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  • Buy-to-Let

    How to build a portfolio WITHOUT buying BMV (below market value).

    This post has been inspired by a comment on "What is stopping you getting started in property".

    Peter Pals commented:

    what an interesting thread... so....become an expert in 10 streets locally, get to know prices, then .... put in silly offers, send out leaflets and advertise.

    agreed..really great advice, thank you, I'll let you know when I exchange on the first one.

    ..however in case I am unsuccessful, I remember someone on PT saying that you can make your fortune with or without BMV purchases (not talking about HMOs either I think), any comments on that? .....assuming near zero capital growth as is likely in the next few years....

    @you guys without deposits, have you found any BMV properties? If so how, what %BMV and through what methods? If you've not had a BMV offer accepted, how do you know its BMV?

    Property investing may not be that hard - anyone can spend their cash, right? But its not that easy recycling your deposits consistently...

    ....I guess the question after all the above is "how to create a portfolio without buying BMV" new thread I think


    I think the answer is to understand that buying BMV is not a strategy. It is a marketing term designed to make people think they are missing out on something or that there is a secret to learn.

    Most of us, in our everyday lives, do not pay market value for anything. We are always looking for deals. I get discounts on holidays, cars, bulk purchases ... etc.

    Property is no different. I think the only difference is that some people do not realise the size of discounts that can be achieved. I often cringe when, on Property Ladder, Kirsty and Phil recommended going in with an offer at £10K under the asking price. I scream at the telly ... offer £50K less!!!!!

    Don't assume that the asking price is the market value and work your BMV discount back from that. The asking price may be over-inflated so you end up paying market value, even with a supposed 15% discount!

    It might be shocking to learn that, a few years ago, I helped a family member into a new build property that was retailing at £360K (on-site comparables).

    I got it for her for £250K plus stamp duty paid. She sold it last year for £320K.

    So, depending on market conditions, there are massive discounts to be had & buying at a discounts reduces your risk and increases the likelihood that you will be able to recycle your cash.

    But you do need cash in the first place - 25% for deposits.

    As Property Mastermind Simon Zutchi agreed with me on the How to build a million pound property portfolio in 12 months with £50K income, you DO need deposits totalling £250K to build a portfolio of £1 million .. and that does not include acquisition costs such as stamp duty, legal fees etc.

    The next thing to understand is that a property might be BMV for a reason ... some are "good" reasons and others are "bad" reasons.

    This was discussed at length on "What's your BMV?".

    There are many people who have built portfolios who have never even heard of the term "BMV".

    They found properties where there was massive tenant demand, they may have negotiated a discount, and they put in their 25% deposit, and got a tenant in ... not rocket science.

    You can still build a profitable and sustainable portfolio without negotiating a discount, although that is preferable for reasons stated above.

    Market value is such a subjective thing anyway and so difficult to prove.

    My way of valuing a BTL property is based on what borrowing the rent will support. That determines it's value to me.

    I use this simple calculation:

    Market rent x 12 (divided by) mortgage pay rate (use 5%) (divided by) mortgage stress rate of 125%.

    So if a property commands rent of £1000 per month, I value it at:

    192,000 plus my 25% deposit = £48K deposit = £240K.

    That gives you a position to negotiate down from and also provides compelling evidence to a vendor as to how you have arrived at such a valuation.

    Obviously, the bigger discount you negotiate, the greater your monthly net cash flow, but the above is a good starting point and could demonstrate that a property is still a good proposition, even if purchased as an alleged market value and/or asking price.

    Ironically, the most successful purveyors of achieving big discounts are people WITH cold hard cash, not those people who have been on a course to learn how to buy property with no money.

    Buying for cash or putting down large deposits is likely to get a better deal from a vendor and also a better mortgage deal, as bigger deposits often give better interest rates >>> greater net cash flow month on month.

    Many people (including myself) have purchased properties which they thought were BMV, and then prices dropped significantly or they later found out that they had not achieved such a big discount, and they are still going strong ... because these properties are generating a monthly net cash flow ...

    So the focus at acquisition should perhaps shift from buying at BMV and "getting a deal" because this is often un-quantifiable ... to monthly net cash flow achieveable.

    IMNCF .... increased monthly net cash flow © Vanessa Warwick Smile

    Monthly net cashflow renders BMV irrelevant and that is why you can still build a successful portfolio without even having heard of the term!

    Finally, when you achieve a massive discount, the irony is that that sale has now become the newest comparable for that type of property in the area. So, in a roundabout way, you have down-valued the entire street!

    Buying in areas where demand is strong from owner occupiers and people are not getting huge discounts will mean that your property's value remains far more robust.

    But again, if you have great cash flow, and you are in it for the long term, you will not be too concerned with capital values over the short term.

