Please note: This is Chapter 9 in the Complete Guide to Property Investment Strategies, focussing on Advanced Property Strategies.
Actually, Advanced Property Tools …
Some people (again, usually people with specific courses to sell), will try and convince you that the following are strategies to pursue.
However, I don’t believe that to be the case. Why?
Because they are really only tools that work in very specific circumstances, which don’t occur that regularly.
If you take any one of them in isolation and deem that your strategy, then you are likely to spend an awful lot of time looking and not a lot of time doing any actual property projects or investing.
There is also the risk that if all you have is a hammer, then everything starts to look like a nail and you will miss otherwise perfectly good investment opportunities.
That is not efficient and is certainly not conducive to building long-term wealth, which is what you should be aiming for when investing in property.
So, I would argue that the following are effectively tools you keep handy in your property investors toolbox. Be aware of their usefulness and when they can be applied, but do not set your stall by them. Your future self will thank you.
In this chapter will we cover:
- Options. What they are, how they work and when they are useful.
- Title Splitting. Making money from admin work.
- Short Leasehold Flats. Making money from admin work, part 2 (although you’ll need deeper pockets for this).
- Assisted Sale. How to turbo charge your returns without actually buying a property.
- The Multiplier Effect. How all strategies and tools are additive.
Intrigued? Read on …
Those of you with any type of financial investment experience will recognise these.
An option as applied to property is simply:
The right, but not the obligation, to buy (or sell) a property (or land) for a given price within a given time frame.
The key term here is “not the obligation” and that is where an option becomes a useful tool.
Property options are used all the time by some of the biggest property players: Namely housing developers.
To explain is best illustrated by an example.
Let’s assume a local farmer has some land which looks promising from the position of being able to put housing on it. In its current state, it has a value as agricultural land, but should it receive planning permission for development, it would be worth considerably more.
However, as the prospective property developer, you do not want to buy the land outright with the risk that planning permission is not granted. Then you are left holding agricultural land which is of no use to you and with your capital tied up.
So, you approach the farmer with a proposal. You want to seek planning permission for his land, but only purchase it if the planning permission is granted. Otherwise, you simply want to walk away.
In short, you want a purchase option over the land to give you the right, but not the obligation, to buy it. This you will only do when you have successfully gained planning permission. If the farmer was amenable, you would agree a price you would pay and a time frame over which you would hold the purchase right – perhaps 12 months.
You have just negotiated an option agreement. In doing so, you have secured your position to give you comfort that by expending time and money on seeking planning permission, you have the right to then purchase the land. You do not have the risk of the farmer refusing to sell it or attempt to sell it to someone else. (Well, technically he could refuse to sell it but you would have a strong case to take to court).
In return for granting the option, you pay the farmer some money. This is known at the option consideration and must be at least £1.00 for the option to be valid. Whatever you pay is down to what you manage to negotiate. In financial circles, this is known as the insurance premium. It is the premium you pay to have the right to walk away from the purchase (in this case, if you didn’t gain planning permission).
Some points to note:
- The exact terms of the option agreement are entirely customisable and down to what you negotiate. You could, in the above example, offer the farmer a fixed price for the land (should you gain planning permission) or a profit share. The length of the option agreement is negotiable, but the longer the better from the point of view of the option holder. Similarly for the option consideration, the lower the better!
- In this case, you should ensure the farmer has independent legal advice. You will be considered the knowledgeable party in the case of any dispute and the farmer could argue he didn’t understand what he was signing. A solicitor acting for him negates this risk.
Why would the farmer enter into such an agreement?
- He is likely to fetch much more money for the land if you gain planning permission, which is the carrot to entice him with.
- He probably doesn’t have the time, knowledge or money to do this himself.
- He may not wish to risk the money involved in seeking planning permission.
- He is left in a better position even if you fail in seeking planning. You would walk away and he still owns the land plus whatever option consideration payment was handed to him in return for granting the option.
Options are very useful instruments in any situation where you are seeking a change of use which may or may not be granted.
Generally speaking, a block of apartments all on one freehold title (as opposed to a freehold with individual leaseholds) is priced lower than if the individual units were are separate titles (leaseholds).
Why? Well, such blocks are only of interest to investors who will be looking for a particular return on investment. Whenever you have a restricted market to sell to, you depress the achievable price.
