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TPP276: The reality of refurbs: One investor shares his story


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Hi there,

 

Great episode again.

 

One question I did have was regarding the final yield the investor was getting following all the works and refinancing the Manchester property. They mentioned they were still getting 6% but would this be gross or net? 

Thanks

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  • 1 month later...

Hi Guys,

 

Yet another great episode as per usual. Always bundles of really good content provided here!

 

I am looking into this strategy for my own portfolio / goals but feel I am misunderstanding how the financing side of it works....

 

So my question is...:

 

If I am looking to buy, refurb and refinance - are my only options to either fund this via either a cash purchase or bridging loan? Or is it possible to get a  standard BTL mortgage on the property, refurb it and then refinance once owned for 6 months or more?

 

It might just be me, but I am seeing mixed reviews on this on the web and I spoke to a mortgage advisor the other day and he said that this method will incur early repayment charges. However, I am not looking to sell the property in 6 months, just looking to refinance at the new (hopefully increased) value as a result of the refurb.

 

Apologies if this is a newbie type question, but any comments / advice appreciated. I am looking forward to getting down to one of the meet-ups soon.

 

Thanks - hopefully see some of you soon.

 

Connor

 

 

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19 hours ago, Connor C said:

Hi Guys,

 

Yet another great episode as per usual. Always bundles of really good content provided here!

 

I am looking into this strategy for my own portfolio / goals but feel I am misunderstanding how the financing side of it works....

 

So my question is...:

 

If I am looking to buy, refurb and refinance - are my only options to either fund this via either a cash purchase or bridging loan? Or is it possible to get a  standard BTL mortgage on the property, refurb it and then refinance once owned for 6 months or more?

 

It might just be me, but I am seeing mixed reviews on this on the web and I spoke to a mortgage advisor the other day and he said that this method will incur early repayment charges. However, I am not looking to sell the property in 6 months, just looking to refinance at the new (hopefully increased) value as a result of the refurb.

 

Apologies if this is a newbie type question, but any comments / advice appreciated. I am looking forward to getting down to one of the meet-ups soon.

 

Thanks - hopefully see some of you soon.

 

Connor

 

 

 

Hi Connor, 

 

The questions you have regarded to with how to finance a buy-refurb-refinance are very valid and are a little muddy in terms of an answer. 

 

This strategy with a mortgage:

You take out a standard BTL mortgage, complete the works and then pay the early repayment fees, take out another BTL mortgage and bobs your uncle. However, the lender will be less than happy with this approach as mortgages are granted with a long-term view in mind, so paying it back early will more than annoy the lender and give you an invisible black mark against your name with this lender. Also, do this too many times and it will be known to lenders through your history. So you'll be less than favorable with lenders in the future. 

 

You also have to pay the early repayment penalty fee (which is put in place to stop exactly this) so that's more dead money. But if your refinance/ refurb is high enough to cover this then it can be done. If you were going to go down this route I would make it a one-off and not a constant plan for finance in your strategy. 

 

With regards to keeping the property as appose to selling it, this doesn't really make any difference as either way you would be paying back the first mortgage early, so either way, if you were to do it this way... You'll end up annoying the lender. 

 

This strategy with bridging:

Buy-refurb-refinance is basically what bridging loans are for. An amount of money that is a short-term loan that is paid back after 6-24 months. it is usually used for purchasing a house and refurbing it, to then refinance out of it with a mortgage that pays the bridging load back.  So this would be a good option for you. The main thing to make sure of is that you are getting the house enough BMV (below market value) or are certain the work you are doing to the property to add value will give you the uplift of price growth you are wanting to achieve, so you can exit the bridge with a mortgage without a problem. 

 

I hope that helps. 

 

Cheers

 

Phil

 

 

 

 

 

 

 

 

 

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Hi all,

 

I to am struggling to deal with the finance side of things, and with Connor's question I'd like to understand the figures of it if I may (using examples) so it's clear in my head:

 

£100,000   House Price

£ 25,000   Deposit

£ 75,000   Mortgage (LTV of 75%)

£ 10,000  Refurb costs

 

So I have an initial outlay of £35,000 and will need to recoup as much of that as possible so I can move onto the next property, we'll assume the following from the same house after refurb:

 

£130,000  New house value

£ 30,000  Increase in value

 

£ 97,5000 is the new mortgage at a maximum of 75% LTV

 

If I have a one year fixed deal, cannot I re-mortgage the house after a year to take the difference of £97,500 and £75,000 (which is £22,500) and use that to fund the deposit of another house? By this time I should have saved some more money as well as received 9 months rent, say if I get the refurb done in 3 months, which will only increase the amount I need to invest in the next property.