    With the current OFT investigation into quick sale house buying and also the BMV Bombshell , BMV might soon be disappearing from the property vocabulary.
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    Hi Vanessa
    Assetz would value that £1k pm property at c £150k from an investors perspective but inclusive of discount - that's for a very good area and assuming no works required - it's an 8% yield

    For two bed terraces that would be 8% to 10% inclusive of all costs and refurb and depending upon location and resaleability
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    Hi Stuart, very interested post.  Would your calculation be the same Vanessa, but with a higher Mortgage Stress Rate

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    Thanks Stuart.

    To be clear, my valuation process is a rough indicator.

    I would agree that you would be looking for a substantial discount from that figure.
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    BMV means nothing more than below the open market value. Buying a deal or buying wholesale if you want to use the USA term. Similar to any market trader who buys at one price with the intention to sell later as a higher price.
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    Hi Vanessa

    Excellent post!

    "192,000 plus my 25% deposit = £48K deposit = £240K."

    £48k is 20% of £240k
    £60k is 25% of £240k.

    Should I use 20% or 25% in this calcuation?

    thanks
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    Hi Henry,

    I think that I may have confused you ... maths is not my strongest subject!

    The equation was worked backwards from a rent of £1000 per month.

    The purpose of my equation was to show if the deal "stacked" using the rent to work out the amount of borrowing that the rent would support.

    But all property deals using finance generally require a deposit of 25%.

    Hope that makes things a bit clearer?! Smile
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    Hi Vanessa

    Thank you for clarification! Now all clear!

    Your method of calculation is just what I need! thank you very much for sharing!

    best regards
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    Henry,

    Think of the follow example from a non-property sector.

    In Silicon Valley a start up company could have different values. Some investors care more about the management team. Some care about the idea. Yet others will care about the existing users / customers or some other indicator of 'traction' in the market.

    If you figure that there could be a range of values, using different approximations will help you zero in on a likely value. More or less financial triangulation.

    New example. If you have a cell tower you can tell if a cell phone is active in the area. If there are two towers you can narrow down the area yet again. With three you can come close to pinpointing the phone. With four towers you can pretty much name the spot where the phone is at any one time. The same for GPS and satellites.

    When looking at property, there are different values. There is the value that a owner occupant will put on the property. This could vary between buyers as some want to be close to a school and maybe someone else does not care. The investors might focus a bit more on the income stream relative to the price (yield). A developer might not care about either and still want the place because of what they could do with the property (higher and best use). Each group will have a value or range of values that make sense from their relative perspective. The collection of values could cluster around a specific number or they could be widely different. If the later, the group that values it the highest will tend to be the group that the property is marketed to.

    Hopefully that helped a bit.
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    [i]"So the focus at acquisition should perhaps shift from buying at BMV and "getting a deal" because this is often un-quantifiable ... to monthly net cash flow achieveable.

    IMNCF .... increased monthly net cash flow © Vanessa Warwick Smile

    Monthly net cashflow renders BMV irrelevant and that is why you can still build a successful portfolio without even having heard of the term!"
    [/i]


    Hi Vanessa,
    With regards to your statements above, I have my eye on a studio flat that has just become available. I know the area well and know that what the vendor wants for the property (Not the asking price) is pretty much the market value. I also know that you would not get a similar property in the area for much less unless it is a special circumstance (distressed seller?).
    I know that if I manage to get the property at just below (maybe a couple of grand) less than what the vendor wants, I can get a positive cash flow of roughly £250pcm.

    So my question is this, does it make sense to buy this property now, taking into consideration prices might not rise much over the next five years, and especially for this kind of property? Because in that case I won't be able to remortgage any time soon. On the other hand, it is not bad return pcm. But how do I grow my portfolio?Huh

    Would appreciate your comments on this.
    Thanks,
    H
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    H,

    What is your objective?

    You appear to want to grow the portfolio by recycling your cash. An alternative to BMV and refinancing is buy, add value and cash out. When refinancing you might leave equity in the property. When selling you will likely have some taxes to pay. The key is can you create equity in the short term that you can take to the next project. The friction, transaction costs, equity left in, is just part of the equation.

    At the end of the day you want to be left with a quality portfolio that you are happy to own long term. Quality is relative. For some it is very much a down market area that they know will hold its value and will be easy to rent. For others it will be a high spec property that has a lot of curb appeal so it will 'always' be easy to sell if that becomes necessary.

    As a landlord you want a place that has lower than normal turn over and good demand. You want to feel comfortable going to the property. You will want a property that can be maintained to a good level so the costs are not killing the cashflow. For some that means buying a wreck and doing it up and for others that will mean new build, steal construction, etc.

    My point is there are a number of possible answers and you are the key variable. Over time your target might change because you change what you are happy to deal with. Focus on something that is repeatable if you want to build a large portfolio.
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.