Starting Out in Residential Property Investment and Development - My Journey

Discussion in 'General Property Investment Discussion' started by MCPI_Ltd, May 25, 2016.

  1. MCPI_Ltd

    MCPI_Ltd New Member

    I’m new to the forum so though it best to start with an introduction. I currently work through my own limited company providing power solutions to the UK Rail Industry. I kind of fell into the industry and the rates of pay a significant so I ended up staying there, although I wouldn’t say it’s my passion! I have always been interested in property investment/development as my father was involved for a number of years, albeit on a small, local scale but never really had the capital to get involved.

    I have owned properties before that I have lived in, however, I am starting my journey into the buy-to-let, property development world and though I’d start a thread essentially documenting my journey. What I’ve noticed is there is a lot of information out there from millionaire/billionaire developers and investors on their methods and somewhat advanced capital investment techniques such as JV’s, “no money down” etc etc, however I don’t think these are applicable to you “man/woman on the street” who’s just starting out and investing for the future so I wanted to start writing about “traditional” methods of getting into the business in the hope that it can inspire/help/guide other people and they can learn from the many mistakes I’ll probably make and also the successors along the way.

    My short to medium term goal is to purchase properties, add value and then put them into the rental market with the objective of providing quality properties of the highest value. By that I don’t necessarily mean the highest market value, although that is obviously a consideration but coupled with that, I mean the value that the properties will offer to their inhabitants, the tenants. I want to be able to offer properties that are finished to a higher spec than would normally be available at their certain price point, giving the tenant more value for money, a quality place to live in the hope of achieving word of mouth recommendations and happy, long term tenants.

    The way in which I aim to achieve this is by doing the majority of the work myself, eliminating the extensive labour costs that can be incurred if you are not willing to do the work yourself. Again, this is going to increase the development time of the properties but will keep costs down. Plus, I like to get my hands dirty with these kind of projects.

    It’s obvious that the above is not a get rich scheme, but again, that’s not my objective. I’m in the fortunate position where I can invest my earned capital in properties and based on previous data property prices go up, some quoting doubling in value every 10 years based on historical data so in the long term, as a pension plan, I’ll make my money. In the short term, if I can give a better quality of life to my tenants at the expense of losing a little profit, I’m comfortable with that.

    I hope I’ll be able to get on here regularly and I can call on the wealth of knowledge here to help and assist and where I can help and assist some of you.
     
  2. MCPI_Ltd

    MCPI_Ltd New Member

    Following on from my introduction, he’s where I am now…

    I’m in the process of buying my 1st buy-to-let property, a 1-bed 1st floor apartment/flat that needs the internal fixings and finishes updating as it has been untouched for some time. My plan is to put in a new kitchen, new flooring and then re-decorate throughout to provide a clean, modern finish. My estimate is that I’ll be able to achieve a gross 10% - 10.6% yield* with me marketing at the 10% in line with my goals and vision for how I want to develop my portfolio.

    *Gross rental yield is the total rent collected divided by the cost of the property multiplied by 100 to provide a percentage. Example: Total rental £10,000, Cost of property £200,000, Gross yield = 10,000/200,000*100 = 5%.

    So what did I need to do to get to this point, as I said previously a lot of the information here is for people starting out so I’m trying to break everything down as simple as possible so anybody can understand and get involved. I’m sure a lot of the info will seem basic to some but might help break down some barriers for others and even take away the fear of the process that people have:

    Raise the initial deposit/costs funds – In my case this was from my own personal savings. For you it could be the “bank of mum and dad” or a friend, co-investor, bank loan, bridging loan etc, however you do it, make sure it’s sustainable and don’t overstretch yourself financially is my advice. Some people are desperate to get into property because they see it as a way to make big money and will do so at any cost, these are probably the same people who lost everything when the market bottomed out in 2008 onwards. How you do it is up to you, in my case it was from my savings as I said and I make sure I keep a contingency aside for a rainy day!

    Make sure you factor in all the costs such as stamp duty (inc the 3% premium for second homes), solicitor costs, broker fees, renovation costs, mortgage payments while you are getting the property up to spec etc to make sure you can cover all of these additional costs.

    Have a vision – This might sound very American businessy (I know that’s not a word but seemed to fit) but I think if you are going to make a business out of property you need to have a clear idea of what you want to achieve. Mine, to provide quality housing at affordable prices. The basis of my vision is that I don’t need to earn an income from my rental properties so I’m in for the long haul and relying on capital growth to fund my retirement. If I can provide a quality product that is to a higher spec than what’s currently available at that price point for my tenants, that’s a win win for me!

    Find a property – This was months of looking through Rightmove, Zoopla etc and speaking to agents in my area looking for something that needed updating so I can add value onto its market value and also that would be suitable for the rental market in the area. The agents can provide loads of local knowledge so it’s always good to tap them up and get on their good side.

