So you’re intrigued how a property can generate £600 clear profit every month and have none of your own money invested in it?
Firstly, without getting too mathematical, let’s outline exactly what an unlimited return on investment actually is as it may be confusing for anyone new to investing.
Return On Investment or ROI as it referred to, is the net profit from an investment divided by the amount of investment made.
So if you buy a £100,000 property without a mortgage, you’ll have invested £100,000 of your own money. Let’s assume the property generates £10,000 per year in net profit…
10,000 divided by 100,000 = 0.1 – which as a percentage is 10%.
This would be a 10% ROI.
Now if you had an investment consistently providing a 10% ROI, most people would be over the moon considering the current savings rates are around < 1%!
According to The Money Advice Service “Cash Savings Accounts are generally the worst place to put your money long term” – which means that putting your money in a savings account is likely to lose money given the rate of inflation!
So whether you’re investing in property, stocks and shares or a new business, the higher the ROI the better a deal it is and through our property investing journey, we have seen some amazing figures.
Taking the above into account, we were looking to generate the highest profit with the smallest amount of our own money in the deal, this allows our own money to be recycled and used in further deals.
In the property investment world, one of the main ways we minimise our own financial input is to borrow the money using a mortgage. Obviously a mortgage has a monthly payment and this is going to reduce the net profit figure, so this is where you have to decide what your goals are and what you’re looking to achieve from the investment.
But what if we could have none of our own money tied up in a deal and still generate a profit?
This is an unlimited ROI.
Any amount of profit divided by zero is infinite – try it in your calculator and you’ll get an error!
So we found the property below advertised with an online agent at £115,000 and we could immediately see the potential for converting to a HMO.
We organised a viewing and had a lengthy conversation with the vendor which enabled us to put together a deal she was over the moon with (this may become a blog post in its own right as the negotiation of the deal is critical).
We made some minor alterations to the layout in order to maximise the space within the house and this left us with five rentable rooms, two of which are en-suite. The photographs below show how we closed doorways and opened others to maximise the space.
Included in the refurbishment was a full re-wire, new boiler as well as the en-suite bathrooms, decoration and furnishing.
The refurbishment total came in £11,000 (2015 prices)
The property was then re-valued as a HMO and refinanced based on the increase in value to enable all of the initial investment to be taken out.
So, let’s have a look at the final figures: –
- Purchase price: £100,000
- Refurbishment: £11,000
- Legal fees: £1,500
- Total Investment £112,500
- Post valuation: £150,000
- Mortgage (75% LTV) £112,500
- Monthly Net Profit £600-£700
Every penny of the initial investment was taken out to be used in the next project and the property performed exceptionally well as a HMO.
Do they all work out like this?… of course not, but by aiming for such a high ROI, there is a lot of contingency for if the refurbishment costs more than expected or the post valuation isn’t as favourable.
For example, in the above example if the post valuation hadn’t increased at all and remained at £100,000, we wouldn’t have been able to take out the £12,500 invested but this would still be an ROI of over 50%! ….. much better than having the money in an ISA!
There are many aspects to a deal such as this, from negotiating a win/win with the vendor through to having tenants waiting at the end of the conversion and dealing with tradesmen in between.
If you would like to know more about how we could help you get the most out of your property investing, or even if you’re thinking about it but don’t know where to start, feel free to get in touch.