Over the past week, I came across three separate people that were asking about recycling their cash investment in property deals. The big question: Is it possible or is it just a myth? Over the next couple of weeks, I shall hope to unpick the bare bones on the concept a little. This week we look at whether we can refinance a 'below market value' (BMV) deal within six months to extract our deposit. I will share the three most likely scenarios when recycling to release our deposit and other cash investment is likely to succeed. Oh and we now have an Amazon Best Seller to our name now too...so that's pretty cool 🙂
Today’s must do’s
Planning on adopting a cash recycling property investment model? Them, do some investigation first. Check with your broker about lender policy & criteria, check the before and after works values and estimate the cost of works along with all acquisition and holding costs. Verify that you have a plausible reason to receive an uplift in value. Then go for it!
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
After all the excitement of the Birthday episode last week, we return to consider a meaty topic in property this week: recycling your cash.
However, just before we plough into that subject, a quick update following last week’s show. Firstly, a few of you were interested in that secret podcast concept that I mentioned and if you dropped me a line, you will have realised that there is more on offer there than first appears…so well done for taking the initiative there. Action takers are rewarded but that’s all I shall say on that right now.
But the big news since last week has to be that my book, Property Investor Toolkit, is officially now an Amazon Best Seller as a paid book as well as a free one! Yes, after my Birthday gift offer last week and thanks to a little bit of support from some very kind souls, it reached number one status in both the Kindle and Amazon book store in the Property & Real Estate sections. Sure, it’s no Harry Potter, or even a Rich Dad, Poor Dad…still it feels really, really…REALLY good I can tell you!
Thank you so much to everyone that bought a copy of the book and don’t forget those bonuses mentioned in it will you!
Right, enough of that…let’s talk recycling shall we?
Over the past week; I came across 3 separate people that were asking about recycling their cash investment in property deals.
The big question is: Is it possible or is it just a myth?
Well, over the next couple of weeks, I shall hope to unpick the bare bones on the subject a little.
Those that ask this question tend to want to know whether they can recover ALL of their cash invested, which includes the deposit, fees, works and any other cash requirement in a property project by refinancing the property soon after purchase rather than selling it on.
I will say this…it is something that I have and continue to do as part of my own approach to property investment. However, it is
- a) not easy and
- b) not always possible to recover ALL cash costs. However, a good chunk of them can often be recycled under the right circumstances.
Let’s start by positioning the first of the questions that I came across on the subject as follows:
“I am about to complete on my first BTL property which I have managed to purchase BMV [below market value]. I will be looking to refinance after 6 months to release my deposit.
My question is: Should I try and add value to the property before refinancing, or as I have bought BMV, is that enough to pull out all of my deposit money after a refinance?”
This question aims at getting a property revalued after a relatively short time period (say 6 months), with a view to refinancing at a figure sufficient to pull out all, or if not, a substantial part of the funds invested to that point.
Starting with this first question then this week let’s consider a below market value purchase.
This is a common view to try and get the property value uplifted quickly without doing any work and one likely to fail I am afraid to say.
Valuers are appointed, and so are answerable to, the lender. Whilst they will be asked to provide a current valuation on the property, if they are looking at one purchased recently (within a year or so), then they will need a very good reason to value it above the original purchase price.
So, the best options to achieve a higher valuation to release our deposit will be:
- Showing demonstrable improvement works that has enhanced the property's condition, value and saleability - not just a lick of paint and a tidy up
- Delaying the refinance to say 18 months to 2 years, when the original purchase price will become less relevant
- Where there is an overwhelming reason to lift the value up to what looks like the market norm. This will need a strong set of comparables that support the open market value figure sought AND a watertight reason why our purchase price was a genuine ‘below market value’, making it look like a complete outlier to the rest of the recent comparable sales.
In the present climate, valuers seem to be extremely cautious or even downright negative and so the likelihood of option 3 happening is very low I would say.
So, that would leave option 1 – adding genuine value to the property or option 2 – delaying the refinancing date as the most viable alternatives.
