Can you really buy a property with just one click?
By Charles Kelly
Author and creator of Money Tips Podcast
Joseph Kennedy, the father of John F Kennedy, once said that
when shoeshine boys were telling him to get into the stock market, he knew it
was time to get out. That’s exactly what he did just before the 1929 stock
market crash, which was followed by a bear market which lasted for decades.
when shoeshine boys were telling him to get into the stock market, he knew it
was time to get out. That’s exactly what he did just before the 1929 stock
market crash, which was followed by a bear market which lasted for decades.
Sometimes I feel the same about property when everyone seems
to be jumping on the bandwagon. Now, there is even a company offering investors
a way to buy a buy-to-let property with the click of a mouse.
to be jumping on the bandwagon. Now, there is even a company offering investors
a way to buy a buy-to-let property with the click of a mouse.
Can you really buy a property online just like ordering
something on Amazon? Well, not quite.
something on Amazon? Well, not quite.
Dot, a Californian company with offices in Manchester,
effectively gives you the facility to reserve a property online, leaving completion
and the legal work to be done later on.
effectively gives you the facility to reserve a property online, leaving completion
and the legal work to be done later on.
Investors are told that they can buy one and two bedroomed properties
costing up to £200,000 in a “few pain-free minutes”, with just a few clicks,
and enjoy a yield of up to 6% pa. Once you have selected a property, the
company sends out a computer generated image of what the property would look
like when refurbished, without investors needing to visit the site themselves.
I guess this would be of more benefit in America where a site visit could
involve thousands of miles of travel and even a flight.
costing up to £200,000 in a “few pain-free minutes”, with just a few clicks,
and enjoy a yield of up to 6% pa. Once you have selected a property, the
company sends out a computer generated image of what the property would look
like when refurbished, without investors needing to visit the site themselves.
I guess this would be of more benefit in America where a site visit could
involve thousands of miles of travel and even a flight.
The company is currently packaging up to 40 flats in
Manchester, Birmingham and Leeds, Cities which it has identified as rental
growth areas.
Manchester, Birmingham and Leeds, Cities which it has identified as rental
growth areas.
They told the Sunday Times that they expect it “will be
completely normal for an investor to acquire, renovate and hold properties
without ever visiting them in person”.
completely normal for an investor to acquire, renovate and hold properties
without ever visiting them in person”.
After the property has been reserved and Dot has carried out
a credit check and verified that the investor is earning at least £30,000 per
annum, the company lends investor the money to purchase the property and pay
all of the stamp duty and legal costs, plus Dot’s 3% fee – which is £6000 based
on a typical £200,000.
a credit check and verified that the investor is earning at least £30,000 per
annum, the company lends investor the money to purchase the property and pay
all of the stamp duty and legal costs, plus Dot’s 3% fee – which is £6000 based
on a typical £200,000.
The loan, effectively a bridging loan, is offered at 0.6%
per month or 7% per annum for 12 months. Investors are required to contribute a
minimum 25% deposit.
per month or 7% per annum for 12 months. Investors are required to contribute a
minimum 25% deposit.
Dot also sets up a limited company in the investors name, so
that tax on the profits will be paid at the corporate rate of 19% rather than
personal rates of 20%, 40% or 45%.
that tax on the profits will be paid at the corporate rate of 19% rather than
personal rates of 20%, 40% or 45%.
After the sale has been legally completed, Dot will offer to
refurbish the property for an agreed fee, which can take up to three months.
refurbish the property for an agreed fee, which can take up to three months.
Before refurbishment starts, the investor takes out a second
mortgage with Dot, on the same terms as the first bridge, to cover the interest
accrued on the first loan plus the cost of the works.
mortgage with Dot, on the same terms as the first bridge, to cover the interest
accrued on the first loan plus the cost of the works.
Note that at this point, the investor has still not paid
anything more than their initial 25% deposit.
anything more than their initial 25% deposit.
When the works on the property have been completed, the
investor takes out a new long-term mortgage to refinance the first two bridging
loans, based on the new higher value of the property. Dot then arranges a
mortgage at an annual interest rate of between 2.89% to 3.99% for up to 30
years.
investor takes out a new long-term mortgage to refinance the first two bridging
loans, based on the new higher value of the property. Dot then arranges a
mortgage at an annual interest rate of between 2.89% to 3.99% for up to 30
years.
This reflects the higher mortgage rates paid by limited
companies. It is still a mystery to me why the mainstream lenders have not got
in on the market for lending to limited companies at more competitive rates
than those offered by some of the more expensive challenger banks.
companies. It is still a mystery to me why the mainstream lenders have not got
in on the market for lending to limited companies at more competitive rates
than those offered by some of the more expensive challenger banks.
Investors are free to arrange their own mortgage and find
their own letting agency to manage the property.
their own letting agency to manage the property.
