Well, what a fun filled and successful month June has been for Baya financial and my team.  Some positive news; I’ve come to the conclusion that Brexit is not affecting our area of business at all. Lenders are busier than ever! We have not seen a slowdown, and landlords are being more creative in raising their return on investment. They are stretching their portfolios to northern regions of the UK, as well as ramping up their refurbishments by using interior designers and including high end equipment to attract a higher yield. We have had many completions this month due to the market remaining so buoyant, however commitment times have extended slightly.  In other positive news, we have seen fewer down valuations this month and many have been exactly as expected.

 

June saw us exhibit again at the National Landlord Investment Show, and what an excellent day we had! The venue was packed and ready for the panel discussion between Andrew Neil and Ken Livingstone – which had a really good audience participation. Ellie and I were joined on stage by our clients Rob and Sarah from Maygreen Investments.  We spoke about their view on the current property market and they gave us some updates on their current projects. This was the second of four shows we are participating in…next up, Manchester on the 8th October.

 

In other news, over the past few months we have really been focusing on business relationships with our clients. We are extremely excited to announce that we have partnered with Stacey Pattison Property Group as their ‘Preferred broker’ and will be working towards managing their network of landlords requiring finance.  It is a pleasure to be working with such a professional portfolio company, and we are feeling extremely hopeful that this relationship will grow from strength to strength.

 

And finally, as a lot of you will know our Baya team has lost a member, Lisa Blake. She has decided to leave the business and head for pastured new. It has been a pleasure working with Lisa over the last year and a half and we wish her all the best for her future. As a result we are now looking to hire a Mortgage Processor, so if you or anyone you know are interested in the position, please do get in touch!

 

As for July and the month ahead, we will be making more hay while the sun shines. Our business is cyclical, so we are enjoying this busy time and keeping up the momentum on our cases!

If you didn’t already know, we were at the NLIS Show at Olympia last week!  It was our second time at Olympia and it just seems to get better!  We had the opportunity to see Andrew Neil host a debate with Ken Livingstone, along with a panel of experts, about the future of the UK housing market.

It was great to see so many faces; some existing clients and plenty of potential new ones – we love meeting you all so you can see how genuinely excited we get about your properties!

We spoke about the opportunities and threats in the current market. It was encouraging to see that even with all the uncertainty around Brexit there are still plenty of investors looking to expand their portfolio.  We also met many people looking to make their first purchase, and it was a refreshing to see so much enthusiasm.

As we have done at previous events, we invited some familiar faces, our clients Rob and Sarah Hodge from Maygreen Investments to talk with us. They gave us an insight into their growing portfolio and discussed how their business has grown using investor funds, as well as opportunities they see in the current market alongside some of their challenges.

Look out for a full interview with Rob and Sarah coming up in the next few weeks.

In basic terms, top-slicing is where the lender uses the borrower’s personal income to top up any shortfall in rent.  This allows them to borrow more than they would be able to on the rental income alone.

So how does it work?

The lender calculates the amount the client can borrow based on the rental they receive or could receive on the security property but will also take into account additional income from the client’s portfolio and other earned income.  The way it is calculated is complicated so not that easy to give a simple explanation, but an affordability check will be made with the client’s disposable income to ensure they have spare to cover the difference required.

Why would you use it?

There are many reasons a client would take advantage of this:

• It allows the client more flexibility with how they choose to borrow money, for example to maximise borrowing on one existing property so they don’t have to remortgage multiple properties. This would reduce costs overall, but still allow additional income from the rest of the portfolio to ‘top up’ the rental calculation.

 

• A client may have a property with equity that they are struggling to sell or refinance to release money to reinvest elsewhere. This would generally be where the property has increased in value but the yield is not sufficient to allow the client to borrow more

 

• It allows the client to borrow based on more than the rental calculation, so they can decide to purchase a property based on other options – maybe it has the opportunity for alternative use or has development opportunities in the future so is more than a simple buy to let purchase.

Of course, this is one of many options to consider and we can help by talking you through all of them.  If you have any questions about this or anything else relating to investment property, then please give us a call and we can discuss your individual requirements.

So Rob and Aiden, what do you think are the biggest opportunities in today’s market?