Even if trying to increase the value as per option 1 - don't be surprised if the valuer still does not lift the valuation figure after such a short period of time. Unless the improvement works are beyond just a cosmetic facelift and do genuinely improve the underlying condition and value and are also supported by a lot of comparable actual sales prices evidence, the value may still not be lifted.
Here are just some value-adding actions that would probably sway a valuer to consider lifting a value above the original purchase price in a short time period, although there are still no guarantees:
- “Kitchens & bathrooms sell houses” – remodel or replace these to add value
- Increase usable living / floor space – extend or convert to add space and value. Clearly this comes at a cost, so do the sums
- Upgrade & refurbish – replace the guts (plumbing/GCH, electrics, etc.) or other aspects of a property with current standards
- Remodel & reconfigure – make best use of the existing shell & floorplan (e.g. add a bedroom / en suite, relocate bathroom, convert garage to living space) BUT there may be a trade-off too e.g. lose a garage to gain a bedroom they may cancel each other out, at least in the valuer's mind
- Fix structural / problem issues – subsidence, Japanese Knotweed, infestations, etc.
- Legal gains – apply legal changes to add value e.g. extend the lease, share of / acquire freehold, title split flats and so on
This is an extract of a longer list that I often work with.
If we do adopt the adding value then refinancing model in line with one or more of the suggestions here, here are some additional things to consider.
- We should take before and after pictures.
- Get all our paperwork in order (e.g. planning, building regs & guarantees)
- Keep all the receipts
- Produce a 'schedule of works'
- We should not forget to value your own time if DIY at a reasonable trader day rate
- Find recent comparable sales figures within the last 6 months and within a quarter of a mile of the property that support our case of a similar condition at the end of the project
- Finally, and as my business partner, a Chartered Building Surveyor, always says - be nice to surveyors, as they are people too
Personally, I had a valuation lifted by over £50,000 from £142,000 to £195,000 based on just a £4,000 light redecoration...but that was a while back now and the valuation climate seems to be shifting again of late for some unknown bloomin reason!
However, I do consistently take on value-adding projects where the after improvement works value is sufficient to release a significant part of my starting cash investment.
The reality is that often some money will need to be left in the deal, even if adopting one of these value-adding strategies that I have outlined here. I usually work on a general principle of leaving something like 10% to 20% of my initial cash investment into a deal, when I am adopting this type of approach. It can sometimes be better and sometimes worse and that largely depends on the lender and the valuer.
However, I should also clarify here that I am including ALL of my cash costs and fees and not just the purchase price and cost of works. I tend to use some kind of financing and so this also brings a hefty cost of financing, plus there are a range of other fees involved too.
If paying using cash, I would probably expect to fully release pretty much my full cash investment in the majority of cases.
So, in conclusion, yes it is perfectly possible to fully recycle your cash when undertaking property projects. However, there is a very large dollop of ‘conditions attached’ to that statement I can tell you.
It depends on:
The nature of the project
Whether you have a cost of financing to cover
The lender’s policy and criteria
How much you pay for the property and the works undertaken
How effective you are at managing the project and containing time and cost overruns
Knowing what the end value may end up looking like
Whether you want to recover ALL of your cash costs or just the purchase price or deposit say
And of course, crucially the valuer and the valuation arrived at as well…and that can be a very ambiguous and uncertain part of the plan these days!
So, it is not a myth …yes it is possible to fully recycle your cash on a property project BUT… don’t just expect to buy a property at what appears to be a crazily low ‘below market value’ price and simply get it revalued after six months…there is a lot more to it than that.
As to the point about below market value or BMV…that’s a whole other topic and one I don’t have time for today, so let’s just leave it there for now shall we?
I hope you found that topic interesting; the show notes can be found over at our website, www.thepropertyvoice.net and by all means feel free to drop me a line firstname.lastname@example.org if you want to discuss this subject a little further. Next time, I will be talking about recycling a deposit and other cash inputs by using a different method of valuation. So make sure you join me for that discussion too won’t you.
Right now though, I just want to thank you very much for joining me on the show again today and until next time on The Property Voice Podcast…it’s ciao ciao!