can build a small portfolio).
The House - Progress
The condition it was bought in:
The rip out:
I hope this was useful and welcome any feedback on my numbers and strategy. I will keep you posted on how the strategy and project develops.
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UPDATE following the rip out...
Once the property was vacant and the full rip out had been complete, a better understanding of the condition of the property was possible. Images can be found on my Instagram.
Issues found:
- The kitchen couldn't be kept. We had planned to keep it but on reflection during the rip out the team decided it would let the property and re-valuation down if kept.
- Upstairs the walls were in worse condition than first thought requiring the rooms to be re-plastered (which wasn't planned).
Financial impact:
- The financial impact wasn't as bad as it could have been. A full re-wire was planned but wasn't needed (saving some money). This meant that the new kitchen only took us £1,500 over budget.
- Upstairs we had two options, a less durable short term fix costing £1,000 or a longer term fix costing £1,500. The longer term option was taken.
With some support from the team and suppliers, the impact was reduced. This has taken the original £10,500 refurb budget to £12,800 (£1,250 over the original figure plus the 10% contingency.)
Solution:
With the team only focused on solutions rather than problems, the decision was made to fit a new kitchen and to have the walls upstairs re-plastered. The impact this will have on the final 18.3% return on capital employed won't be understood until the re-valuation is complete.
Lessons learned during the rip out:
- Quick and honest communication made it less of an issue.
- Understanding that until a property is empty, it's hard to know the exact condition.
UPDATE following the refurb:
No more issues were encountered during the refurbishment. Here are some after shots.
FINAL NUMBERS after being rented:
Originally the plan and numbers (as per above) were based on the house being rented for £500 pcm. However when the agent came to list it, it was apparent that a higher rent was achievable. They put it on the market for £600 pcm and within a week we had a number of viewings and possible tenants.
Following referencing it was agreed at £600 pcm on an 18 month agreement. This extra £100 pcm had a huge impact on the cashflow and return.
PROJECTED NUMBERS vs ACTUAL:
The final ROCE figure is 3% higher which is great and the extra £100 per month in rent is brilliant. However there were some higher costs on the refurb / fees. That being said, overall it's better than expected.
FINAL possible risk:
Getting more than we expected for rent per month helped the monthly cashflow and overall return. However there are still three risks: 1.The re-valuation in two months comes in less than £80,000 (reasonably confident but who knows). 2.The tenant doesn't pay the rent. 3. The £600 per year 'maintenance and voids' pot isn't big enough.
With the referencing and checks carried out, hopefully we have a great tenant who can make the house into a lovely home. With the maintenance, being newly refurbished, we hope there won't be many issues.
In a few months' time, once refinanced, I will let you know how it turned out.
Summary:
Time will tell if this delivers the return we hope for, but so far it's been a success and hopefully the start of many successful refurbishments. Follow me to see our latest projects LinkedIn - Facebook - Instagram
Here are some before and after pictures:
I hope this was useful and welcome any feedback.
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