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Expert critique needed for my strategy - Leeds


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Hi there,

I am looking for experts on here to critique my property investment strategy.  Any thoughts/concerns etc are welcome.

Background:  I am mid-30s living in London mortgage/rent free.  Currently unemployed (looking for contract work via LTD) and have one London btl property in my name (£10k net profit, 65% ltv).  I have remortgage this property recently and released 100k equity to be used for my strategy.

Strategy:  Buy a portfolio of 4 (maybe 5) freehold houses in Leeds around 1-2 miles from the city center.  Purchases will all be in a LTD company I will need to setup.  Have already found 4 houses on zoopla, each house goes for around 80-90k and rents at around 500pcm.  Assuming asking price purchases, Gross yield at 7.25%, ROI at 8.3% (assuming 75% LTV and 20% written off the rent to take into account management fees, voids and ad hoc costs).  This produces an annual net cash flow in the first year of £8.7k.

Rationale:  The areas i am looking at are Harehills, Armley and Holbeck.  I am avoiding student areas around Headingley as yields are lower and i want to focus on working professionals.  The areas i am looking at are very much working class and many properties do house benefit tenants.  But there are also working professionals who rent there (2 of the properties i have seen currently house professional tenants, the other 2 are unoccupied).  I think rents and property prices are set to do well in the coming decades due to 2 main reasons:

- infrastructure spending such as HS2 and other spending by government specially given the recent elections

- wages rising for working class and other income people due to demographics and push towards reducing inequality

Buying 4 or 5 cheap properties should give me enough diversification away from voids, tenant problems etc (i think/hope!).  The areas do have council selective licensing scheme so I am looking to avoid the streets that have this.  Of course there is always the risk that in future the streets i buy on could be taken over by this scheme, but i think i can deal with this should it arise.

I am very much grateful for any input!  Thanks for reading.

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Hi srikanth,

Just to be clear..you are buying 4x houses in Leeds with SPV mortgages.

Your only income at the moment is £10k rental income (net).

What is your residential status at the moment?

And have you spoken to a broker that deals with SPVs to ensure your strategy is sound. ( I know one...but I am not one).

If all is good, what is your intention in the future?

If pay of your debts/mortgages via rental income then it could work for you long term?

If you are hoping to survive on your rent, and use the company proceeds to live off ( via dividends or payroll) then I cannot advise this course of action.

I dont know Leeds too well so cannot comment on the finer points you made.

Hope this helps a bit

Conrad

 

Conrad Paton

+44 7957 959851

conradpaton@yahoo.co.uk

https://www.linkedin.com/in/conrad-paton-424446110

 

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We’ve completed an increasing number of surveys for people in your position; its popular and the strategy appears sound.  We see a focus on Holbeck, Hunslet, Beeston, Cottingley, and Farnley.  I am not familiar with all areas, but would be cautious of Harehills. 

Of the areas listed, I’d not suggest any as prime ‘professional’ areas, but it does in part depend upon how you define professional.   I’d suggest professionals would be looking towards Meanwood, Weetwood, Kirstall, and further out on routes to Horsforth, Pudsey, and Morley. 

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Hi Srikanth

Sounds good in principle; but I have some observations on your assumptions and approach that you might want to reflect upon...assuming you are going to proceed with all transactions in a short period of time.

1. Transaction volume & costs - 4-5 properties also means 4-5 sets of legals, SDLT, broker & lender fees, valuation fees, insurance to arrange, etc. The remortgages will also come up for renewal in the future at a similar point time and you are likely to have multiple mortgage applications running at a similar time too. These costs are not always a straight % of the purchase price and so multiple transactions can be inefficient use of your capital. Equally, and trust me when say this...4-5 simultaneous purchases and (re)mortgage applications is a lot of time, hassle and often stress too! If you can achieve similar yields with higher value properties, then it may be best to do less transactions. An alternative could be to buy a small portfolio instead, where a deeper discount might compensate for the extra transaction friction and cost.

2. Cashlfow assumptions - I usually allow for 25% deductions rather than 20% when using agents. The reason for this is to allow a decent provision for maintenance and updates, which most landlords omit to take into account and can lead to shocks or having to find larger sums from other means later down the line. Even if we look at your net cashflow position, the assumption seems to be that £181 per property as a net cashflow per month is quite low. This could easily diminish or even disappear with an extended void, large repair or a few points by way of an interest rate rise. Each to their own, but I look at £200 as a minimum per month to safeguard against such things.