In such instances, you can create value by undertaking the legal process to create separate titles for each flat and then selling off each flat individually. In some cases, the sum of the parts are worth more than the whole and you could end up making a profit for what is essentially a paperwork exercise. You can also sell off the freehold separately too, for extra profit, or retain one or more flats for your own buy to hold portfolio.
Extracting Cash from a SIPP / SSAS
There are some interesting nuances that can apply in the right circumstances. A SIPP (Self-Invested Personal Pension) or SASS (Small Self-Administered Pension Scheme) can invest in commercial property. However, it must be purely commercial.
So, in the case where you have a SIPP / SASS, you can consider buying a freehold Mixed Use property such as a shop with a flat above, all on one title. You can then, as the freeholder, create separate leasehold titles for the flat and the shop and then sell the leasehold of the shop to your SIPP / SASS.
You would still own both units, except now you have gotten back some of your working capital from the deal via your own SIPP / SASS.
However, this can be a legal quagmire so please do take professional advice before attempting this, particularly in the case of a SASS if you are the director of a limited company! I am mentioning it so you can consider it as a possible investing tool in your toolbox.
Short Leasehold Flats
Leasehold properties can create investing opportunities. Whenever there is a problem with a property, there is reduced demand and hence a suppressed price. If you can fix the problem then you can instantly create a price uplift to your benefit.
Other defects in leasehold titles can exist (e.g. an absent freeholder, usually because they are a company which no longer ceases to exist). However, the majority of these can be fixed by a suitable Indemnity Policy and a solicitor can advise. Still, they may put off a vanilla owner-occupier to your advantage.
Short leases are a common problem with flats.
A flat is sold under the terms of a lease. The lease gives you the right to occupy the flat for the remaining length of the lease. This means that everything is fine and dandy for flats with a long time remaining on the existing length of the lease (generally anything over 90 years is unaffected from a market value viewpoint), but this gets less attractive for a purchaser as the lease length shortens considerably.
Once you get below 80 years remaining, you enter the realms of Marriage Value and the cost to extend the lease starts to increase significantly.
Once you get much below 70 years, the number of lenders willing to lend a mortgage against the flat reduces considerably. Properties with a short enough lease will then only be subject to cash purchases as no lender will touch them.
So, flats with short leases put off most buyers, whether owner occupiers or investors. If the lease is short enough that it is a cash-only buy, then that heavily stacks the odds in the favour of cash-rich buyers.
Under the Leasehold Reform, Housing and Urban Development Act, leaseholders have the right (subject to certain qualifying criteria) to extend their lease by a further 90 years and have the Ground Rent effectively extinguished (or reduced a “peppercorn”, in legal parlance).
The main qualifying criteria is that you must have owned the leasehold for at least two years and the process is started by the leaseholder serving what is known as a Section 42 Notice on the freeholder.
However, the trick here, as the purchaser of the short lease property, is to get the current owner (or leaseholder) to serve the Section 42 Notice as part of the purchase process. This notice can then be passed onto you as the new leaseholder and you do not have to wait the customary two years before extending the lease.
Obviously ensure the current leaseholder that you are buying from has owned the property for at least two years!
Once the lease has been extended, the property is now much more desirable, especially if you have made it mortgageable once again and that will be reflected in an uplift in the market price.
Obviously, for all this to be worthwhile as an investor, you need to make a profit. You need to ensure that:
New Market Price – Purchase Price – Lease Extension Costs – Purchase Costs = Acceptable Profit Margin
So how do you know what it will cost to extend the lease?
Well, this can be as much an art as a science, especially when the lease gets particularly short! However, there are online calculators that can give an estimate but should not be totally relied upon. You will need a specialist survey in order to be sure of an accurate cost.
A good starting point is the calculator given on the Lease Advice website. In fact, the Lease Advice website is a great source of free information and advice should you ever be considering deploying such a tool in your arsenal.
In short, it is possible to realise a profit by performing what is essentially a paperwork exercise.
The final investors tool I will consider here is the concept of an Assisted Sale.
Note an Assisted Sale is really a property investor term. This is not a term that any Estate Agent or property vendor will be familiar with. The concept is that you assist a vendor with a sale in a way that will benefit both the vendor and yourself. Note: This does not mean acting as an Estate Agent, which comes with its own set of standards to follow.
This is best illustrated by an example.
Consider a vendor with a very run down property that they wish to sell. Perhaps it is even unmortgageable (generally, a property will need a working kitchen and bathroom to be deemed suitable security for a mortgage). The property would be worth much more, if it was renovated to a good standard, but the vendor simply doesn’t have the time, knowledge or money to undertake this themselves.