    Eventually I found a few properties that fitted into my strategy so I arranged viewings. I think the main point here and one that’s been said numerous times, is that you need to look for the potential of the property and not how it looks now. Don’t be put off by messy, old, dirty, grubby properties because they are the easiest to add value to. A tidy up and decorate and hey presto, you’ve increased your property value with little work. I guess this point all depends on how hands on you want to be. Some people will want to buy something and have it on the market the next week and be completely hands off and that’s great for them but I want to be able to add value by investing a little time and a little money to make more money!

    Mortgage advise – At the same time as I was looking for properties, I was in constant communication with a number of independent advisors, looking for the best deals. It’s good to get these on board early so you know exactly what you can borrow and how much it’ll cost you. The ones I’m using charge a fee but only when you receive the offer so there’s no upfront costs or lost money if you decide to put it off for a while.

    I sorted out a good deal with a good lender and get the decision in principle before I made an offer on a property. The cost of the mortgage will play a part in deciding how much you are willing to pay for your chosen property and your ongoing costs so make sure you know!

    Offers – I put an offer in which equated to 83% of the listing price and was rejected at first. I didn’t feel the property was worth more, taking into account the amount of capital that I would need to invest to get it to the standard I wanted and its potential value so I stuck to my guns. I think it’s important to note that you need to look at what work needs doing to a property and consider the cost of the works and get a ball park figure. Speak to tradesmen if you’re going to sub work out and get some quotes, the more information you have the better. Speak to the agent and get an idea of what it “could” be worth and the rental income expected once you’ve done the works and that will guide you offer.

    After a few days the seller came back and accepted my first offer.

    Agents Information – When your offer is accepted you’ll need to show proof of funds to the agent, in most cases. The agents selling this particular property wouldn’t’ take it off the market until they had seen this so it’s good to make sure you have your mortgage decision and deposit fund information at hand.

    Solicitors – For me, this was an easy one as I have a solicitor who my father dealt with on numerous properties and I’ve dealt with a number of times on my own homes so it was a no brainer. He’s good at what he does and very open so there are no hidden charges.

    Most people will need to shop around for a good solicitor. My advice is always use one that’s been recommended. You might find one cheaper on the internet but I know of people who have been hit with additional charges for every call and letter the solicitor takes or makes. Make sure their costs are transparent and they come recommended. You might end up paying a bit more but it’s beneficial to know the difference between lowest cost and best value!

    Knowing who you are using before you have an offer accepted is a good idea so you can pass on this info to the lender, broker and the agents as most of the correspondence going forward will be done between these parties.

    Mortgage offer – So this is where I’m at having received the formal offer this morning.

    Before you get the offer the lender will need to undertake a valuation survey to confirm the property is worth the amount you say and satisfy themselves it’s worth lending against. Once they have this and all the other required ID, proof of funds info, they’ll send the offer out to you and your solicitor. At this point the solicitor will take over and there’s not a lot for you to do over the next few weeks other than get a plan together for what you are going to do with the property.

    Property Survey – It’s always good to get an independent property survey done before you exchange contracts on your property.

    There are generally three types of surveys that you’ll look at:

    Condition report – The basic survey which gives an overview of the properties condition and highlights any significant issues but doesn’t provide a great level of detail.

    Home buyer’s survey – More detailed than the condition report and will highlight things like damp, subsidence and any necessary repairs. This isn’t an intrusive survey and only identifies “surface level” problems

    Building/structural survey – This is the most thorough survey and provides a comprehensive assessment of the structure and condition of the property as well as checking the loft areas and under floorboards.

    The type of survey you have will depend on a number of factors including the type of property you are buying, its age, if there are any issue you noticed during the viewings, its general condition, if it looks like it’s been well maintained etc.

    My advice is to go for the homebuyers survey if everything “looks” ok and see if that uncovers anything. Whichever way you choose to go, make sure it’s complete before you exchange contracts as at that point there’s no turning back. Another benefit in the survey is that if it highlights some work that’s needed, you can always go back to the seller and see if they will either do the work or reduce the price to purchase the property so you can have the works done.

    So that’s where I’m at and I’ll keep updating as I go along the process. Hopefully once the renovations start I’ll be able to photo document the process so it’s not just tonnes of text!

    On a side note, if you read these posts and have any advice on what I’ve said, can expand or point out any inaccuracies, please feel free to. I want this to be a thread that can help people and although I’d like to think I’m informed, I’m by no means an expert and what I write is just my opinion!
     
  3. Dennis Cortez

    Dennis Cortez New Member

    Looks like you have an exciting journey! :)
     
  4. Nicholas Wallwork

    Nicholas Wallwork Editor-in-Chief Staff Member Premium Member

    Hi there,

    Great post and really looking forward to helping in anyway we can...

    When you mentioned that JV's and creative financing are for more advanced developers I'd have to disagree there... I've personally mentored a number of clients who have purchased using JVs even for their first development... If you don't know how to do it, I agree it's hard but it's definitely possible...

    Let us know how you get on with the purchase and then how the refurb goes!
     
  5. Nicholas Wallwork

    Nicholas Wallwork Editor-in-Chief Staff Member Premium Member

    Another good tip would be to setup a Ltd company to run your business through, better tax breaks for rental income (especially with recent changes) and also you can sign up for trade accounts when doing your refurbishment work which will get you "at cost" trade materials and keep your costs as low as possible...
     
