K
King Tubby
Guest
On the subject an 'acceptable return' from residential investment I had a conversation recently with an experienced investor who has spent nearly 30 years in the residential property business in London.
He explained the metric that he uses to judge whether a property is 'good value' from an investment point of view.
He looks for somewhere that produces 'rent in excess of repayments plus charges' of greater than 1% per month of the initial cash outlay. The initial cash outlay is comprised of deposit, stamp duty and refurbishment costs. He projects rent on a gross basis - not allowing for potential future vacancies. He also ignores potential future refurbishment costs beyond the initial refurb.
So a flat selling for 315k might have an initial cash outlay of 32k deposit + 10k stamp (3% in the UK) + 8k for a reasonable revamp = 50k. A UK mortgage for 288k at 4.6% over 25 years would cost approx 1,630 per month, service charges say another 100 pm. He would look for a rent of in excess of 2,250 pm to justify this investment, i.e. giving approx £500 free cash flow per month.
He explained the attraction of this measurement as the focus it provides on the cash nature of the investment and the cash flows it produces, rather than allowing judgement to be blinded by leverage and the allure of 'wealth' resulting from having borrowed lots of money. It also incorporates all the normal yield considerations employed by sensible investors.
By the standards that currently apply in Ireland this is an extremely strict discipline - in fact it is likely that on this basis he would have been unable to buy anywhere in Dublin since 2001.
Even in London - where yields have remained (slightly) higher he said that he has only bought two or three properties in the last 3 years, and does not foresee that he will be able to buy any more in the near future.
Obviously where he finds a property that meets the cash flow criteria, he then applies some thinking to the potential for future appreciation, quality of the area, gentrification, future transport enhancements etc But only when the underlying financials are right. He doesn't concern himself whatsoever unless it meets that hurdle.
Historically he claims that he didn't buy any property in London from mid - '86 until sometime in 1990, because he couldn't find anything to meet the criteria - thereby missing the worst excesses of the property bubble that burst at the end of the 80's. Whether or not this is true, and he kept his head when everybody else was making lashings of seemingly easy cash I don’t know, but he is certainly an extremely prosperous individual now.
Interestingly for anyone intrigued (as I was) by this ‘deep value’ approach to property investment he still goes and looks at upwards of 10-15 places a month. The places he has bought in the last number of years were ex-Local Authority houses and flats in the East End, in gentrifying neighbourhoods near Brick Lane. He says it is possible to get close to his magic 1% number in these areas, although being a bit of an old posh fuddy-duddy he is not convinced by the rise of the East End as the next frontier of boho youth culture.
Anyway – thought this might be of interest.
He explained the metric that he uses to judge whether a property is 'good value' from an investment point of view.
He looks for somewhere that produces 'rent in excess of repayments plus charges' of greater than 1% per month of the initial cash outlay. The initial cash outlay is comprised of deposit, stamp duty and refurbishment costs. He projects rent on a gross basis - not allowing for potential future vacancies. He also ignores potential future refurbishment costs beyond the initial refurb.
So a flat selling for 315k might have an initial cash outlay of 32k deposit + 10k stamp (3% in the UK) + 8k for a reasonable revamp = 50k. A UK mortgage for 288k at 4.6% over 25 years would cost approx 1,630 per month, service charges say another 100 pm. He would look for a rent of in excess of 2,250 pm to justify this investment, i.e. giving approx £500 free cash flow per month.
He explained the attraction of this measurement as the focus it provides on the cash nature of the investment and the cash flows it produces, rather than allowing judgement to be blinded by leverage and the allure of 'wealth' resulting from having borrowed lots of money. It also incorporates all the normal yield considerations employed by sensible investors.
By the standards that currently apply in Ireland this is an extremely strict discipline - in fact it is likely that on this basis he would have been unable to buy anywhere in Dublin since 2001.
Even in London - where yields have remained (slightly) higher he said that he has only bought two or three properties in the last 3 years, and does not foresee that he will be able to buy any more in the near future.
Obviously where he finds a property that meets the cash flow criteria, he then applies some thinking to the potential for future appreciation, quality of the area, gentrification, future transport enhancements etc But only when the underlying financials are right. He doesn't concern himself whatsoever unless it meets that hurdle.
Historically he claims that he didn't buy any property in London from mid - '86 until sometime in 1990, because he couldn't find anything to meet the criteria - thereby missing the worst excesses of the property bubble that burst at the end of the 80's. Whether or not this is true, and he kept his head when everybody else was making lashings of seemingly easy cash I don’t know, but he is certainly an extremely prosperous individual now.
Interestingly for anyone intrigued (as I was) by this ‘deep value’ approach to property investment he still goes and looks at upwards of 10-15 places a month. The places he has bought in the last number of years were ex-Local Authority houses and flats in the East End, in gentrifying neighbourhoods near Brick Lane. He says it is possible to get close to his magic 1% number in these areas, although being a bit of an old posh fuddy-duddy he is not convinced by the rise of the East End as the next frontier of boho youth culture.
Anyway – thought this might be of interest.