Now, one option for you as a property investor would be to:
- Buy the property outright.
- Undertake the refurbishment.
- Re-sell on the open market, hopefully for a good profit.
In doing so, you will incur the following fees alongside the costs of renovation:
- Legal fees to purchase and onward sell.
- SDLT to purchase (including the 3% surcharge if you already own a property).
- Estate agent fees to onward sell.
- Financing costs to purchase the property (if not a cash buyer).
- Funding requirements for the deposit in order to purchase.
- Any other holding costs (e.g. utilities, council tax).
You also face the risk of being stuck with the property if you fail to sell it.
These costs are considerable and have an adverse impact on your potential profit. It may also render the property deal a no go, depending on the vendors price expectations.
This is a perfect situation for an Assisted Sale. In this scenario, you would:
- Not purchase the property (avoiding all the buying, funding and selling costs above).
- Finance and undertake the refurbishment work.
- Agree a profit split on the uplifted market value.
- Protect your position by registering a restriction on title with the Land Registry and getting an undertaking from the sellers solicitors that the appropriate profit due to you will be transferred to you directly on completion of the onward sale.
You would clearly benefit from needing much less funds in order to do the deal as well as less paperwork and delay in the buying process. Your Return on Investment could be significantly enhanced as a result, due to needing less funds to do the deal.
The vendor benefits as they will gain from:
- Increased proceeds by sharing in the profit split over and above what the property is currently worth.
- Potentially a quicker sale if the market is stronger for a fully refurbished property than a project.
As will all these Advanced Tools, it will only work in the right circumstances. In particular, you will need to:
- Find a vendor willing to wait whilst the work is done.
- Find a vendor who is willing to trust you with key access to their property.
- Get this past an Estate Agent who won’t understand it and may be reluctant to try and sell it to the vendor.
- Communicate this to the vendor effectively, who also won’t understand it and will be naturally wary. Compounded by the fact that you may struggle to speak to them directly if the sale is via an Estate Agent.
But in the right circumstance, it is a very cost effective way to deploy your capital.
The Multiplier Effect
Remember that the really good deals are a combination of:
- Doing the sorts of deals that scare off other investors due to complexity and / or a lack of knowledge.
- Are a combination of different strategies bundled together.
Finding a really good, but straight-forward, buy-to-let or buy-to-sell deal is hellishly difficult. This is because there is simply so much competition for this sort of property. Everyone that has watched a few episodes of Homes Under the Hammer knows what to do with a 3-bed house.
But if you can find a deal to which you can apply a combination of strategies, then you can be onto a winner.
This is comparable to all sorts of endeavours. I achieved my Ph.D. in part because of taking two (already well-known) methods and combining them to solve a different kind of problem.
That translates well to property. An example might be buying a disused pub, obtaining planning to convert the upper levels to residential and then using your permitted development rights to create a House in Multiple Occupation. This should create superior returns since you are combining:
- Planning permission for change of use.
- Conversion to residential.
- Management as an HMO.
These types of deals do not grow on trees and come with associated risks, but it is where you can generate superior returns. Granted, they are not beginner-friendly deals, but as you gain knowledge, experience and confidence, you can look to these sorts of deals should they suit your risk appetite.
But don’t think you have to be doing these types of deals. Boring investments can be very solid, safe and dependable investments and is how I built the majority of my portfolio!
I have listed the most common advanced tools you will most likely need during your investment life.
- Options are good for land acquisition deals or commercial conversions where you need the surety of planning permission for the deal to be viable.
- Title splitting for blocks of flats where there is strong buyer demand for the individual units.
- Short leasehold flats for when you have the time, money and patience to extend the lease, enhancing the value. Even more so if this takes it from a cash buyer only state to a flat that is now suitable for a mortgage.
- Assisted sales for buy to sell type projects where the vendor is amenable. As you have seen, the cost savings are considerable and this enhances your return on capital invested quite considerably.
- The Multiplier Effect for when you can stack up multiple strategies and / or tools to take several bites at the cherry.
As stated at the beginning, these are tools, not strategies. Please don’t go around looking specifically for deals which will fit one of the above. Much better to stick to a core strategy and then apply one of the above if the tool fits, the vendor is amenable and it makes sense to do so. Especially if it helps to clinch the deal, makes it work or otherwise de-risks it from your perspective.
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