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You can make money when you are willing to roll up your sleeves and get your hands dirty (or have a partner who will).
This deal is a classic diamond in the rough scenario with potential for super profits.
The situation is a large portfolio landlord needing cash for another opportunity, is disposing of a block of flats.
The property has a number of complexities and issues.
The individual flats are valued below a mortgageable level and have historical issues with antisocial tenant profile.
The properties are in poor condition both internally and externally.
The titles are on a long 103 year sublease hold basis and the locality is a remote regional town.
The solution is a discounted purchase price, with the vendor completing a schedule of external work between exchange and completion.
The purchase will be of all of the units by a special purpose vehicle limited liability company with investors holding first charge over the property assets.
This is then followed up with a strong operational plan and a phased move to Social Housing leases.
The commercial revaluation is likely to provide all of the cash back out plus a premium to buy back the investors shares in the company (they will have enjoyed income paid into their bank account from the first month after completion).
One of the key features of the deal was the use of an unusual but simple risk assessment investment tool and the fantastic peace of mind provided by understanding this cash flow to finance number:
Interest Cover Percentage
A version of this is commonly used by banks that typically target a 130% level for most mortgage product lending.
Simply put, it’s what percentage of the annual interest due is the rental income.
The higher the number the safer the income.
In this case we took it a step further and looked at the operating profit as the cash flow part of the equation.
The net rent after costs equals 204% before the cash flow optimising strategies applied.
In farmers' language, there is plenty of fat built into the deal.
For the right investor (subject to FCA rules) this can provide an estimated 51% return on cash over three years (17% per annum).
As always, investors should be aware that there are no guarantees in life or in investment and should do due diligence and seek appropriate professional advice.
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