The 4-unit conversion on an exchange with delayed completion - The Year of WTF! A review of our businesses in 2020 – Part 2
Welcome aboard episode 50 of the Rent to Rent Success Podcast and today we’re talking about our businesses in 2020.
In this Part 2 episode I’m going to talk about the businesses where we’re buying properties. We usually talk about rent to rent here and interview other people about their businesses, so I’m excited to tell you all about our businesses today.
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Let's dive in…
I’m explaining what’s happened in our businesses and I want to acknowledge that to some people what we do is small fry and for others it’s unbelievably good. And that’s OK, I know it’s all relative. I can only talk for what’s happened for us, which blows my mind.
I honestly had no idea that property and business success were available to me until 5 years ago and that’s what makes me passionate about sharing how it can totally change your life in a short period of time when you go all in.
And I do all of this with my sister and business partner, Nicky Taylor. You might be saying ‘who?!’. Nicky is often behind the scenes so you might not know her.
Do listen to episode 30 if you want to get to know all about Nicky and her journey into property which is very different from mine.
You can also watch the video here.
Let me give you an overview to start off with, of our businesses.
We have three parts
Our rent to rent HMO management business HMO Heaven
Our rent to rent training company Rent 2 Rent Success
Our portfolio of owned properties owned in a number of limited companies
I talked about HMO Heaven and Rent 2 Rent Success in episodes 48 and 49, so today I’m talking about the businesses we have buying properties.
3SS
We exchanged on this property on 20th February 2020.
This is a 4-unit conversion in Newport.
It’s made up of
1 x small one-bed flat.
2 x almost-studio flats.
1 x studio flat.
What I mean by almost-studio is that they have an open plan lounge/bedroom with a separate kitchen so almost a studio but not quite.
The property was converted into 4 studio type units back in the 1980s. Although the units had individual council tax accounts, they were heated by one combination boiler and shared the same gas, electric and water supply. The units are all on the same freehold title.
The units were in varying states of repair. At best 1 needed shower room repairs, and at worst, a recent strip out meant one of the units had no kitchen or shower room.
It was simply arranged as 3 rooms, the smallest of which only had room for a toilet, wash hand basin and the property’s boiler.
A full refurb was required including:
Roofing & guttering repairs
Replacing rotten floor joists
Split the utilities with the utility suppliers
Upgrade plumbing & electrics including installing new combi boilers and splitting supplies
Upgrade fire detection and protection systems
Installing new stud walls and an external window to create a shower room
Strip out of existing kitchen & shower rooms and replace with new
Redecoration and lay laminate flooring throughout.
We bought it using exchange with delayed completion.
Typically when you buy a property you exchange contracts and complete the sale very shortly afterwards. An exchange with delayed completion is where you exchange on a specified date and complete the sale on an agreed date, or date range, in the future.
Exchange with delayed completion is sometimes called a no money down property strategy because typically you won’t need a 30% lump sum like you would for a deposit on a standard buy to let property purchase.
And typically you won’t need a mortgage upfront either. It’s known as a creative property strategy which allows you to buy property over time without having £50k in the bank.
The refurbishment took 10 months to complete and will cost circa £65,000, which includes over £8,000 paid to suppliers to split the utility supplies.
Splitting Utilities
£8,353.78
Electrics
£6,327.71
Plumbing
£12,660.00
Building
£36,580.25
Dressing
£1,261.11
£65,182.85
The 3 biggest challenges with this refurbishment were due to:
Delays due to COVID, which meant the usually protracted utility splitting process took even longer than it should have. Scarcity and increased costs for materials. And having fewer contractors on site to ensure social distancing.
Things that come up that you haven’t budgeted for. The stuff you can not see prior to starting works. For us on this project spongy flooring concealed rotten floor joists that had to be replaced. And we had hoped to keep & reuse some of the existing kitchen units and existing laminate flooring, but in the end this all needed to be replaced with new.
Splitting utilities process. The process can be long and protracted, with lots of inbuilt delays, for example the Council are allowed up to 3 months to respond to a request for a road closure.
Our 3 top tips when undertaking any project is to:
Consider multiple exits for your project, plan for things NOT going to plan! For example, we knew the splitting of the utilities would be delayed, so we requested our plumber to do some extra work to enable the units to continue to work off 1 supply. This meant we were able to push on with the works and were not delayed as much as we could have been, and could have tenanted the properties ahead of the supplies being split.
Have a detailed, well thought out budget including a decent contingency. We would recommend you build a 10% contingency into your budget. As annoying as our challenges were, they were covered within our contingency.
If splitting utilities, contact the suppliers and start the process as soon as possible.
Here are the numbers for this deal.
And afterwards I’ll explain what this means in practice. Remember you can also see this written down on the rent 2 rent success website. It’s at rent 2 rent success dot com slash 50 for episode 50.
Agreed completion date: within 5 years
Agreed price: £160,000
Option fee: £16,000
Monthly payment: £320 Balance @ 5 years: £124,800
Monthly income: £1,800
Monthly cashflow*: £1,426
Yearly income: £21,600
Yearly cashflow: £17,112
*Income after monthly payment and maintenance/running costs
5 year income: £108,000
5 year cashflow: £85,560
5 year cashflow after refurb costs: £20,377.