 

I just don't see how you can do this with NO finance as some people have said, or without paying a massive penalty on something like a bridging loan - will be up for the next meeting and would actively like to discuss this further if it doesn't make sense here.

 

Cheers,

Steve.

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Afternoon @steve cargill

 

The sums you have done are spot on and correct. You have pointed out the areas where you will have a problem. 

 

Mortgage: paying a mortgage back before the fixed period will incur penalties, it will also get you a little black mark next to your name with this particular lender, so will be less likely to lend to you in the future. If this is done regularly it will become known amongst lenders and will be increasingly difficult for you to get mortgages. With this in mind, I would only use it once if there is no other choice and then find others ways. It shouldn't be a staple in your strategy. 

 

Bridging: This is what bridging loans are for and even though are expensive, as long as you have done your research and know what you will be able to refinance out of the deal with, then you will be fine. 

 

No money in the deal (NMID) these are talked about a lot and are in my view ways to sell property courses. I don't like this approach and even though there are ways to buy property with no capital, they carry high risk and so would advice staying away from them and using either releasing equity in a residential property to get you going or that old school trick of being frugal and saving. 

 

I hope that straightened a few things out for you? The figures and your understanding of the finance are spot on by the way. 

 

Cheers

 

Phil

 

 

 

 

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Hi Phil, 

 

Thanks for your response to my query above, much appreciated. It has cleared a few things up.

 

However, I am still struggling to understand the early repayment fees side of things with the BTL Strategy you outlined.

 

If I use a BTL mortgage to help fund the purchase of the property, I then refurbish it and its value increased by 20k for example, instead of selling it and being hit with the early repayment fees (like you said above) I was more thinking along the lines of just refinancing (with the same lender) after 6 months or more to borrow more money on the property based on the new equity achieved by the refurbishment. Of course, Monthly mortgage payments will rise because of this. Does this type of refinance still attract repayment fees even though I am not moving to a different lender or selling the property - just borrowing more?

 

Thanks again,

 

Connor

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On ‎8‎/‎15‎/‎2018 at 5:23 PM, Phil Brown said:

Afternoon @steve cargill

 

The sums you have done are spot on and correct. You have pointed out the areas where you will have a problem. 

 

Mortgage: paying a mortgage back before the fixed period will incur penalties, it will also get you a little black mark next to your name with this particular lender, so will be less likely to lend to you in the future. If this is done regularly it will become known amongst lenders and will be increasingly difficult for you to get mortgages. With this in mind, I would only use it once if there is no other choice and then find others ways. It shouldn't be a staple in your strategy. 

 

Bridging: This is what bridging loans are for and even though are expensive, as long as you have done your research and know what you will be able to refinance out of the deal with, then you will be fine. 

 

No money in the deal (NMID) these are talked about a lot and are in my view ways to sell property courses. I don't like this approach and even though there are ways to buy property with no capital, they carry high risk and so would advice staying away from them and using either releasing equity in a residential property to get you going or that old school trick of being frugal and saving. 

 

I hope that straightened a few things out for you? The figures and your understanding of the finance are spot on by the way. 

 

Cheers

 

Phil

 

 

 

Thanks for the confirmation Phil, understanding the impact of paying a mortgage back before the fixed term agreement in place helps to plan going forward, as I think it's prudent to maybe look at buying one property a year when the fixed term for the mortgage ends, and utilising the equity / additional savings / rent, to finance the next one - will also consider bridging loans as well, but the numbers have to be correct.

 

Do you see any mileage in a repayment Mortgage for one of the BTL's? I was thinking of starting with 2 properties as Interest only, so that I can maximise the rental return for the 3rd property to be repayment  - again, if I may, I'll use figures so I can get it straight in my head:
                                Mortgage   Rental Income    Surplus
Property 1 (IO) -    £250           £650                     £400
Property 2 (IO) -    £250           £650                     £800
Property 3 (RP) -   £600           £650                     £850

Although I make no real profit on the 3rd property, the surplus of properties 1 and 2 help to pay the repayment mortgage, which has the benefit of property 3 increasing in value, but the mortgage being paid - I plan to use a Limited Company SPV and will also help keep the corp tax down on the net profit, as well as having the added benefit of not being liable to capital gains tax in the future.

 

Cheers,

Steve.

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