Deal Summary
The Figures
Valuation: £95,000
Guaranteed Discount: 25%
Purchase Price: £71,250
Instant Equity: £23,750
Monthly Cash-flow
Rent: £350
Mortgage (4.35%): £258
Insurance: £ 10
Profit £82
Since the peak and start of the subsequent property market crash in mid 2007, we have all heard horror stories from and about investors who were buying multiple investment properties in the few years preceding 2007. I’m talking about those who caught buy-to-let fever; which seemed to grip the UK after a decade of consistent capital growth and ‘easy’ lending. Those who bought plenty of property that was ‘washing its’ face’ so to speak and only covering costs in the good times; but then fell in value by 20% when the market fell, leaving these investors in negative equity. Many investors who started buying investment property 3-4 years ago thought they would struggle to survive when the crash commenced – with some investors facing 100’s of thousands of pounds of negative equity and cash-flow that was neutral at best.
What we have seen since has turned many of these investor’s situations around completely. Now many of these investors are still in negative equity which is a given, but they are not overly concerned because their cash-flow neutral portfolio is suddenly producing a healthy profit each month. Take the following example:
Investor takes out £100,000 mortgage which tracks at .05% below base rate in July 07. At this point, the base rate was 5.75% so his mortgage had repayments of £5,250 per annum or £437.50 per month. Many investors were happy to buy property at the time with a rental income of £530 per month which, after management, insurance and contingency buffer would just cover monthly mortgage payments. They were happy to buy this way as cash-flow was not as imperative to them as the capital growth they anticipated based on previous years.
So when the market started to drop midway through 2007, many investors who had bought property in the previous couple of years started to panic. Until of course the base rate started to drop… When the interest rate hit 1.5% in January 2009 the investor in the above example was paying just 1% per annum on his money – just £1,000 per year or £83 per month against a rent of £530 per month. When rates continued to slump to just half a percent in March of the same year, many mortgages went down to literally zero! I have seen many a copy of a framed letter from lenders stating ‘The New Monthly Payment on your Mortgage is Zero’ hung on a proud investor’s wall!
Many other investors took out two & three year fixes before the market started to dip in 2007. These were typically fixed around the 5% mark, and once out of their fixed period, reverted to the lenders reversionary rates which were set at the time to track the base rate. A few years back for example, Mortgage Express had a reversionary rate of 1.75% above base rate. Many investors are reaping the benefits of this reversionary rate today. Offer money to investors looking to buy property today at this sort of rate and they will snap your hand off! If the investor in the above example had been on a 2 year fixed tracker in 2007, he would now see his mortgage down at £2,250 per annum or £187.50 per month versus rental income of £530. With cash-flow currently this strong and still on a tracker rate that far more attractive than any currently on the market, being in negative equity suddenly doesn’t seem so daunting.
A common saying I hear from investors and industry contacts alike is that, ‘You make your money in this game when you buy – not when you sell.’ IE you must be buying at well below market value in the first place to prosper from a market value sale at some point in the future. This has elements of truth – of course it helps to buy below market value, but it is not the be all and end all of successful investment in property. If you bought at 15% below market value in the peak of 2007 it wouldn’t help matters much if the market dropped 20% overnight!
A combination of buying below market value, with strong monthly cash-flow, and the ability to take a medium to long term view with property is key for success. It’s imperative to take a medium to long term view, as history shows, you will always prosper over the long run if investing sensibly. The market throws up surprises as we have seen a few times now – no one predicted interest rates would rise to 15% in the late eighties, nor did they see them falling to their current level of half a percent. Whichever market you are in however, hold tight for the medium to long term and you will generally do very well.
Now is as good a time to buy as ever – you will probably never be able to pick up deals at genuine discounts of 20%+ below today’s low market value for many years to come. If your cash-flow is strong and resilient to interest rate fluctuations and you can sit on these types of deals for the next sustained period of capital growth, you really can use today’s market to build good levels of income and genuine equity.
View our Current Deals & Example Deals
It is difficult to move in the property investment ‘circle’ these days without hearing about lease options in one form or another. Yet many investors seem confused about the fundamentals; mainly over if and how lease options actually work. This confusion arises from the fact that many investors operate different strategies when it comes to lease options, and although the fundamentals are similar, there are varying techniques being utilised. This is probably best demonstrated by way of example which we will get on to shortly, but first you must understand the basics regarding futures contracts.
A futures contract is a contract that upon signing, commits both parties to exchange something at a price agreed upon signing, but at a date in the future.