Bear in mind that unless the property has dramatically
increased in value, you will need a bigger deposit than 25% (you are unlikely
to be able to raise much more that 75% and may be lucky to get 70%) to take out
the previous Dot loan, fees and refurbishment costs.
increased in value, you will need a bigger deposit than 25% (you are unlikely
to be able to raise much more that 75% and may be lucky to get 70%) to take out
the previous Dot loan, fees and refurbishment costs.
Based on their current projections, investors who stay with
the company would make £3358 per year from a two-bed property worth £207,000
and rented out for £1000 per month or £12,000 per year. The rent looks a little
high to me. A quick search on Rightmove showed that you can rent older 2 bed
flats for £575 pcm and the only luxury city centre new-build flats command an
asking price near to £1000 pcm.
the company would make £3358 per year from a two-bed property worth £207,000
and rented out for £1000 per month or £12,000 per year. The rent looks a little
high to me. A quick search on Rightmove showed that you can rent older 2 bed
flats for £575 pcm and the only luxury city centre new-build flats command an
asking price near to £1000 pcm.
Based on my calculations, this means investors will only
receive less than 40% of the rental income. Mortgage payments, ground rent and
service charge of roughly 30% (for insurance, tax reporting services and a
management fee) are deducted from the rental income.
receive less than 40% of the rental income. Mortgage payments, ground rent and
service charge of roughly 30% (for insurance, tax reporting services and a
management fee) are deducted from the rental income.
That doesn’t sound like a 6% rental yield to me and in in
reality is more like 1.76% after costs.
reality is more like 1.76% after costs.
Dot claims it will make it easy for people to purchase a buy
to let investment without doing any work or research for themselves. However,
nobody is going to do all this for nothing so there are quite lumpy fees and
charges involved.
to let investment without doing any work or research for themselves. However,
nobody is going to do all this for nothing so there are quite lumpy fees and
charges involved.
On the face of it, the Dot deal looks like an innovative
scheme using technology to make it easy to get into property, but there are
drawbacks.
scheme using technology to make it easy to get into property, but there are
drawbacks.
Firstly, the advertised 6% yield is a little exaggerated,
even without mortgage costs, when you take into account the hefty management
fees. You may argue that any property will involve some sort of management
fees, but Dot are selling a buying a package.
even without mortgage costs, when you take into account the hefty management
fees. You may argue that any property will involve some sort of management
fees, but Dot are selling a buying a package.
Secondly, buying a property remotely is always risky.
Thirdly, much of your profit will be eaten up by bridging
loan interest costs, which of course are adding to the profits of Dot.
loan interest costs, which of course are adding to the profits of Dot.
Fourthly, you are almost totally reliant on this company to
fulfil the refurbishment and management and you have very little control over
either. If the company releases 40 flats onto the market at once, there is a
risk that you may not be able to find suitable tenants.
fulfil the refurbishment and management and you have very little control over
either. If the company releases 40 flats onto the market at once, there is a
risk that you may not be able to find suitable tenants.
Finally, and most crucially, the scheme relies on a new
higher valuation in order for you to remortgage out of the expensive bridging
loan. If your lender’s valuer does not agree with Dot’s higher valuation, or the
market dips or Dot just gets it wrong, you may end up having to put in a lot more
of your own cash than 25% into the deal in order to get out of the punitive 12-month
bridging loan.
higher valuation in order for you to remortgage out of the expensive bridging
loan. If your lender’s valuer does not agree with Dot’s higher valuation, or the
market dips or Dot just gets it wrong, you may end up having to put in a lot more
of your own cash than 25% into the deal in order to get out of the punitive 12-month
bridging loan.
The scheme could either be a major flop, leaving hundreds of
investors out of pocket, or become the “Uber” of property investment.
investors out of pocket, or become the “Uber” of property investment.
In the meantime, I’ll stick to my own research and deals.
The best way to get into property is to do your homework and learn from
experts.
The best way to get into property is to do your homework and learn from
experts.
Word of the Day
Land Registry
Official government body that registers most property titles
in England and Wales.
in England and Wales.
Your solicitor will normally do a search to check ownership
as well as registering your interest in the property once you have completed
your purchase.
as well as registering your interest in the property once you have completed
your purchase.
If you would like further details on how to learn about
property and become a professional property investor, email charles@charleskelly.net
property and become a professional property investor, email charles@charleskelly.net
There are more
examples and practical steps to getting rich and being happy in my book, Yes, money can buy happiness, I cover the 3
R’s of Money Management, the Money B.E.L.I.E.F System and much more. Check it
out on Amazon http://bit.ly/2MoneyBook.
examples and practical steps to getting rich and being happy in my book, Yes, money can buy happiness, I cover the 3
R’s of Money Management, the Money B.E.L.I.E.F System and much more. Check it
out on Amazon http://bit.ly/2MoneyBook.
See also:
No comments:
Post a Comment