3. ROI - are you factoring in ALL costs on both sides of the equation i.e. capital costs and then opex costs? For example, it is rare to buy a rental property and have no initial costs to get it rent-ready, especially if it's not new build. White goods, carpets, decorating, garden tidy and even some minor repairs are not uncommon.

That should help a little with your strategy review for now I hope.

Good luck!

Best

Richard

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

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Let's connect...mention The Property Hub :)

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Thanks very much for the replies so far, much appreciated!

Richard - excellent points made and I have thought about these.  The thing is 4 lower value properties well help with voids etc as it would be very unlikely all 4 having no rent being paid but if say 1 or 2 don't, then i still have another 2 or 3 that do pay rent and will cover all ongoing costs.  I essentially benefit with diversification.  The properties i saw are already tenanted and require very little or no work.  All this means that a 20% deduction is reasonable.  But even 25% would make it a good return on my cash.  My ROI figure does take into account ALL costs and is very conservative.

Point taken on the transaction costs, however SDLT would benefit me as the properties are below 125k as opposed to higher value.  Mortgage fee i would anyway choose the product with no fee given the low mortgage value.  This would also benefit me given the higher rate as i can expense this for tax purposes.

So overall i think i am quite comfortable with my strategy and understand the risks.  I get that the areas are not exactly for professionals in the traditional sense, however my view is that the coming decades should experience a reduction in inequality in this country and so the working class areas i am focusing on should benefit from this, and i think should do very well given the leveraged returns i expect.

My only stumbling block at this stage is to find financing.  I have found a lender who can lend for another 2 properties, however for the 3/4th ones since they will be my 4th and 5th properties, I may require at least 2 years landlord experience.  I have 8 months so far, so i guess i could buy 2 next year and then another 2 the following year.  Wont benefit from diversification initially but then my ongoing costs are lower.  I just hope house prices in the area do not shoot up whilst i wait!

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I don't know leeds that well but this stratgey sounds like you are going for the bottom end of the market in terms of quality of housing and tenants. As a income strategy it has some merit but I am doubtful you will get strong growth in these sorts of areas any time soon. Rather than voids I would be worried about evictions and the cost of these is much higher. I looked into a similar strategy in the midlands and after 1 property, i switched to the a better area with better tenants which meant going from 100k to 150k properties. I am now glad i did as have had decent growth as well as reliable tenants.

Good luck but as others have said you need to think it through very carefully.

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I'm sure you know best, good luck!

R

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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23 hours ago, haf1963 said:

I don't know leeds that well but this stratgey sounds like you are going for the bottom end of the market in terms of quality of housing and tenants. As a income strategy it has some merit but I am doubtful you will get strong growth in these sorts of areas any time soon. Rather than voids I would be worried about evictions and the cost of these is much higher. I looked into a similar strategy in the midlands and after 1 property, i switched to the a better area with better tenants which meant going from 100k to 150k properties. I am now glad i did as have had decent growth as well as reliable tenants.

Good luck but as others have said you need to think it through very carefully.

I can see where you are coming from, but I do understand the risks.  Problem is it is very hard to quantify it.  I am not looking for short term capital growth, but instead cashflow over the long term with enough buffer for any unexpected issues as well as capital growth over the long term that ties back to my views i mentioned in my original post.  I will be getting landlords legal expense and rent guarantee insurance for all the properties so that would limit a lot of the risks i imagine.

However, I am considering fewer but more expensive properties to get better tenants, so would you be able to suggest any good areas i should research into that has both good yields and capital growth potential?  I am not looking for a refurb etc.

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It’s a little conflicted, although I get the diversification over multiple properties to limit voids.  

In the areas / values you suggest the tenants may be less reliable, result in a higher requirement for refit, and limit capitol growth. If you prioritise income it’s all good; Although potentially a challenge to manage remotely  

A quieter life with long term growth, are these areas / tenants really what you seek ? 

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9 minutes ago, alastairkennedy said:

It’s a little conflicted, although I get the diversification over multiple properties to limit voids.  

In the areas / values you suggest the tenants may be less reliable, result in a higher requirement for refit, and limit capitol growth. If you prioritise income it’s all good; Although potentially a challenge to manage remotely  

A quieter life with long term growth, are these areas / tenants really what you seek ? 

