“BRRR” Strategy Examined: Property Developer Special
On the MLC Show For Property Professionals, Jamie Pritchard Head of Sales at Bridging Specialists Glenhawk examines the “BRRR” strategy and additional property developer strategies.
Jamie provides insights and tips regarding auctions, refurbishment, letting, options to extend a property portfolio, borrowing costs, bridging, and the opportunities bridging presents.
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Glenhawk
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Property Developing & the “BRRR” Strategy
Sean Rogers interviews Jamie Pritchard | December 2021
Traditionally, lots of people will have grown up with a 25% to 30% deposit, in order to secure a 70% or 75% loan to value, to secure that buy to let mortgage, maybe with the traditional term lender. Having to put down such large deposits, is a big hurdle anyway, but for those trying to get on the property ladder, with their first buy to let, or more importantly, extend that portfolio, add in the rise in house prices, it makes it even tougher. How have you seen property developers overcoming these hurdles, and how does bridging offer an alternative?
It’s a great question. And what is traditional these days? Everyone is looking again, onto the internet to find ways that they can do a deal, and make sure that they can buy properties, maybe quickly, and actually create the wealth, or the business plan that they want. That wealth could be through the yield that they get from the rental, that they get in the future, if they will retain that property. There are lots of different ways:
- It could be a property that’s below market value itself. Maybe it needs to be sold quickly. Maybe the property is just in disrepair. Glenhawk have a number of different ways we help developers in situations like this. We can do that with a 10% deposit. You can secure that below-market value property with 90% of the purchase price, as long as that’s not less than 75% of the market value of the property itself. So that could be a great way of picking up a good deal. But I’m sure we’ll go into later, what warnings you should look out for, for these below market value transactions.
- Bridging can offer a number of opportunities. If you’re not a first time landlord, let’s say, or don’t have any security other than what they’ve got already in equity, then you could bridge against other properties in your portfolio.
- Don’t think of anything as linear. Don’t think that I’m sat here today, as a developer, or an investor wanting to buy that property in front of me, and that is the transaction. What else have you got in the background? What else can you actually bridge against, that could actually make that, in your mind, not putting any cash down. So it’s not a liquid purchase from the deposit, but you’re utilising the equity in the background as a form of your deposit. That is a great, and quick way, when it comes to bridging of picking up a property quickly.
- That will also put you in a really good stead with the buyer, because bridging is the closest to a cash transaction, that you can get. It gives you that speed, and that ability to move quickly, without the chain. So it puts you in a really strong position that way, as well.
So raising capital from separate security is a way to do. Below market value transactions, that’s another a way of doing it, as well. Or it could be that, yes, you still need to put down maybe 20, 25% deposit, but the property that you’re buying, may a little bit of TLC, e.g. doing up so to speak. We could be purchasing those properties and basing what we could lend in the future, off the GDV (gross development value).
So two things here.
1) The OMV, which is the open market value, the property that you’re buying at today, the below market value, which could be the purchase price that’s below that, or
2) The GDV, which is the gross development value. That’s what the property is going to be worth, after you’ve actioned the works that’s needed for that property. Great things can happen when you use bridging for that.
And if you do it through advice, and know what you’re doing with it, you can lend against GDV. So you don’t have to put the liquidity down for that. And then, if you wanted to keep that property, you could flip it out to a buy to let lender, who could lend against what that property is then worth, after the works. Or, if you sell that property, guess what? You’ll be able to sell it for what that property’s worth, after the works as well.
So it’s a great way of wealth creation. And all of those funds, if you do sell, could be used for your next purchase, and then you suddenly would have more of the 25%/30% deposit to put down.
There is a lot of chatter online about the BRRR Strategy. So for those who don’t know, that’s “buy, refurbish, rent, and refinance”. Now that’s high risk, if you don’t know what you’re doing, but in the right circumstances, with the right execution, it can be very rewarding. And I want to drill down on this with you, Jamie.
So the, B in BRRR is “Buy”
People who swear by the strategy say it’s all about buying below market value, when they refer to buy.
So how do developers find properties below market value and close those deals?
Are you seeing any typical property types or patterns in respect of why they’re available below market value or would be a great deal?
