How I borrowed £100,000 from an investor at 1.25%
I'm sure you are wondering, how did he borrow £100k at 1.25%? Well the answers in this article but first let me tell you about how my 2018 went! Not counting property brought with JV partners, I brought £500,000 of property using none of my own money initially. After refinance I put £25,670 in, meaning £500,000 of property has cost me just that - £25,670.
This is one of those properties and it was a difficult one. I stretched myself further than I had ever done before; in both capacity and financial terms. That’s why I think there are some really key learnings to be taken from it.
Everyone teaches you to tell people what you do and this deal came from just that. We were renovating a property in the same area when we had some damp ingress coming into the kitchen. To see if it was penetrating damp I knocked on the neighbour’s door and asked if I could take a look from her side. We got talking and I mentioned that we brought and renovated houses at which point she mentioned that her sister was looking to sell and that she didn’t want to deal with estate agents!
So fast forward a few months and with only one rival bid I came up trumps. Not because my bid was higher, in fact they were the same, but guess who stayed round for a drink and had a chat with the vendors about their new home. I also visited the vendors prospective onward purchase and gave my opinion on the works required to get it to what they wanted. That’s what got me the deal. A lot of people think that quantity of viewings is what gets the deals and they are mostly right. However, quality viewings where you spend time building report with the sellers are the viewings that get you the great deals. The once every six-months kind of deal kind!
This property was a three-bedroom double fronted Victorian terrace and could easily be converted into a six-bedroom property. This style of house is something that we typically look for. After doing as much due diligence as possible I was happy with the deal. It wasn’t the best deal I’ve done but it stacked well, initially around 25% ROI. A friend of mine had just completed a property on the same road and rented it at the drop of a hat so it was looking good.
To finance this purchase I borrowed a substantial part of the money from an investor at an extremely low interest rate of 1.25% PA. I’m sure your wondering why someone would lend at such a low rate? Well it was because in return I provided him with a turn key five-bed HMO for free. Turn key is the term used for a ready to go HMO deal. So, I sourced, managed, furnished and then passed it over to my rental team. Like a car where you just add fuel that’s a deal where you just add cash. The whole loan was in place and things were good to go. That is until my friends valuation came in £50,000 less than what had been expected.
Property is all about flexibility and as I was deep into the purchase in both cost and time I knew there was a deal to be had here. I went back to the drawing board to see if there was any way I could add more value to the project so that at the end I could pay the loan back with ease rather than having a huge chunk of my own cash left in it. I decided that instead of creating a six-bedroom property, the same as my friend, I would apply for planning to get a seventh-bedroom. This increased the renovation significantly as it meant adding a lean-to extension, effectively doubling down in a sense. By creating a seventh room I could in theory go for a commercial valuation using the sui generis planning as leverage. Therefore, increasing the valuation substantially. I’m not keen on over gearing or commercial finance in general. The main reason being the costs involved and the rates that average at 5%. However, on this deal I managed to secure a rate of 3.7% on commercial finance which swayed me and meant that this was a viable option. The monthly payments worked out at around £650PCM.
I’m sure you're wondering how to get a seventh-room out of a three-bedroom Victorian terrace. It’s fairly straightforward but does involve adding a lean-to extension for the living room and going into the loft. I also added six bathrooms, meaning most rooms had en-suite facilities with the exception of two that shared a communal bathroom (see the plans before and after)
If you haven't got it already (and if you have thank you) I've created a ten page PDF showing you a range of case studies from standard BTL to the 3-7 bed HMO on how to get the most space and value from your property projects. Each case study shows bathroom details, plans, drainage and images of the type of property you should look for. There are also hints and tips on how to make the most from your projects! It is a must have for any aspiring or active investor and it took 5 years to create! You can download it here www.jmiholdings.co.uk/playbook.
The renovation on this one didn’t go as smoothly as usual. I always opt for a private building inspector vs the council. I find working with private inspectors more beneficial as they tend to help you with issues that arise rather than telling you what you need to solve.
On this occasion I decided to try a new private building inspector, who for some reason didn’t take a liking to my renovation team. That cost me a lot of money but mostly time, so the learning here is once you find something that works stick to it.
The build took six months and toward the end I was wondering if I had made the right decision in moving forward with this one. This came from an amalgamation of the build being slower than usual, of course the implications on costs that come with that, and also the time which the project was then finishing (late October). This meant that finding tenants would be far more difficult, especially on top of the usual moans from my agent about saturation.
Thankfully within two weeks of completion we managed to rent five rooms by mid-November. So, a fairly good result. I whole heatedly believe this related to the final finish and design. This gave me leverage to move forward on the reevaluation which I anticipated to be £270-£290k. Of course, I always put in the higher and see what happens. After a good meeting with the surveyor I had the great news of a £290k valuation, especially as a friend's six-bed property came in at £215,000.
All in all, a relatively good result compared to what was expected in March when I agreed the sale of the property. The key learning I have taken from all of this is to stick to your guns. There’s so much negativity with HMO’s currently, and yes there is defiantly a change happening in the market, but if you know something that works don’t be swayed by others opinions.
Final figures below.
Purchase price: £145,000
Buying costs: £6,370
Planning costs: £1,500
Cash in: £237,870
end val achieved: £290,000
75% LTV release: £217,500
Cash left in: £20,370
Gross rent pm: £3,215
Net rent pm: £1,922