My focus is on income over capital growth, however i agree with what you say about the hassle factor.  These sorts of areas will undoubtedly be quite a bit of work to manage but I am very much hands on (i already own a BTL which i enjoy managing).  The question is would be worth it especially given what you say about it being managed remotely.

So I am actually reconsidering my plan.  together with the fact that I will not be able to buy a 4th and 5th  BTL for at least 1.5 years, I think it makes more sense to focus on buying 2 BTL in higher value areas (sacrificing yield for better tenants and capital growth).

With a £100k cash pile to deploy, at a 75% LTV this means two properties worth around £150k-175k each.  Does anyone have any suggestion as to what areas I should research into?  I am still focusing on Leeds but happy to consider other areas with clear catalysts for future capital growth.

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I concluded similar to be honest.  

North and North-West Leeds are good bets, but I’d rather be outside LS.  Wakefield (Stanley, lofthouse, Ossett/Horbury), Morley (parts of middlestons etc) or east out towards garforth, Bramham, etc. 

I’d struggle to invest remotely without knowing the areas, nothing like driving around. 

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I am assuming you have though through the tax implications to see if the num bers stack up. Getting income out of LTD is not easy (as i have found) so this really needs to be thought through before execution of the strategy. I would be nervous about a LTD strategy for 2-3 properties only as its very likely the income will be very much reduced after mortgage costs, capital gains tax, paying an accountant etc.

After 5 years (and 5 properties)  I am doing my first HMO as the income from traditional BTL in a LTD is really not sufficient to give up the day job. As a long term pension investment then thats another story.

As I said in another post, starting out in property today is very different to 10 years ago and needs lots more thought - especially from a tax/regulation perspective..

Don't let this put you off but do think through all the angles.

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haf1963 - but isn't a HMO also difficult to manage with potentially problematic tenants - given they are students?

For me, buying 3 or 4 properties in my personal name would mean that once i get a job, I would fall into the higher rate tax bracket, which would mean no mortgage interest relief and my buy to lets being less profitable.  So it would be worth buying in a LTD despite the higher interest rate, admin fees etc.  I am viewing the strategy as a pension effectively.

Going back to my original idea - I completely get the risks given the target market (low income and benefits) but given my views longer term, surely the areas I have chosen (Holbeck, Beeston, Armley) should outperform significantly given how cheap the properties are?  I can see these areas being zone 2 London in the 70s/80s - and we all know what happened to prices in these areas since.  You have a government that is likely to increase public spending for the northern cities as well so employment should pick up for lower skilled labour in the shorter term.

Any thoughts?

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HMO is indeed more difficult to manage but do-able with help or good agent. I would not look atr students at all but working professionals and am specing my hmo high with onsuites etc to attract them.

If you are in no rush to get money out of the Ltd then its a good way to proceed.

I have no clue about Leeds so of you think your areas have strong potential then thats fair enough.

Ultimately you have toi actually get going at some point and then you will be a lot wiser after the first purchase - good or bad - so maybe if yopu think your orginal stratgey is reasona bl ethen get your first proeprty done and then re-evaluate. As many others have said, the reality is usually different to the theory and no-one can really give you any guarantees about which area/strategy will work best for you

I have learnt a huge amount about tax/ltd/regulation/planning and all sorts along the way and my BRR stratgey worked out reasonablly well so far - though real income levels have been lower than expected.

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On 12/23/2019 at 12:59 PM, srikanth-k said:

Thanks very much for the replies so far, much appreciated!

Richard - excellent points made and I have thought about these.  The thing is 4 lower value properties well help with voids etc as it would be very unlikely all 4 having no rent being paid but if say 1 or 2 don't, then i still have another 2 or 3 that do pay rent and will cover all ongoing costs.  I essentially benefit with diversification.  The properties i saw are already tenanted and require very little or no work.  All this means that a 20% deduction is reasonable.  But even 25% would make it a good return on my cash.  My ROI figure does take into account ALL costs and is very conservative.

Point taken on the transaction costs, however SDLT would benefit me as the properties are below 125k as opposed to higher value.  Mortgage fee i would anyway choose the product with no fee given the low mortgage value.  This would also benefit me given the higher rate as i can expense this for tax purposes.