We’re coming out of a few years of flux, obviously, but property values have been going up through that time, as well. But also, some people’s circumstances may be that they’re wanting to, or need to get rid of properties as well. So there’s a lot of research that can go into these areas, and the internet can be your friend.
The holy grail is what they are referring to. Picking up a property, that’s actually worth something, but you can get it for perhaps 40% below market value. Unfortunately, you’re just not the only person looking for these properties. So how can you get in front of the others on these?
Search Rightmove and Zoopla, until it’s going out of fashion. Search them in the descending order and in the area that you’re comfortable, and wanting to buy in. That could be, not just the geographical place you live in, but somewhere where you understand, and you can pick up, because you’ll understand that area, and really what those properties are worth.
Then, always question the value of the said property on there, as well. So, it could be certain property types, that they’ve been picking up. You asked me, “What are we seeing out there at the moment?” It’s wide-ranging. I’m seeing quite a lot of commercial properties, that could be flipped into residential under PD (Permitted Development) rules. They’re presenting a really good opportunity.
I’m seeing a lot of either terraced, or semidetached properties, that are being picked up, as well. There’s no real rhyme or reason, or exact same property being picked up the right way.
However, when you are searching through Zoopla, and Rightmove, keep your eye out for something that’s been poorly advertised. It might be your opportunity. If it’s actually been lit up wrong, on the photos, if the photos have just been poorly staged, or the property itself is poorly staged, lots of people will go past them.
They’re the ones that you need to be looking at, because they could be priced wrong. They may just not be having as many people interested in those properties. Then that’s a great place to negotiate. So don’t scroll past.
If you’re into cosmetic flipping, I always think of it the other way. If you were to sell your own property, you would probably have the cleaners round, you’d stage it, you would make it look as good as you want it to be. Look for the photos where something’s been staged really poorly, where the estate agent just has not taken the greatest of photos.
They’re the ones that present opportunities, as well.
The last one would be auctions.
Get to know your auction sites, make sure that you’re comfortable going to an auction, and that you haven’t got the syndrome of putting up your hand, whenever it needs to be.
So understanding what something’s value is, but really explore the auctions, because you’ll get pre lots, you’ll get an understanding of what properties and assets are going to be on there and that will show you in your areas, what types of properties are coming on the market, as well.
Secondly, make sure that there’s not a lot of the same properties on there, because there could be a reason why there’s a lot of those types of properties. Are they actually people, wanting to rent them at the moment? Are they the properties that people are just getting rid of, because it’s just not working in that area. So lots of questions back and forth, you need to be asking yourself.
But Zoopla, Rightmove, auctions, and looking for the properties that may have just slipped through the net. They’re the ones that you can probably find the best deals on.
I suppose, just going to the auctions as well, as a visitor, rather than someone looking to be directly involved, you’ll be able to pick up so many things. Like you’ve just referenced, as important as the auction is the area, isn’t it? It is knowing what kind of properties are coming through. And you get to network whilst you’re there as well, don’t you?
If you’re cute about it, you’ll be able to pick up a lot. You’ll be able to pick up so much from just even attending….
Such a good point. People who will be thirsty for knowledge, that’s why they’re looking at it. Lots of alleged “gurus” out there, trying to tell you how to buy property. And there are lots of good gurus, to use that word. There are also some gurus, that have never bought a property in their life as well. But if you go to these auctions and seek out active investors, and they will give you their time. They will tell you some nugget, about how they negotiate, as well.
So it’s not just about negotiation when buying at auction, because there’s no form of negotiation there, but what do they put in place after that? If they are looking at doing the property up, what do they do with their tradesmen? What do they do with their team around them? What do they negotiate with their estate agents or letting agents, if they’re going to keep that property? What type of tenant do they look after? You will pick up nuggets, going to those auctions.
As part of the BRRR strategy, the R, or the first one is refurbish. And then obviously, possibly convert, maybe change the use. So what makes a good refurbishment, and what makes a bad refurbishment? And can you provide some examples please, Jamie?
There’s not one size fits all. There’s no such thing as a really … “Don’t go for this bad refurbishment, or a good refurbishment,” because it could be the worst property in the world. But I could, if I’ve got that in my experience, knock that down and get planning and build something else up. You’ve got to understand yourself and what your capabilities, wants, and abilities are, in a sense. So, do you know you’ve got the right team around you? You could be a tradesman on here, who knows how to do everything. I’m not one of those people. Any DIY that I need to do, needs to be then undone and done again. I’m terrible at that.