When a normal property sale contract is signed and entered into it commits both parties to buy / sell something – and any party that changes their mind has to pay a penalty for doing so.
Future contracts are different – they commit only one party to a sale and the other party can pull out at any time without penalty. When signing a lease option contract therefore, one party usually pays in one form or another to enter into the agreement, but for this have the benefit of walking away from the agreement at any time.
Some of the forms of options are demonstrated by the examples below.
1) Investor and property owner enter into an option. The agreement gives the investor the option to purchase the property at a desired price within a timescale of 4 months. This allows the investor time to line up suitable finance, or to find someone else to buy the property for more money than the option stipulates. Depending on how strong a position the investor and property owner respectively are in often determines how much the option is bought and sold for. It is not uncommon in the current market for options to be entered in to for as little as £1.
2) Investor owns a property and gives their tenant the option to buy the property at a date in the future for a pre-agreed price. In this instance the property owner and tenant will often agree on a rent figure that is above current market value – ie the tenant will pay a premium on a monthly basis for the privilege of the option to buy at today’s price in the future. If the option lasts for 2 years and the market drops during this time, clearly the property owner will benefit as he will have increased his income without having missed out on capital appreciation in the meantime. However, if the market rises significantly during the two years, the tenant may be better off as they can buy at a much lower level than they would have been able to otherwise.
3) Investor and property owner enter into an agreement which stipulates that the investor will take over or subsidise the property owners mortgage payments in exchange for the option to buy the property at a pre-agreed price at some point in the future. With mortgages much harder to acquire these days, this type of lease option is becoming an increasingly popular way for investors to acquire property with good equity / strong cash-flow that they may not normally qualify for. Effectively, the investor does not need his own mortgage – so no being refused credit, no arrangement fees, reduced transaction costs. Normally, this type of option will also be transferable, so it can be sold on to other investors or first time buyers as a rent to buy. This type of option is often long-term to the investor’s benefit.
4) Property owner and investor enter into an option similar to the option described in scenario 2 above. The option lasts for 12 months and stipulates that the investor can buy the property for current market value (for example’s sake). The property in question has a large plot of land at the rear which is prime for development. Once option is entered into, investor gets planning permission to build another house. Once planning permission is granted, investor exercises their option, buys the house and then builds the additional house on the grounds. Alternatively, the investor could sell their option to a local developer or national homebuilder for more than they have agreed with the property owner thanks to the increased value planning has added.
These are just a few examples of lease options. As you can see, they are varied and can become very creative. There are a few pitfalls and certain things to look out for. The main pitfall you must consider is that an option may become completely null and void if the property owner gets repossessed and becomes bankrupt. A mortgage lender will always have a first charge over the property and come before you when any monies from the sale of a repossessed property are distributed. Secondly, it is advisable to ensure you use a solicitor who is familiar with lease options when getting one drawn up. Leaving certain stipulations out of a contract can costs thousands, and may not become apparent until years of financial commitment and you try to exercise your option. Also always ensure as an investor that the property owner is represented by a solicitor. We have heard many stories from investors who have again lost out when trying to exercise options because a property owner claims in court that they did not know what they were signing / or that they were forced into signing something they didn’t understand. If a solicitor runs through everything with them and explains what they are doing, there will be no way to wiggle out of an agreement which suited them at a point in the past but not necessarily anymore.
For more information about options, please feel free to email us at options@ventispropertyinvestment.com or call us on 0208 9409 556
The latest Nationwide survey shows that house prices in the UK have risen for the seventh consecutive month. The average value increased by 0.5% in November, surprising many observers as the pre-christmas period is usually sluggish for the property market. The latest figures reveal that the demand for housing is buoyant and considerably more resilient to macro-economic conditions than many experts intially thought.
Having been at forefront of the property industry, this reinforces Alpha Property Investment’s belief that movements in the housing market tend to be the harbingers of the wider economic environment. Although the UK economy is still in a worrying state (notably in terms of unemployment , GDP growth, and a ballooning national debt), the green shoots in the property market are indicative of a modest, yet sustained economic recovery. Credit flows seem to be up-and-running again, thereby enabling mortgage lenders to ease their criteria and provide house-buyers with the financing facilities indispensable to maintain a healthy, wide-based demand in the property market. This could well be a self-reinforcing trend as lower interest loans helps consumers free up funds they can now spend on other goods and services, thereby spurring wider economic growth.
