Are you a typical buy-to-let investor?
If so you’ll have worked hard to build up a small portfolio of buy-to-let properties. The rental income you receive each month will cover your finance, maintenance and management costs. Hopefully, there’s a little left each month to make all your hard work worthwhile.
But take a step back for a moment. Are you really earning the kind of regular income you’d hoped when you first took the bold decision to become a property investor? Is all the hassle, risk and effort really worth the amount of profit you’re left with at the end of each month? If you’re a typical buy-to-let investor, then I fear the answer is probably along the lines of “errr… now you come to mention it Lyndon, not really.”
Like most people, my first foray into the world of property involved a small, run down terraced house. I bought it for £28,000 cash, completed a full renovation and rented it out. Over the next few years I leveraged that original investment to amass a residential and commercial property portfolio worth over £10m.
Despite owning over 80 buy-to-let houses, the profit I made each month – after finance charges, maintenance costs and management fees – was never going to allow me to live the kind of lifestyle I’d dreamt about.
Now don’t get me wrong. My family and I were hardly going to starve and I could look forward to the day when all the finance had been repaid and I could sell the portfolio for a healthy profit. However, I was impatient. I wanted a carefree lifestyle NOW, not when I was old enough to retire!
I’d learnt a lot from renovating all those properties and established a network of architects and contractors who I knew I could depend on. At the time, I’d no experience whatsoever of new build developing but when I spotted an old Methodist church for sale near my home in Bolton I saw the potential to earn a fast(ish) buck. I got out my cheque book and took the plunge.
I bought the site of the church, obtained planning permission for eight houses, secured finance and enlisted a main contractor to carry out the construction work. Within a few months I’d returned a profit of over £250,000. Now that was more like it!
I realise that for many buy-to-let investors, the thought of moving into new build development is somewhat daunting. It certainly was for me. I must admit, compared to a run-of-the-mill renovation project, there’s a lot more to think about. However, if you can pull it off, new build development can produce truly life changing returns.
When I speak to newbie developers, the area they seem to worry about most is the construction phase. However, in my experience this is by far the easiest element of a build project… provided you leave all the work to a single main contractor employed on a fixed price contract. In the past I’ve attempted to reduce construction costs by co-ordinating the build myself and employing a range of specialist contractors as and when they were required. It didn’t take me long to discover that this was a very false economy. The amount of time, stress and hidden expense this approach involved quickly outweighed the supposed savings. Nowadays, even with the benefit of my experience, I wouldn’t dream of project managing a build myself. I leave it to the experts who take care of practically everything for me, leaving me free to concentrate on tasks such as sales and marketing. What’s more, because I hire contractors on a fixed fee basis, I know exactly how much the build will cost at the outset. No nasty surprises.
Plus, I always negotiate a late completion penalty clause. As a result, my projects are very rarely late so I don’t get saddled with additional finance costs.
Once my houses are complete, I either sell them on for a quick profit or retain them as rental properties. A project I’m just about to embark on acts as a good example…
Due to the current climate I’m concentrating on small developments at the moment. My next venture consists of just two semi-detached houses near my home in Bolton. The properties will be worth around £150,000 each and at this stage I intend to sell one and retain the other as a buy-to-let property. The profit on the house I sell will go toward reducing the mortgage on the other. After completion we will walk away with a brand new 4 bedroom property worth £150,000 but with only £75,000 owing.
That’s the plan at the moment. But I’ll see what happens. If I get eager buyers for both houses, I’ll probably sell and make a quick profit of around £80,000. The whole project should take around 9 months from submission of planning to completion.
In my experience, the key to a successful development is securing the land at the right price. Luckily, due to the recent downturn in the market, there’s rarely been a better time to find and secure quality development land at knock down prices. If you can buy the land at below market value then its possible to obtain finance to cover the entire cost of your build. Even in today’s market some banks that will fund up to 70% of the Gross Development Value (GDV) of the scheme. In the example above, the value of my two semi-detached houses are £150,000 each, which provides a GDV of £300,000. The bank will therefore fund £210,000 towards the land and construction costs which, in this case, is sufficient to 100% fund the development… simply because I paid the right price for the land.
However, I would always advise you to have contingency funds of your own should you need them. I aim to source land below market value by securing it without planning and, with the help of my architect, obtaining the necessary building consent. This will always increase the value of the land and often provide the capital required to finance at least a good proportion of the build.
Whilst new build is a completely different beast to a renovation project, I would urge anyone with some experience as a property investor to seriously consider a small project to help conquer that learning curve. As long as you pay the right price for the land, secure funding at a competitive rate, have a good architect in place to help you get the most appropriate – and profitable – planning permissions and a main contractor on a fixed price contract to do all the hard work, you stand a very good chance of walking away with a substantial pay cheque. And because these professionals handle most of the leg work, a new build project needn’t demand too much of your time and can be fitted around your other commitments.
Over the next few weeks I intend to go describe in more detail each stage of a self build project. I hope that by the end of these series of articles, you will be convinced that self-build is easily within your reach and is an ideal way to supplement, add to or even replace your buy-to-let portfolio.
To your continued success in property,
Lyndon.
More articles from Lyndon Forshaw
Very interesting post, this is exactly what we did with Property Rescue. We had to sell to rent back, due to us not being able to afford the monthly repayments on our mortgage. And it certainly helped us in that respect, but no-one likes selling their home espcecially when they are not looking to buy another. At the moment the property market is dire, and finding a good deal anywhere is really really hard. I had to knock back a few others on my home as they fell way to short, but as more and more came in for around the same price, these offers seemed to appear more reasonable.
Yeah I agree Barry sentiment does seem to be returning back to the market. I have been reading a lot lately and many estate agents are saying that buyers and sellers price aspirations are becoming more inline