Is the plan I outlined in the Part 1 to make unlimited tax free wealth realistic?
Actually, I think it is, but there are a few practical issues which need further thought and attention if the investor is to stay on track. Let’s have a look at these now under these headings:
- Buy a property preferably below market value
- Let it out at a rent that covers all costs
- Wait for prices to go up
- Refinance
- Pocket your tax-free lump sum
Buy a property preferably below market value
There are many ways of achieving a bargain at below market value, and many of these techniques have been discussed in detail in this and other publications, including, of course, buying at auction.
Most of these techniques involve seeking a ‘distressed’ seller or a ‘don’t wanter’ owner; often someone who is in a hurry to move, or going through a divorce, or someone who just needs their money out fast. There are many possible reasons why someone might want to sell in a hurry and will accept a lower price.
Then there are properties which require ‘work’, ranging from cosmetic tarting up to major structural repairs. The worse the problem seems to be, the more price is likely to be discounted disproportionately to the cost involved. For example, a house which in good condition would sell for £200,000 might be on the market at £150,000 in an unimproved state, but the cost of the works and the improvements to get it back to a £200,000 condition might be only £30,000. So there is a £20,000 margin to be made.
And lastly, there is the relatively recent phenomena of gifted deposits. These have caught on with developers who have seen an opportunity to sell in bulk to the Buy-to-Let market. Now you’ll find whole apartment developments being offered to investors at prices reflecting a 15% to 20% discount. Of course, the key thing is to make sure that the price really is discounted and that the developer hasn’t just added 15% to the price, just to knock it off again.
A variation on this theme is where the developer accepts only 85% of the sale price at completion, so the deposit is ‘gifted’. Some lenders are happy with this arrangement, and it allows purchasers a true ‘nothing down’ deal. Sometimes a developer will pay stamp duty and legal fees, or give cash back on completion, or some other package of incentives.
If property prices are rising, or are expected to rise, naturally through market forces, then buying below market isn’t so crucial. However, any equity you can gain at the point of purchase will allow you to take money out later.
As they often say in property ‘the profit is made on the purchase, not on the sale’. We’ll look at the next step in the next post.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