Whereas, if you’ve got a business plan, and knowing how much you can spend on the property, knowing what your team’s availability and capabilities are, then you can weigh up the challenges versus the end benefits, at that time. I have got some tips, that I would actually probably give when it comes to refurbishment. And this is not an exhaustive list.
Get a good survey. A survey will tell, and a building survey as well, depending on how much that property seems to need to do work, is imperative. It will highlight the major issues to do with that property itself. We mentioned on a previous answer, be prepared for the competition.
So one of the things that I would always suggest to people is, if you are in competition for a property outside of an auction, then don’t be afraid of letting the vendor know, maybe even via writing, why you are the best buyer, what puts you in a great place, what type of deposit you’ve got, what type of finance, what puts you in a great place to buy that property, and move quickly for them if speed is the aim of that person selling that property.
Review your budget, as well. I’ve heard some horror examples, and I think that Channel Four is littered with loads of examples of people who run out of money, so review your budget. Make sure you take notes of everything that needs doing to that property, even if it is a lick paint, It needs a new bathroom in it, etc.
Always make sure that you’ve taken into account the VAT. So many times, you’ll get something, and it doesn’t even have the extra 20% written into it, and says, plus VAT. Have you had a look at what that VAT will add on, to the final bill? That’s just one bit, but be aware of the unknown costs. Really be aware, have a contingency pot. I can think of a property, that we’ve done in the past, where everything was just going to be a lick of paint, until I decided to take down some of the wallpaper, and there was damp behind it. Not picked up on the valuation report. There’s a cost to that, that will hit my bottom line. And understand where to get the best deals. And that’s the best deals all along the supply chain of what you’re wanting to do.
So that could be the best deals for legals. The best deal doesn’t mean, by the way, cheapest, but the best deal to yourself, and who will look after you as well. If you’re trying to put in a bathroom, don’t go for the best bathroom if it will not fit the area that you’re in.
I think it’s only fair if I picked on an area I pick where I’m from, so Newport, I don’t live there anymore, but would I put a bathroom in one of my properties in Newport, that I would put in the same property in Kensington? No, I wouldn’t. So get the deals. Know where to go on eBay, know what to do with different areas, where you can pick up them.
And be subsidence savvy, is what I’d say. Check the roofs, check the damp. As I said before, I’ve seen horror stories with those as well. And just prepare for those auctions as well.
And my final point, understand the differences between permitted developments and planning. I’ve seen a horror story, to use your words there, Sean, where somebody has gone through months of trying to get planning work, for the property that they’re looking to do an extension on, which they could have done in the PD, but they were never told that. So be permitted developments, and planning savvy.
Realistically, what’s the ceiling in this area, whether I’m renting it, or whether I’m selling it, what’s the appeal factor for them, if you will, in terms of what they’re likely to be looking for. And again, you get that with experience, don’t you? You want to avoid complacency, even if you’ve got the experience, don’t you?
I’ve got a good example of one like that. I was talking to one of our developers at Glenhawk. They picked up the property, and just because of the way that they like to live in a property, influenced how they developed this property. After the event, he said, “I wish I hadn’t done, what I have done.” And this is as simple as this. They had a downstairs bathroom in this terraced property, which they said, “No one wants a downstairs bathroom,”. So he decided to move it upstairs, because that’s how he would want to live in that property.
That’s got to go somewhere. They couldn’t increase the square footage of the property. And that took away the bedroom size of one of the properties. So when they were looking to sell it, even though they had a bigger kitchen area downstairs, and there were only two bedrooms in this house originally, it took away a lot of the square footage of that one-bedroom, and made it a bit less appealing to the property itself. So that’s just one example of a small change, which had a lot of influence.
HMOs, are really growing in popularity. You do your research on this, pretty much every trend that you might want to look at it, it’s pointing towards HMOs, continuing to grow, over the next couple of years. Now, when refurbishing a resi, to a HMO, fixing any problems, increasing the appeal goes without saying, but is it crucial to add more space via extensions, to create them extra bedrooms in particular, like you are referencing? Or is special refurbishment effective too? Like you might convert a room into another bedroom. You might make that lounge a kitchen area creating space for a downstairs bedroom.