  6. E Ahmed

    E Ahmed New Member

    Enjoyed your post so far will keep reading with interest
     
  7. KGeeson

    KGeeson Property Forum Staff Forum Partner

    Welcome to the forum! Great to read such a detailed introduction and looking forward to hearing more about your journey :)

    Also nice to read such an ethical approach to owing a buy-to-let property ("giving your tenants a better quality of life at the expense of losing a little profit"), i completely agree that if you can make money through property without being ruthless then it's a win win.
     
  8. nmb

    nmb Well-Known Member

    I think this will be an inspiration to many would-be property investors in the future. It can be a lonely time beginning your property investment journey but knowing the challenges you face, and the fact others have overcome them, must surely give confidence?
     
  9. MCPI_Ltd

    MCPI_Ltd New Member

    While the solicitor deals with the ongoing elements of the purchase. I thought I’d start planning the renovations that I’m going to undertake so I can get started as soon as I get the keys to limit the renovation period.

    As I said previously, the main elements that I’m looking at are putting in a new kitchen, new flooring throughout and general decoration.

    I’m looking at using Howdens for the kitchen as I’ve used them a number of times before, they offer good quality products and have a free planning service that’ll take advantage off. I’d be happy for people to recommend other places to look for kitchens if anyone has any?

    For the flooring I was looking at carpet throughout. I’ve seen the posts by others regarding wood/laminate flooring but I have a contact who has their own carpet business so hopefully I can get a good deal on what I want. I’ll probably go with a neutral carpet throughout so hopefully save through scale of economy.

    The walls in the most part are in pretty good shape so these will just be filled and sanded when needed and painted, again going fairly neutral but trying to add a fairly modern overall look.

    The property has GSH and double glazing so no issues there. The electrical outlets will want updating but the property isn’t that old so there should be no need to re-wire. I’ll have a thorough electrical assessment undertaken by a friend of mine to ensure there are no problems.

    Gas will be checked by another friend and the relevant gas safe certificates issued.

    One idea I am floating is seeing if I can alter the internal arrangement to create an additional bedroom. I think this can be achieved by the use of stud walls limited structural work required. All the apartments in this particular block are identical, however, some have been made into 2-beds so I know the managing agents are open to the idea and consent should be easy to get. I’m going to get in touch with my solicitor to see what the process will need to be.

    I’ve drawn up some plans to create the additional single bedroom using above minimum space requirements (70ft2) so it can be marketed as a bedroom. I thought if I go to the management company with properly developed plans with structural assessments, they’ll be more likely to grant the permission than if I just call out of the blue and simply ask the question.

    Looking at rental increases, an additional bedroom will enable me to gain an additional 12.5% rental income, it will also raise the value of the property. A recent 2-bed in the block was sold for 22% more than what I’m paying for this 1-bed. The 2-bed also needed work so potential value is even greater.

    So the plans I have are shown below:

    [​IMG]

    This is the existing internal arrangement.

    [​IMG]

    This is the 1st option and requires the least work. The removal of one wall, subject to structural assessment and the creation of a bedroom by installing a simple stud wall.

    [​IMG]

    This is the 2nd option and probably my preferred however this will require the removal of a wall, installation of stud wall and a new door opening so slightly more work.

    Obviously all of the above will be run past the structural engineer who is coming to do an assessment once I get the keys.
     
  10. MCPI_Ltd

    MCPI_Ltd New Member

    Hi

    Thanks for the comments.

    I currently operate a limited company in which I run my consultancy business through. My original aim was to do the same for the property business, however, I wasn't able to get the mortgage I wanted via a ltd so this purchase has been done on a personal basis.

    I am hoping that when I come to re-mortgage, I will transfer it to a ltd company although i'm aware of the additional costs that this will incur.

    I hope to buy another property later this year and set the ltd up at that point.

    I've actually written a post on the pros and cons of Ltd Vs personal. I might post it on here. Your input would be appreciated as it's based on the research I did and this is not my area of expertise so getting the input of somebody more experienced is always good. Hopefully it might also help to educate others.

    Thanks for reading
     
  11. nmb

    nmb Well-Known Member

    It is simply a case of weighing up the additional charges associated with a limited company against the protection this gives to your personal assets. There is also the issue of arranging mortgages for a limited company which is not as straightforward as it could be!
     
  12. MCPI_Ltd

    MCPI_Ltd New Member

    There are also a raft of tax differences from CGT to corporation tax and income tax, national insurance etc, higher mortgage rates and lack of lenders, personal guarantee so some of the protection goes, tax associated with re-mortgaging etc. So i'm not sure it's as simple as the difference between paying an accountant to file your returns or not.
     
  13. nmb

    nmb Well-Known Member

    Fair point. There are also considerations such as taking money out as "salary" or dividends and the relevant tax repercussions. Where possible you would always like to utilise your personal capital gains tax allowance as well as reducing your limited company tax obligations as much as possible. Probably worth taking advice from an accountant or somebody who has been there and done it?
     
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