So overall i think i am quite comfortable with my strategy and understand the risks.  I get that the areas are not exactly for professionals in the traditional sense, however my view is that the coming decades should experience a reduction in inequality in this country and so the working class areas i am focusing on should benefit from this, and i think should do very well given the leveraged returns i expect.

My only stumbling block at this stage is to find financing.  I have found a lender who can lend for another 2 properties, however for the 3/4th ones since they will be my 4th and 5th properties, I may require at least 2 years landlord experience.  I have 8 months so far, so i guess i could buy 2 next year and then another 2 the following year.  Wont benefit from diversification initially but then my ongoing costs are lower.  I just hope house prices in the area do not shoot up whilst i wait!

Hi Srikanth

 

You do realise that  you are still going to pay 3% SDLT on sub 125k properties because they are not your first property?

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You can have the best strategy and goals in the world but without area knowledge, and by that I mean real time on the ground, looking speaking to people and driving around the streets, and putting time in. I think your gambling with your investment  and not taking a calculated and informed risk. 

 

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For a forum that's supposed to be encouraging and building up each other MOST of the responses to this poor person post is like he's expected to fail. Jezz guys we are all in this together.

Srikanth - NOTHING IS IMPOSSIBLE. If property investment was easy everyone would be doing it. As long as you've done your homework go for it.

If one of your property is in the wrong area and you have to evict someone, so what! You will LEARN from that. There is nothing wrong with buying properties at the bottom end of the market if that's what you can afford. We can't all start at the top.

All the best.

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@Nikki, whilst it's commendable that you want to encourage people to be supportive and uplifting, the OP asked for an expert critique on their proposed strategy, which I believe most respondents have genuinely attempted.

I am not sure about your experience level but one thing is for sure, a messy eviction is NOT something we want to go through if we can avoid it, as much as it will teach us. Just take a look at some of these tenant horror stories to illustrate the point: https://www.dropbox.com/s/dac5a9tfvxqf4y7/Horror Stories Part 5 Tenants.pdf?dl=0 Then, I had a case with a social tenant that took 10 months to evict...no rent...property damage...legal & court fees...no chance of recovery...not a wonderful experience and one I don't want to have to repeat too often if possible.

I think most people are trying to help Srinkanth from falling into a bear trap that's all. As I like to say, experience is learning from your own mistakes, whereas wisdom is learning from other people's mistakes...the OP was looking for wisdom I believe. I hope he appreciates the insights shared, which could save him a lot of time, trouble , money and indeed heartache later on...hopefully.

I sincerely believe that's both a supportive and uplifting approach at least. :)

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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Thanks for all your replies so far.  Nikki - thanks a lot for your input as well, whilst i agree partly what you are saying, the other posters do make valid points about the areas I was looking at - even though some may have wrongly presumed I did not know what I was getting into with potential bad tenants.

I am still quite stuck where to go from here.  I know I want to invest in residential real estate, I have around £150k in cash to invest (and another £100k later this year due to an early inheritance) and I am looking for mainly income with some capital gain prospects in the future.  I am based in London so only really know London well.

My original idea still sounds good - great yields and cheap property which are very well located.  Only problem is the type of tenants - but that risk can be diversified away by being able to buy 3 or 4 properties (is that enough?).  I have visited the area and I know what it is like.  But I can see potential of growth - its kind of like zone 2 London in the 70s - look how much that appreciated since!

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I think your best bet is to go ahead and start some viewings and offers to get your first property. Once you have done that you will know a whole lot more about every aspect and you can then decide if the strategy is still a good one. As numerous people have said, the reality of doing a BTL from start to finish is very little like the theoretical model we come up with remotely.

The main learning point for me was that the net income is pretty low - especially after LTD company costs have been factored in - so double check your figures.

"Strategy:  Buy a portfolio of 4 (maybe 5) freehold houses in Leeds around 1-2 miles from the city center.  Purchases will all be in a LTD company I will need to setup.  Have already found 4 houses on zoopla, each house goes for around 80-90k and rents at around 500pcm.  Assuming asking price purchases, Gross yield at 7.25%, ROI at 8.3% (assuming 75% LTV and 20% written off the rent to take into account management fees, voids and ad hoc costs).  This produces an annual net cash flow in the first year of £8.7k."

My experience is that you are being a bit optimisitic with 8.7k net given 4% mortgage rates for LTD and accountancy fees, insurance and various other bills. I would think 6-7k is more realistic. I would also factor in that its unlikely these 80-90k properties meet the regulations for letting so expect some upfront costs as well.