What are you seeing, in terms of does it add enough value? Is it just use the space better, or looking at potentially doing that extension, so it is truly extra bedrooms added, if you like, rather than created?
It’s a great question because at Glenhawk, I’m seeing a lot of HMOs come to us, and conversions and refurbishments, of all ilk. And I was thinking, as you were talking about 10 different answers, that I’ve got in this, and all of them are pertinent with it. So I think reverse engineer it.
Understand the area, that you’re buying that HMO, or that property, that’s going to become a HMO.
And then, the type of tenant who is going to be living in there as well. So if you are looking to use one of your points, to extend it and make it the most professional HMO in the world, but it’s actually based in an area for students, would you do that?
If you were to extend and create the extra bedroom via an extension, how much would that cost, and how much would that bedroom give you back the cost that you’ve put into the works of that extension?
Were you able to do that extension, under PD or planning? And you think of the amount of time, that you won’t have that property rented out, versus then how much you’re going to be spending on it.
So lost rent versus how much the costs are going to be. I’m not trying to put you off doing that if that’s what an investor wants to do. Just the considerations and things, that you need to think about.
Still, people buy properties and don’t understand, that sometimes you can convert it from a C3 residential, into a HMO under permitted development rights.
Sometimes you can’t, and then you need to have planning permission to do that. That’s called an article Four area, Salford, Southampton, Birmingham, the list goes on.
However, if you buy in one of those areas, can you rightly convert it? And under the new HMO rules that came out for licencing … which is separate to planning, you need to be thinking about those room sizes.
So I’ve seen some horror stories, where it’s like the worst landlords out there. We’ve all seen those programmes, maybe on Channel Five, Channel Four, where they’re trying to put as many bedrooms into a property as possible.
Understand your room sizes. If you’ve got somebody who’s occupying that bedroom, that’s going to be over 10 years old, it needs to be a minimum of 6.51 metres square. And if you’ve got anybody that’s less than that age, you cannot have a bedroom that’s under 4.64 metres squared.
So you have to work out, if you are going to do an extension, or going to utilise the space of, say a living room, is it going to meet those requirements? Because guess what? You will not get a licence, or any rent that you bring in, and there are £30,000 fines for that.
So, that is something you really need to do. If you want to build up a portfolio of HMOs, do it correctly, and make sure you go and get the licences, as well.
We’ll allow you, at Glenhawk to lend without the licence, because obviously, you’re doing the property up. Then, finding a lender that will still allow it, if you’re still only applying for the licence. There are some really good lenders, that will allow you to do that, as well.
Understand the tenants in the area. Understand Article Four areas, and understanding, how much you’re willing to spend on it, versus actually what the property should be, and desirable in the area.
In terms of knowing whether to go down a permit development route or planning, is that something they can just find out online themselves, or are they best getting specialist advice on that?
A good specialist broker, mortgage advisor, should know all of this. So if I had a pot, and I wanted to spend it on HMOs and go out tomorrow, I would do my homework on a lot of things.
So it would be if I actually do want to do the works to any properties … and I’d probably put together a board of the type of property, that I’m going for, in the areas that I want to buy it in, understand the tenancy, how much I can charge for the rent on them. I would understand if I want to do the works because people want to live in nice properties.
A good example of the HMOs, at the moment, is that people are working from home. So not only a bed, does it have a place where you can work within that? Have you set it up, so you know it’s going to have good Wi-Fi? All of those areas will help you, get more rent from a property.
And then, I would understand the area. You can go onto local councils, do the research. If you are looking at three different areas, go on all of those three areas, and see if you can convert from a C3, into a C4, under permitted development.
Having that book available to you, and then getting a schedule of works, of what you would want to do, and the costings for them, that would allow me, in two days time to absolutely go flying, instead of trying to buy them today. That element of research is all available on the internet, but I’m always available to help with any of those questions, as well.
On budgets, typically, a lot of people will say never invest more than 10% of the purchase price on a refurbishment. Allow 5% potentially, to purchase cost for legals, additional fees, etcetera. You were touching before, on almost like an emergency fund, for just hidden problems, that may come about, whether that’s right into the property, or even potentially with legals, I guess. Would you agree with that 10% purchase price, on a refurbishment 5% purchase cost, for additional fees and legal? Is that about right, or is that wrong?