What I love is that the property pays for us to refurbish it and buy it. Because it’s an exchange with delayed completion, and we’ll own it, we will get an increase in value plus a very healthy cashflow going forward.
And I’m actually living in one of these flats now!
Make sure you listen to my personal review of 2020 in a future episode to find out more about that.
What’s happening in this deal?
We pay for the property over time. And during that time we don’t pay rent. And at the beginning we don’t pay a 30% deposit which would be £48,000.
We pay an upfront £16,000.
And then £320 per month.
And then at the end of the 5 years we pay the outstanding balance.
So the agreed purchase price is £160,000
We’ve paid £16,000 upfront
Plus £320 x 60 months = £19,200
Total paid £16,000 + £19,200 = £35,200
Balance to pay in 5 years = £124, 800
You might be thinking ‘well it was all sounding so good but what do you do in 5 years when you need to pay £125,000?’.
Good question. And I’m going to come on to that.
What I want to talk about first is getting access to these deals in the first place. You can do this type of deal where you pay as little as £1 upfront. It’s whatever is agreeable to buyer and seller.
So £16,000 as entry.
Instead of £48,000.
When I was working as a contractor at the bank, I might have heard this and thought ‘well I don’t have £16,000 so I couldn’t do this’. And now I can. The only difference between me now and then is knowledge, action and resourcefulness.
When you get the knowledge and take action you create opportunities that attract resources. It happens. And it’s unbelievable when it does.
We do not seek private investors, yet almost every week investors contact me through social media or through our websites to find out more about investing with us. What I want to say here is that your resourcefulness will increase once you get started.
There are lots of ways to raise money depending on your experience level and attractiveness to investors.
Here are just a few ideas.
Borrowing bank, overdraft
Cashflow from your business
Release equity from your home
Family and friends
We live in one of the richest countries in the world, resources aren’t the problem. Resourcefulness is the issue. And it’s something you can develop if you don’t feel confident you could raise £16,000 yet. I wanted to open the door to the fact it’s something you can do when you develop the skills.
Let’s move on now to the question…
What about the end of the 5 years and how do we pay £125,000?
You’ll be able take out a conventional mortgage. It’s likely the property value will have increased due to the refurbishment
You could use your own funds or raise private finance to fund the purchase in cash and repay investors in interest or in equity.
You could sell the deal on to another investor if you don’t want to buy it (so long as the exchange with a delayed completion contract you signed with the seller is ‘assignable’ which means transferrable to another buyer).
You can use cashflow from other assets and save the funds over the period
Our plan is to mortgage the property at that point.
The deposit has already been paid so there will be no lump sum to pay. We’ll be able to get a loan for 70% of value and it’s likely the value will have gone up and even if the value of the property hasn’t gone up 70% of £160k is £112,000 which would only leave an additional £13k to find.
Buying this way gives you flexibility to buy more properties. If we had to save up £48k for each one it’d take much much longer to build our portfolio.
Then I know you might be curious how to find deals like this. Or sceptical that property owners would want to do deals like this. It is somewhat perplexing why wouldn’t an owner want to get paid in full upfront for their property as they would in a standard property transaction.
There are many reasons property owners may prefer an exchange with delayed completion or another creative strategy. They may want certainty. Putting your property on the market is very uncertain, sales fall through and it can be an emotional rollercoaster for sellers. Sometime it might be that no one is prepared to pay the price the owner is looking for now but you might be prepared to offer the price they want in 5 years. Or 7 years or more.
The circumstance for the couple who owned this property is that they have a portfolio of properties. They’re approaching retirement and want to sell off their properties on a schedule so not all in one tax year. They want certainty and no hassle. They are fair and we were able to agree to a price which both they as sellers and we as buyers agree is fair value.
One important thing about this is that we want everyone we work with to be delighted they worked with us. Whether that’s, landlords, investors, tenants, students on our Programmes. We want them to feel great about the deal and we want to feel great about it.
We’d love to buy other of their properties as they sell them on too. It’s not about a single transaction, it’s about a relationship. Relationships are much more valuable in every sense of the world. You can’t put a price on feeling good about what you do and what you stand for.
How did we find them?
They found us. We’ve been sending out rent to rent letters to landlords since we started in 2016. So when they came to sell, they knew us, had heard about our work and got in touch. So send letters to your HMO landlords, it’s a phenomenal strategy and we devoted a whole episode to it in episode 19 and you listen and see the show notes at rent 2 rent success dot com slash 19.
So how can you do this?
How can you do it? Be aware of it. Be able to offer solutions that work for people. A lease option or exchange with delayed completion won’t work for everyone. Rent to rent is a great strategy for finding lease options. As part of our Kickstarter Programme we explain how to just simply incorporate it to what you do.
And if you’d like to join us in Kickstarter and get your year off to a flying start, find out more and sign her here.
It’s your last chance to join us before our prices go up at midnight on 21st January.
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Until next time, have a great rest of the week.
And remember,
Believe Bigger, Be Bolder and Be a Gamechanger!
See you soon!
Stephanie & Nicky
xx
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