As I said at the start of this reply - your best bet is to go and buy 1 and get it rented out - only then will you know the true figures.

Exciting times for you and good luck with the venture

 

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On 1/12/2020 at 12:17 PM, srikanth-k said:

I am looking for mainly income with some capital gain prospects in the future

My original idea still sounds good - great yields and cheap property which are very well located.  Only problem is the type of tenants - but that risk can be diversified away by being able to buy 3 or 4 properties (is that enough?). 

I have visited the area and I know what it is like.  But I can see potential of growth - its kind of like zone 2 London in the 70s - look how much that appreciated since!

OK, let's take a look at some of these specific comments in turn...

Income versus capital growth - I wish I had a pound for each time someone said they are looking for both! Looking for income is investing, whereas looking for capital growth is speculating. It's extremely difficult to straddle two horses, so it's usually better to pick one. The income requirements you state don't look like a true income strategy as Haf has also said. The capital growth statements appear to be more like hope and expectation than anything else. If you want income, then you need to look at the fundamentals along with an accurate and realistic net income position after allowing for all reasonable deductions. Fundamentals include rental supply and demand factors, tenant profile, transportation links, jobs, local amenities, crime stats, etc. A few people, including me, have commented on your net income position and cost assumptions. I have 75 rental units accumulated over 10 years, so I do know a thing or two about the running costs of a BTL portfolio. 25% rental deductions over the long-term when using agents is a reasonable assumption as is aiming at a decent net profit each year that can absorb the occasional and inevitable blip, along with the necessary light and heavy refurbishment, repair, renewal, etc. If it were me, I would aim at 8% return on your cash investment and £200 per month net cashflow pre-tax as minimums to aim at, using the revised cost assumption. It is possible to specialise in low income/benefits tenants but if you do so, I would get yourself clued up on the rules and future trends in this niche area. Then, speak to local agents that specialise in this tenant profile to gain better insights on the ground. Ask them about arrears, evictions, tenant damage, anti-social behaviour, benefit level versus top-ups, no-go areas, etc. As for capital growth, this is about looking at the drivers of long-term house prices and can be simplified down to predicting inward investment into an area (i.e. following the money...and the population growth). Think of Hull with the sustainable energy industry, Liverpool and Manchester with urban regeneration (note not city-wide!), Slough with Crossrail and East London with the Olympics as some examples (the latter also benefited from the ripple effect of housing affordability in by far the biggest city with the biggest economy and international appeal in the country).

'My original idea still sounds good' - check for possible investment biases here (in particular overconfidence & confirmation bias): https://www.thepropertyvoice.net/4-investor-personality-types-12-investment-biases-understand-invest/

'it's like zone 2 London in the 70s' - what is the corroborative data that underpins that point of view, especially with regard to what you expect to happen next (i.e. new transport links, job creation, public/private investment/regeneration, etc.? There are lots of places that resemble zone 2 in the 70s but there was usually a catalyst or a series of catalysts that triggered any positive change...and some places across the country still have not seem such a change. But as said earlier, this is a speculator position to hold rather than an investor position. You can be at the extremes of this investor-speculator spectrum and sacrifice short-term income for long-term capital gain (or vice versa), or you can sit somewhere in the middle and go for decent fundamentals with some clues of future inward investment...arriving at more of a hedged or average result.

Overall, I would decide what investment strategy you really want to follow, then do the research and legwork, make a start and then re-evaluate as you proceed to test your assumptions and fine-tune as you go. 

Honestly, trying to help. Good luck!

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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  • 2 weeks later...
On 12/23/2019 at 10:47 AM, alastairkennedy said:

We’ve completed an increasing number of surveys for people in your position; its popular and the strategy appears sound.  We see a focus on Holbeck, Hunslet, Beeston, Cottingley, and Farnley.  I am not familiar with all areas, but would be cautious of Harehills. 

Of the areas listed, I’d not suggest any as prime ‘professional’ areas, but it does in part depend upon how you define professional.   I’d suggest professionals would be looking towards Meanwood, Weetwood, Kirstall, and further out on routes to Horsforth, Pudsey, and Morley. 

 

I agree on the suggested areas. The ones you've named, do go look at them. Have a drive round and at night too. Not the greatest choice but it's also why you are finding property for that value too. Cheap property can attract cheap tenants. Be wary.

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