I think 10 to 15% for contingency, I would always keep there.
When buying a property, would I only spend 10% on the refurbishment? It really depends on where I’m buying, or where the developers are buying that property. And the state of the property at the start, because it may need a lot more work done to it, than 10%. But the true end value of that property, is going to be exponential, compared to what? So it’s understanding again, how much I would spend on it.
5% for cost of legals. Yeah, that’s about right. These are those hidden costs and budgets, that people don’t really think about.
So have you considered your stamp duty? Have you considered what you’re going to do later on? So I’ve seen again, some of these gurus say, “Buy them in your personal name.”
And I think you suggested earlier, “What happens to the people, that want to get into this game now?”, then maybe because of their tax position (and none of this is tax advice), buy it in personal names now, but later on, down the road, they may want to convert that into a limited company, I.e., sell it to their own limited company.
What are the cost ramifications, that will affect your budget then? If you’re selling it from Jamie Pritchard, into Jamie Pritchard SVP, there will be a stamp duty implication to doing that. Lots of customers still do not understand, because they think that they are the UBO to that, (ultimate beneficial owner). They’re not, the limited company is.
When thinking of budget, plan forward to where you want to be. If you want to own 20 HMOs, reverse engineer that, where would be the best place for your tax position, for the ownership structure, for what you want to do with 20 properties moving forward?
And what that would look like.
Finding a really good lawyer, that can help you with these things, can be the difference between losing the property.
I think anyone going into it would be well placed, whether to do their own research, or going speak to someone, to get tax advice, as you say. In terms of the limited company, buy to let’s always worth speaking to a mortgage broker, because again, whether you’re limited company, buy to let, it’ll change over time, of course. But it’s interesting to maybe gauge the temperature of the room, to go, “How easy is it for me to get mortgages right now, limited company, buy to let, to do resi to HMO conversions,” as an example, not just with someone like yourself, Jamie, if we’re bridging, if we want to go with say a term lender, is it as easy as me being an individual? So that, how does gearing get affected, with me being an individual, versus a limited company? Is it one, or the same? Do they look at it differently?
These kinds of things are subject to change anyway. And then on the legals, a little plug for us there of course, but as you say, there’s a lot of making sure you’ve got the right firm, that couldn’t do limited company buy to let, anyway. Alongside the lender, which can be messy, especially when you start going to some of the quirkier ones. Just because some firms are more expensive, does not mean they offer a better service. If you want to get in touch with us anytime on that, please feel free.
Back to the “BRRR Strategy” – The R, is for rent. Now, any refinance on a mortgage, quite often will require ownership for six months, as I understand it. And the owner will want to, obviously increase the rental yield to the maximum level. You work with so many successful property developers, Jamie, experienced valuers as well. What are the common factors, which help increase rental demand, rental yield, and secure the best tenants moving forwards?
Great question, because we’re lucky enough to see some really good people, and how they do other properties. Think about what you would like living in. Think of the sort of hotels, if you’re away, being in, and what do you want. And what’re those little touches, those little touches that make that property work better than they are. That’s where the best property developers are putting their houses and staging them, in the right way, which could increase the rental by just a few percent per month. But you start adding up those percentages, over an eight-bedroom HMO. It works. Don’t just think, “Oh, I’ll take away the kitchen and social living area, shared living area, just for an extra bedroom.”
That could probably get you less rent, in a certain way. Don’t try and just put people like baked beans into a house. Think about how they want to live, because … this is the main bit.
You can have the best property in the world, but if you’ve got a flux of people, just keep on coming in and out, you’re going to start losing that rent, per month as well. Secure tenants that will live there for a long time. They are the best tenants to have, as well. So think about what you like living in. Making sure all the areas are absolutely staged to the best. And then, it’s just understanding the area as well, knowing what yield you can get for the property, as well.
I think we mentioned earlier, you could be in an area of Liverpool, or an area of Newport, that would only ever have a ceiling on what you could charge on that rent, as well.
And securing the best tenants, I always make sure that if you’re not able to do this yourself, then go and get a good letting agent, that really cares for what your plan is, going forward. Negotiate with them, make sure you know what they want to do.
