What would you do with £40K?
THE QUESTION
As a first time property developer and with just 40k to invest, what would you do? Use the 40k as a deposit on a house or use the money to buy a much smaller, cheaper property outright? I see that there are some properties in certain parts of the UK that appear to sell at auction for circa £30k although I'm guessing these are incredibly cheap for a reason! Which option would be a better idea?
THE ANSWER
The first question to ask yourself is - what are your property ambitions? Both the options you mention are a 'one and you're done' situation. That means you will be out of cash after buying a single property with either option. If that is the limit of your ambition, that's fine, but if your property ambitions go beyond owning a single property, then neither option is a good one for you.
It is fair to say that no one comes into property with limitless cash, some have more to begin with than others, but almost everyone will run out of cash before they run out of ambition and that means you need to learn to think smart before your cash runs out.
Thinking smart means understanding, learning and implementing the concept of recycling your cash - Buy, Refurb, Refinance as it is also referred to.
To be clear, this means when you buy a property you only consider one that is in a poor condition currently and thus has the opportunity to improve it and add value, preferably exponential value.
Once you have added the value, over a period of a few weeks or months, you then get a mortgage on the uplifted value and you get as much of your £40k cash back out again.
This will enable you to use the same £40k to buy a 2nd property, repeating the same process of buy, refurb, refinance. This is sometimes also referred to as 'momentum investing' - in a nutshell by recycling and reusing the same £40k time after time you get to buy multiple properties rather than a single property.
The principle is simple but the practice sometimes not so simple. There are a number of factors that can derail inexperienced investors’ attempts to pull all of their cash out of their property projects:
- Paying too much for the property because they don't know how to work out what they should pay
- Underestimating the time it takes to refurb it
- Underestimating the cost of the refurb
- Overestimating the done up value
- Not having good quality tradesman, so getting over-charged for poor quality work
- Lack of understanding of how finance works and the full cost of it
- Getting the property down-valued at refinance because they don't understand how mortgage lenders valuers up-value a recently bought property.
Educating yourself to become aware of how to avoid falling prey to all of the above would often be regarded as a sensible move.
£40k is going to be very limiting if you intend to pay cash, as very few areas of the UK have properties that can be bought for cash at this value. So that means borrowing to finance the purchase. You cannot use a mortgage because mortgage lenders do not lend when they know you are going to redeem the mortgage within a few months. That leaves you with two ways to buy a property to do up:
- Borrow the cash from someone you know
- Bridging finance
There is a specific type of bridging called a Refurb Bridge. You can borrow 70% of the purchase price and 100% of your refurb costs. Leaving some cash aside for stamp duty, fees etc. this would mean you could look to buy shabby properties for up to £100k but certainly for around £80k.
However, bridging finance is not something to leap into unaware, get it wrong and it can cost you dear. Educate yourself on how it works, the pros and cons. Used correctly it can leverage you into bigger and potentially more profitable deals.
A good start to this would be my YouTube channel where there are now 100+ videos on how to use bridging intelligently and other associated property finance education -
You can learn more here:
- Contact Kevin Wright over on his Facebook page.
- Browse the Recycle Your Cash online training library by clicking here.
- Attend an upcoming 1-Day Property Finance Masterclass event - Book in here.
