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What would you do with a windfall?

strategic planning Feb 18, 2016

This is a little different to the usual questions I get asked, but quite interesting to consider.  The windfall could come from a number of sources - an inheritance, some good property deals or - as this questioner suggests winning it!

The question:

If you won £500,000, how would you invest it to maximise your monthly cash flow?

The answer:

The answer you would normally get from mortgage brokers/advisers is to use your cash as 25% deposits, get 75% mortgages e.g. you could buy 5 x £400k properties, put down 5 x £100k deposits; you could of course buy more properties at cheaper prices.

Whilst this would no doubt generate multiple fees for your broker (surely not why they advise it?!) it is also a finite use of your resources. Once you had used up your cash on 5 or 20 properties that's it; granted you should have created a good income for yourself, but your capacity to continue buying is exhausted.

As an alternative you can consider buying one property at a time - but the right type of property, refinance it; then repeat as often as you want to.

  • You buy your target property for cash outright, no borrowing. This allows you to leverage your position as a cash buyer to:
    • Complete the purchase within a matter of days
    • As a consequence, negotiate the best possible purchase price.
    • It also means you have zero borrowing costs
  • If you have bought a property that needs some work to bring it up to its highest value (and you most certainly should), also by using your own cash, you can then get a mortgage on it based upon the new higher value you have created, rather than based on the purchase price.
  • This means you will tie up way less than 25% of the purchase price so, after refinancing, virtually all of your £500k capital is still in your bank.
  • By recycling your cash in this way, the number of properties you can buy is increased massively as, of course, is the income you can create for yourself.

You can leverage this still further by only targeting properties to buy that are currently unmortgageable.  Unmortgageable properties can significantly increase the profit you generate from each purchase because:

a) Most buyers/investors need mortgages, so they can’t compete with you to buy

b) Vendors with such properties know that they can only sell to cash buyers and cash buyers never pay top dollar; thus they are already conditioned to accept much lower offers

c) The bigger profits are there if you are prepared to make 'outrageous' offers

The caveat is to understand what is making the property unmortageable (i.e. no kitchen, bathroom); know that you can solve the problem; and finally, know the cost of solving the problem is significantly less than the value added to the property by fixing it.

Using this strategy, over time you could acquire a multi-million pound portfolio and create an income that supports a very comfortable lifestyle.

These figures will add some clarity, but this is just a 'for instance'; there will be endless variations of how deals actually work out.

  • You start with £500k sitting in your bank account
  • You find a property that, in its current condition, is unmortgageable i.e. it could be a probate property that needs total modernisation to make it habitable again
  • It is on the market for £220,000
  • As a cash buyer, you can wrap up the sale in a matter of days and you use this leverage to negotiate a price of £160k, which the vendors agree to because they just want rid of the hassle the property is giving them
  • You complete the purchase and then spend £30,000 bringing the property up to a high quality modern standard
  • Your investment is £160k + £30k = £190k...plus associated costs
  • Your bank account is now reduced to £310,000...£500k - £190k spend
  • With the refurb completed and it rented out, you bring in your own surveyor to value the property and it now gets valued at £250,000
  • You arrange a mortgage on the property for 75% of the £250,000 value = £187,500
  • When the mortgage completes, your solicitor pays the £187,500 into your bank account
  • Your bank account now stands at £497,500... £310,000 + £187,500
  • You now have a property rented out, giving a positive monthly cash flow but your bank balance is only £2,500 lower than when you started
  • You find your next unmortgageable property and you repeat the cycle again

Granted not every deal may flow as sweetly as that and you might tie up some more cash, but it demonstrates the principle. I hope that gives some additional clarity

 

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