It seems quite out there, but I used to always go to see a tenant and interview them, in a sense. Go and see them, in the property they’re currently renting, or the property they’re currently living in.
That will show me how they treat the property they’re in at the moment. So if they’re not treating that property well, they could have the best CV in the world and they’ve got the best job, but they’re not going to look after my property, again, that’ll hit my bottom line. I’ve done my homework on the type of properties, and the customers that will live there the longest. It may be that I’ve seen areas of Reading, where it is set up HMOs for professional tenants, and professional HMOs is set up, because there are not as many hotels in those areas, and it’s a good commute into London. Then you would need those rooms, to do something slightly different.
They would actually probably need to look a bit more hotel-like, than somebody that just wants to live there with maybe children in the HMO, or whatever it may be.
Lots of different areas. I think it’s just closeness to knowing what the area is, understanding what rentals are out there at the moment.
If you could just make that property look great, the reverse of what we said we would do on Rightmove, but making that room look great. You can charge more for it as well.
And one of the other, last bits of advice with tenants, that I’ve used in the past, is that I give them, and get them to sign into a free ASU policy, accident, sickness, and unemployment because I don’t want to lose rent and I don’t want them to lose the property they’re living in.
So if they do go through this period of unemployment, which again has happened in the last two years, then that policy potentially could kick in and help them still live in that property, and help us with the rent itself.
Great advice. And the R, of the BRRR strategy, is refinance. Now, for want of a better phrase, in essence, that’s exits for people looking to try and buy below market value. Obviously, refurbish it, then rent it, and at some point, they’re looking to refinance it. Now, how stable is the refinance market, for those trying to employ that strategy, with a view to getting a buy-to-let mortgage? And what are the common issues you see, that could be avoided, where people struggle to get that refinance, or struggle to get it on terms, that maybe they could’ve done, had they done something differently?
We at Glenhawk, do bridging. Do not think that we’re never thinking about refinance. On every deal, where that is the exit, we’re always thinking, “Make sure that fits.” The last thing that we would ever want, is a client who buys a property … and remember, bridging is an amazing tool, for doing a property up, and creating wealth for yourself, and creating what that property could be rented out for, in this example. But we’re always thinking about the exit.
Some of the things that we’ll look at … and to answer one of your questions, is it a stable market? It is a really highly supplied market out there, at the moment. There is a lot of buy to let lenders, which means that it by proxy, should be a very stable market. However, let’s have a think of this, what vehicle you’re buying the property in. Is that personal ownership, or is it a limited company? You need to even delve deeper into that then. If it’s a limited company, then you need to be thinking of how is your limited company set up? Is it a special purpose vehicle, I.e., an SPV. Lots of lenders, lend on that.
Say you’ve got a company that may be … I don’t know, Jamie Pritchard’s Electrical Wholesalers, but I’m trying to use some of my profits, and buy properties within that, that could be a trading limited company. Fewer lenders do that. Then suddenly, I could have a company that is layered, fewer lenders do that. So maybe my electrical wholesalers owns the SPV, but they’ve got shares in both. So understanding the vehicle that you’re buying in, that will determine if you’ve got much ability to exit it. A good mortgage broker will be able to steer you in these areas, not on the tax advice element, but on the refinance itself.
Also, the vehicle you buy-in, and one of your questions was someone that wants to build up a portfolio. There’s a lot of rules, that people need to think about them, as well. So I think you mentioned earlier about stress tests, and what people need to do there. We need to be thinking about, how much your rental will go up, and how much affordability you can get. So just because a property is worth a hundred grand, and you think that you can put down 25% deposit because that lender does 75%, doesn’t mean you’re going to get 75%, because they have to do certain stress tests, based on your tax position, your ownership structure, and then also what rates you’re on as well … whether it was a five-year fix, or a two-year fix, that will determine the amount of loan that they can provide you.
So that needs to be considered for the exit.
Let me give you some examples. If you own in personal name, it could be that you’d put in 145% stress, at potentially 5.5% onto the loan amount itself. That could mean less loan. It could be that you’re buying it within a limited company, not tax advice again, but that could give you a stress test of 125%. So it may be 5.5. Or, on a five-year fix, it could be at the pay rate of the deal. All of these things need to be considered. Then you come into portfolio territory. So it’s something the Prudential Regulation Authority, which came in with the rules for what I just said, which was the stress test, let’s just call them. The ICR calculations, they’re called, interest coverage ratios. If you owned four mortgaged properties or more, in the background, including the one that you’ve got, then we have to stress your back book as well.
