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Case Study 1.2 – 2 bed terrace

Exactly What I'm Doing and How I Did It

Welcome back, glad you’re still with me. So last time we went over the overall goal I have within property and the strategy that I’m following.

I shared with you the fact I am looking at building up a portfolio of property, without any mortgage debt on them, and will then rent them out for the long term.

The type of property I generally target are £60k - £150k and rent for at least 7% yield. In this particular case study, the property I’m buying is £110k and rents for £650 per month, which is 7.1% yield.

Now we’re going to look in a bit more detail at exactly what I’m doing with this particular case study, how I went about finding it, and how I assessed the deal.

Exactly what I’m doing

OK so now that you know roughly what I’m looking for, we can delve into the specifics of this project a bit more. I have built up some cash from helping other property investors get started with their own investment strategy, and that money was enough to start looking for my next property purchase.

As an aside yes, it is possible to buy houses with none of your own money, but there is always a catch with those types of arrangements and honestly, I can’t be arsed with the extra effort required with doing it that way. Call me lazy (although I prefer energy efficient), but I’ve got better things to be doing than trawling the streets looking for desperate people to take advantage of….

Because I had around £40k available for this purchase, that told me that I could look up to a maximum purchase price of £160k (i.e. if I put £40k down and get 75% LTV mortgage, that equals a £160k property). But that’s above my target isn’t it?

See, I practice what I preach.

Also when buying a property I tend to use around £5k to cover all of the costs involved in buying and getting the place set up. Things like stamp duty, solicitor fees, mortgage fees, survey fees, etc. So that brings me down to £35k to spend on the deposit. Using the same maths, that means my target property was now up to £140k.

The reason I do it this way round is to make sure I am not wasting mine or anyone else’s time looking at stuff I can’t afford and that doesn’t make sense for me.

I then run the numbers on the minimum rent I need to achieve; 7% of £140k?

£820 a month if memory serves me.

Finally, I’m generally a fan of 2 and 3 bed semi-detached or terrace properties, so that’s my preferred property type.

Can you see how my search criteria is shrinking rapidly? I am now looking for a 2 or 3 bed house, that costs less than £140k and will rent for more than £820 per month.

I use a neat little trick to find areas throughout the country that meet these broad criteria, but that’s for paying clients so <img class=” />

In this instance, I know the area I already invest in will meet that criteria, plus I have a large list of contacts in the area, so it kind of made sense to just buy another one up there.

I don’t want to skip too far into the due diligence process just yet, so let’s just say I did all the due diligence I’m about to talk you through and found myself a 2 bed end terrace on the market at £125k that had been on for a while, that was already tenanted at £650pcm and was owned by an accidental landlord.

At £650 I knew it didn’t meet my 7% criteria, but my research makes me think I can up the rent to £700 – £725 without too much trouble. So the property at that point is worth the £120k – £125k mark.

As I said last time, I’m not one for squeezing every last penny out of a tenant, so my plan would be to leave these people in place paying the same rent and raise the rent when the tenant moves out (or in another year or two if they aren’t looking like leaving).

So I could have just walked away because the numbers didn’t stack up on this property. Or, I could make an offer that means it does stack up for me.

Guess which one I did? <img class=” /> I’m not one for fannying around, so I went in at £110k cos that’s what made sense for me. It was sufficiently under the asking price for me to feel a bit like a chancer, but was close enough for it to be a legitimate offer.

You already know they said yes, so I won’t try and make a cliff hanger out of it. They did try to negotiate me up, but I was clear with my first offer that was my final bid. So I told them it was that or nothing. I was happy to walk away from the deal because I had zero emotion attached to it. It was just numbers on a spreadsheet at this stage. I hadn’t even viewed the property.

A quick note on that because it’s a bit of a grey area. Had I actually made a formal offer at this point, or was I simply asking the agent to run the offer of £110k past their client to see if they would be interested in a deal at that level?

I leave it up to the other side to figure it out, but I always make the “offer” subject to survey. Which in my case just means subject to a viewing – the joys of being a building surveyor, bitches!

I’m not a dick (honest), so unless there is something majorly wrong with the property that will cost thousands to rectify, I tend to stick with whatever offer I’ve made. In this case there was a bit of redecoration to be done, but nothing the current tenant was interested in doing so I left the offer as is and was happy to proceed.

Due diligence

So going back a little bit, now that I have a fairly tight set of criteria to be working from it’s time to start the due diligence process.

15 minutes on Rightmove and I’ve got myself a shortlist of properties to look into. I confirm what the rental figures are for this type of property in the area, and I’ll look at what else is on the market. What I’m looking for is properties that are of a similar size, standard and location as the shortlisted properties. If I’m looking at sales figures I’ll look at what’s on the market and what has sold recently. The exact process is fairly fiddly, but if you use sites like; www.home.co.uk , www.zoopla.co.uk and www.mouseprice.com you’ll be able to find most of the details you need there.

I’m now armed with;

  • Rental figure
  • An idea of the demand for this type of property
  • What the property is worth

With this particular property I found out that the rent for a 2 bed terrace in the area varied from £625 for an ugly, shitty little hovel all the way up to £800 for a fairly pimp looking new build. The one I was looking at was kind of middle of the two, it had a newish kitchen and bathroom (about 2 years old) and was in a popular location. Had off-road parking, but it was a pretty tight spot, but that’s quite unique in the area. I figure I could be getting £725 relatively easily if it was on the market now.

The demand for the area wasn’t amazing, but it was consistent. It’s near a hospital and has really good transport links, but it’s not a prime city centre location or anything. I reckon if it was empty it would take me around 3 or 4 weeks to get it tenanted. But due to it being close to some half decent schools, I think any tenant that goes for it will be keen to stay for several years.

The average tenancy length is currently 4.3 years, so if I manage only average (and I think I will have tenants stay longer), then I’d effectively have 1 week void a year. I can live with that.

Once I’ve got all of the above information, I try to speak to the agents as soon as possible to check it’s still on the market and to find out anything particularly interesting or relevant. I’ll also get them to confirm the numbers I’m assuming. So,

  • What will it rent for?
  • What’s the demand in the area for this type of property?
  • Will they take an offer / Can I get it for £xxx do you think?

Bless Estate Agents, I don’t trust anything they say. But if they tell me numbers I’ve already found out, then I can start the conversation around;

“If I was to put in an offer of say £110k – knowing that I can complete quickly and am happy with the fact there is a sitting tenant – do you think this is a number your client could accept?”

See how it’s somewhere between an offer and a question? If the agent knows their client is a twat and won’t accept anything less than full asking price, then they’ll let me know and I can move on. If they think there is a bit of movement, they’ll usually say something like;

“Well if you want to put in an offer we can always run it past our client to see if that’s acceptable.”

Which translates as; “You might get it for that – give it a go.”

 

If on the other hand they tell me something massively different to what I’ve found out… then I’ll call round a couple of other agents to get their view, and I’ll also go and do a bit more research myself.

It’s not an exact science, so you’ve got to go with your gut to an extent, but you can have it backed up by as much data as you want. Just don’t fall into the trap of analysing everything forever and never doing a deal.

 

That’s about the extent of it really. Hopefully that makes sense, but as always if you’ve got any questions let me know.

 

Next up we’ll look at how I went about financing the purchase, and what the plan is for the longer term with this particular property.

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