Landlords have been hit hard by the Government’s housing policies introduced over the past few years.  Mortgage tax relief is in the process of being phased out. The Government is also proposing the scrappage of Section 21 eviction notices, making evicting tenants more difficult. As a result, many amateur landlords and landlords who own property in their personal names are finding owning property is less attractive and profitable than it once was. Many BTL landlords therefore have become motivated sellers themselves, and wish to liquidate their property portfolios quickly. As professional property investors who treat owning property as a business, we see this as an opportunity to take advantage of.

In November 2018 changes to HMO licensing was introduced meaning that all HMO’s (5+ bedrooms) regardless of number of stories, need to be licensed. This means that licensing standards such as minimum room sizes, fire safety and sound insulation requirements, etc., came into force across the board. 6 months on, there are many HMO landlords who are only just becoming aware of these changes and the cost implications of bringing their properties up to a licensable standard. For those landlords who didn’t foresee these changes coming, they may now be left with HMO properties that are no longer viable investments. Again, for professional HMO landlords who are aware of the new rules and regulations, there are opportunities to be had in taking advantage of the situation many landlords now find themselves in.

Furthermore, we have found that there is a huge demand from overseas buyers for purchasing performing assets such as HMOs. We sold an HMO on a yield based valuation, to an overseas cash investor earlier this year. We believe this to be the easiest flip on the market today.

And what do you see as the biggest threats?

One of the biggest threats is the possibility of an economic downturn. Many are predicting a 10-20% fall in house prices in the near future. This is obviously a concern, especially when doing short-term buy-to-sell projects. We are in the process of selling a property in Chester currently. Even with there being a shortage of housing stock and it being a seller’s market, I am praying for a quick sale! Generally however, we invest for the long term. We protect ourselves by making the money when we buy, by buying BMV (below market value). If you are expecting a 10% fall in house prices, then buy your properties 10% cheaper!  If a recession does hit, then that will breed more opportunities.

A downside to market uncertainty though is the potential for down-valuations when purchasing and refinancing. We have experienced one down valuation recently on refinance which taught me that valuers aren’t only valuing the property as it is today, but predicting its value over the next few years and over the course of the mortgage. Brexit is contributing to this uncertainty of course! Down valuations obviously impact the equity you can release on refinance, and therefore the funds that can be reinvested to grow the portfolio.

With it being difficult times, for some an ROI (return on investment) reality check may be needed. Though you may have accepted nothing less than a 50% ROI 12 months ago, a realisation that the market has changed may persuade you that a 30% ROI is a good result in today’s climate. Perhaps in 12 months from now, the market will be more buoyant and a 70% return on your money will be more achievable.

Another threat that we’ve identified is that of councils individually banding council tax on HMO rooms. I’ve heard of landlords being hit with this and it is a worry. I know landlords who have taken the council to court and won, and I know other landlords that have taken the council to court and lost. If it did come into effect in the council areas where we invest, then it would impact the profitability of our HMOs. Some landlords say they aren’t worried as they will simply pass the cost onto the tenant, but one has to realise that there is only so much HMO tenants can afford, and affordability is one of the main attractions of HMO’s for tenants.

You’ve quickly entered the HMO market, how have you grown your portfolio?

We have managed to grow our portfolio in a relatively short space of time by being selective about the property deals that we do. We only do deals that give us a high return on investment, where we are certain that we can release a large amount of equity in order to replace our initial capital. This means the funds can be recycled and reinvested in to future deals that allow us to grow the portfolio. We also raise finance from private investors which allows us to do more deals.

Has Brexit had an impact on you?

Yes, I would say Brexit has definitely impacted us. The down-valuations mentioned previously were no doubt a consequence of market uncertainty which Brexit is contributing towards. There has also been times we have approached investors to get involved in our projects and they have been reluctant because of the market uncertainty.

Tell me about your latest projects?

Our last few projects have been mixed-use developments. We have recently finished a 6 bed HMO conversion above 2 hairdressing salons that we also own, in the Wirral. Our current project, which is being featured on ‘Homes Under the Hammer’, is a 6 bed/6 bath HMO above a 1-bedroom apartment, and shop. Both Aiden and I really like the high levels of diversified income that these projects give us.

What’s next for you both?

We will continue to buy the smaller stuff (BTL’s and HMO’s – as that’s our bread and butter), whilst progressing into larger commercial to residential conversions. We invest primarily in Merseyside at the moment, but with us both being Manchester lads, it would be nice to get a few deals closer to home!