So if you’ve got someone who wants to put down lots of lower deposits on properties, they would be highly geared. And would they be able to refinance all those properties? Even if the one that you’ve got is not highly geared, but the ones in the background are, all of these things need to be considered. I think all roads lead to getting a really good mortgage advisor, who understands buy to let, but also understands bridging. Bridging is not a dirty word, it’s a vehicle to provide the solution that you need, but do not get trapped on a bridge, and do not pick a mortgage broker that does not understand buy to let.
Very good advice. And obviously, as you say, getting that broker that understands and works, especially in limited company buy to let, as well, because that’s something that is quite a recent phenomenon….
2015 is when George Osborn mentioned tax changes. And then, 2016 is when it kicked in. So since then, right to the present day, someone in personal ownership, who’s a high rate taxpayer, can not get 100% mortgage interest relief anymore. You can still get that within a limited company, does not mean that that is the right solution for yourself. You need to consider that, both options. Most good buy to let brokers will understand both limited company, and personal ownership.
A million percent. A lot of people have their own tax advisors, or accountant anyway, who might be able to assist there too. But like you say, it’s that perfect … if you like, it’s the perfect square, which I know you can help with, as well, in terms of having the right broker, working with the right bridging operation, and then a good legal team. And I think especially … that sort of combination, you’ve got all the right advisors around you, and you should definitely be steered the right way.
In terms of the dangers of this kind of strategy, Jamie, which one would you say is probably the biggest issue? I’ve seen stuff out there saying that … All of them have a place, I guess, as a danger, and one of them is location. So there might be some locations that appeal now, but maybe as the decade moves on, there won’t be.
So city centres I’ve seen, will people want to necessarily live in the city centre as much, especially working from home, technology coming in, things like that down valuations. You commented yourself, even if that’s in the future, when you’re looking to refinance if you’re too highly geared. Refurbish risk, with cost and delays, or maybe building your property portfolio too quickly. And like you referenced before, maybe … I don’t know, risk profile damage, in terms of being able to refinance. I know it’s difficult, but if you had to pick one kind of danger of that strategy, what would you say is the one that jumps off the page at you?
Everything that you’ve mentioned there, shows me the thing that we’ve not got, that everyone wants to have, which is a crystal ball. Can we see into the future, and see what my portfolio will look like, against my business plan? But you have got a really good option to create a crystal ball for yourself. And that comes with planning and a business plan.
If you plan out exactly where you want to go, plan out the] costs, have a look at what’s happening, in the locality of where you are. I.e., has it got an HS2 coming through it? Has it got an ability, where they’re trying to make Leeds come closer to London, by the rail links? What is the council’s planning for said areas, are they trying to build an out town shopping area, and then an out of town business area, that would take away from that city centre living? By understanding all of that, it will allow you as much ability to think, “This is going to be a good investment.”
By planning as much as you can it will help ensure you do not to bite off more than you chew. So thinking you can do so much, buy too many at first, “I’ve got a pot of money and I’m going to buy loads of them.” Have you even considered getting an eight-bed HMO, and trying, if you’ve got no experience, getting rents off each one of those eight people? Then, times by 10, if you want 10 HMOs. Have you thought about your plan of what you’re going to do with that? Have you actually thought about your plan, and how highly you are geared if one of those people doesn’t pay? Can you soak that in? Have you thought about refurbishing, “I want to do up the property like this, but I haven’t got a crack team around me, and I don’t even know how to do a schedule of works?”
So I think all of those things are important as each other, but I think it’s down to the individual. Do not bite off more than you can chew. Nothing’s risk-free, but if you plan it right, that’s the way to go.
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The content of the show is for information purposes only, does not constitute advice, and is aimed at experienced regulated professionals in their field.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATING EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
SOME BUY-TO-LET MORTGAGES ARE NOT REGULATED BY THE FCA. EQUITY RELEASED FROM YOUR HOME WILL ALSO BE SECURED AGAINST IT.