You have been researching on how to get started in property you have been looking at too many property deals but you got stuck in trying to qualify whether deal makes a good deal or a bad deal. Today we are going to show you the top 4 things that we focus on when we are qualifying a good deal.
Here's a video version of this post if you prefer:
1. DEMAND
Demand is super important for us in this business. What is the particular demand for this property in this area? Do people want to live in houses or flats? Is it a 1-bed property or a 3-bed house in this area? Speak to your local estate agents to find out what they say because they are in the business longer than you. They should be able to tell you what is in high demand in this area. Also make sure you're checking out property platforms like Rightmove and Zoopla go into the For Rent section or the For Sale section and just see what is currently letting out, what is selling. You will then know what the demand is in that area. You can also go for viewings with estate agents. You might be qualifying a couple of properties that you think are in high demand, register for a viewing and get to meet the estate agent after viewing.
For example, for a house share you want to make sure that you know how long every rooms take to rent out. If you're doing a 5-bed house share, how long does it take to fill all five rooms? Does it take two weeks to fill all five rooms or does it take two months to all five rooms? Obviously the greater the demand in an area, the faster the rooms get rented out.
Another example is if you're flipping houses, that is buying, refurbishing and selling it for profit, you need to make sure you know who your buyers are. Do you know who is going
to buy your property? Is it a young couple, first-time buyers? Is it an elderly couple who is
downsizing? In a high-demand area for homeowners, if you are flipping a property for profit you need to check out how long it takes to sell this property. Does a bungalow sit on the
market for a week before it gets sold or does it sit on the market for three months before it gets sold? Normally a bungalow sells really quickly so you really need to check in your area. Is there a two-bed house, three-bed house or a bungalow that is high in demand? How long does it take to sell?
2. RETURN ON INVESTMENT
The second point is return on investment (ROI). It is a measure that varies from investor to
investor, they can give you a different definition of how they calculate their ROI. How we calculate our ROI is mainly the cash flow per year divided by the amount of money that we have left in the deals. For the cash flow, take the monthly rent deducting management costs, monthly operating costs and the mortgage costs. Then that is the monthly cash flow for that property.
For example, we have a property with a rent of £500 per month, we take away the mortgage, the management, and the monthly operating expenses which are roughly £250. We're left with a cash flow of £250 per month. Per year that makes £3000. For money left in the deal, if you assume you have a property you bought it for £80,000, with a 75% loan-to-value mortgage, which means you need a deposit of £20,000. Now you have paid £20,000 and you are making £3000 every year. In this case, your ROI would be around 15% which is not bad. This deal wouldn't qualify for ourselves because we're looking for a higher ROI than that. However, for a lot of people it does so make sure that you're setting up criteria for yourself. What is an acceptable ROI for you? Use that in qualifying your deals.
3. EXIT STRATEGY
The third point that we focus on is the exit. How many exit strategies do we have for a particular property deal? One exit strategy is to rent out. Who am I going to rent out to? What kind of rent am I expected to get from my property? If you want to rent out a property, are you going to put a mortgage on it? Are you going to buy it with cash, rent it out and earn the rental income from it? If you were to sell a property, are you going to sell it to an investor or are you going to sell it to an owner-occupier? Who is the end buyer? Is the buyer going to get a high-street mortgage? Or is it going to be an investor who is going to get a specialist mortgage on that? If you're selling a very low value properties, is it going to be a cash buy?
There are a lot of low value properties around the North of England or in Scotland. These low value properties are normally for cash buyers only and there are also certain type of student flats or studio flats that are purpose-built. They are smaller than usual so it's only for an investor buying it outright with cash. We always look for at least two exit strategies for our for all our property investment deals. We need to make sure that when we sell it, we can sell it to the public or an investor. Also when we rent it out, we can rent it easily, making sure that the rental income covers the mortgage payment and also all the monthly operating costs.
4. EASE OF CONVERSION
Finally, the last point is the ease of conversion. When we were qualifying a deal, we're asking ourselves how difficult is it to make the conversion. In a way, it correlates with the level of risk that is associated with carrying out the conversion.
The first level is it's a ready-made property, it's a turnkey solution. There's no hardly any risk associated with that because it doesn't require any work. Those are the type of deals that we are not looking for because we want to get our hands dirty and add value to the property.
On a second level, we would class it as light refurbishments. Those are properties where you just replace like-for-like with a new kitchen a new bathroom. Those are usually your BTL. It's very simple and you have refurbishment duration of up to four weeks and then the property is ready to be rented out. Then there are the medium refurbishments. Those are refurbishments where you need to have building control, probably an architect, change the layout of the property. Maybe there is a change of use from C3 to C4 which is from residential to HMO, whereby you are shifting walls around, installing more bathrooms and conversion timelines are more in the range of three to six months.
On the highest level, those would be the conversions that needs planning application. In this level, you need to go through the planning application process. This is another layer of risk that's added because you don't know how long it will take to get the planning permission. You probably need a planning consultant. We personally have done small conversions where we need to go through planning. We also know people who have gone through full planning applications to convert a block into flats. The scale can vary wildly.
If you're looking for carrying out works at a property, you might have to buy it with a bridging loan or development loan. We have made a bridging calculator so if you're interested in calculating what the cost of a bridging loan is, you can click here to download the calculator. Here's also a video to explain what you need to look out for when taking on a bridging loan. Keep in mind the bigger the project gets, your team needs to be prepared to handle it because obviously a small refurbishment requires a different build team than a conversion of a house into HMO. We have also put together a Top Ten checklist for anyone who is looking to invest in UK properties, which you can download here.