Purchasing buy to let property with cash.

Why a cash purchase makes sense. | Top

When the property market goes sideways and interest rates are high, it makes sense to purchase with cash to maximise cash flow.

When the property market rises in interest rates are low, it makes sense to purchase with finance to maximise capital gain. ( detailed explanation below )

Timing the market cycle is important.  Let’s assume you buy a property with cash at a discount. Interest rates fall in the future AND there is a prospect of capital gain, then it makes sense to refinance to get a mixture of reasonable cash flow and exposure to capital gain. (I explain capital gain in more detail below.)

Motivated sellers and discounts | Top

We are now seeing more and more motivated sellers willing to discount in return for a quick property sale.

The best property profile for long term gain:

  • Buy high quality properties at below market value from motivated sellers.
  • The properties will need renovation. When renovated, refinancing allows you to draw down most of your money. (See calculations below)
  • If the property needs extensive renovation, you can legally avoid up to 90% of the stamp duty you might otherwise pay. ( more about this later )
  • These properties will achieve far higher yields than previously seen during the summer of 2022
  • Whilst the market is going sideways, you’ll benefit from strong cash flow
  • When interest rates come down in the future, you can refinance and benefit from capital gains

Nick Garner. Founder Invesmore.

Many sellers are running low on cash and must sell in order to realise funds to see them through these difficult times. Our research team finds good properties which have been discounted or have been on the market for more than 3 weeks. We share these properties with our clients.

All deals assume your:

  • Buying with cash
  • Targeting a high yield
  • Looking for a property that will easily get refinanced when interest rates drop

If a property:

  • Has previously been on sale.
  • The sale has fallen through
  • Has been on the market for more than 3 weeks
  • Needs extensive renovation, anywhere between £10,000 and £30,000
  • Owner occupiers do not want to purchase the property because it requires too much cash expenditure

… Then it’s possible you can purchase this property at a significant discount to asking price.

The most important thing to remember: We are working to target yields. And when Nick talks to agents about lower offers, the agents are happy to have these discussions because they know we have done our preparation when coming up with a suitable offer figure.

Why does this BMV strategy work?

Example of calculations

Calculations explainer

Example cash purchase property

The perfect property:

  • Needs Renovating
  • Can be deemed ‘uninhabitable’ by HMRC, so you can legitimately reduce your stamp duty burden
  • Is in a good location
  • The vendor is motivated to sell quickly
  • You are able to buy with cash with the assurance of a quick property completion

Why this property deal works. Its a nice semi detached house in a good location in need of extensive modernisation. Owner occupiers will be unlikely to purchase this property because of the large amount of cash it requires.

For a buy to let investor, one’s main objective is return on investment through cash flow and capital gain. By purchasing the property at the right price and doing the renovations, you maximise rental income & rental return on investment and increase refinancing value. So when it’s time to refinance, you can draw down most of your cash and re-invest it.

Case law example. In January 2017 Paul and Nikki Bewley bought an uninhabitable bungalow. They paid £1500 in stamp duty. HMRC claimed they owed £7500 in stamp duty. Bewley’s contested this claim. The Bewley’s won the case. This legal victory said case law precedent allowing buyers to successfully argue that certain properties can be deemed uninhabitable and therefore not be subject to full rates of stamp duty. Details of the case here.

Client example

  • The property needed extensive modernisation
  • The kitchen was dated and appliances were missing
  • The central heating system is not up to modern standards
  • The EPC rating was E

Client paid the full rate of stamp duty. At this time we were not aware of the case law precedent set by Paul and Nikki Bewley. The client’s conveyancing solicitor did not flag up the possibility of a reduced stamp duty payment due to uninhabitability of the property. Nick came across this case law example above and (Invesmore founder) engaged the services of THY Claims, a specialist in reclaiming stamp duty on properties deemed uninhabitable by HMRC’s definition.

Fortunately for our client we are very thorough about documenting all property acquisitions. We assembled a case file demonstrating the poor condition of the property and within 3 weeks of assessing our client’s claim, our client was refunded £8532.44 from HMRC.

 

Do I have to pay full stamp duty upfront and then reclaim later? | Top

No. You simply have to identify properties which can be deemed uninhabitable. Document the property condition carefully. Then ensure your conveyancing solicitor has all the necessary case files from us along with clear direction. Your conveyancing solicitor then makes a stamp duty payment on your behalf as ‘non-residential’.

 

Examples

Habitable buy to let property owned by a foreign national and purchase through a limited company.

  • Freehold or leasehold: Freehold
  • Residential or non-residential: Residential
  • Results based on SDLT rules from 17 March 2016
  • Non-UK resident: Yes
  • Individual: No
  • Purchase price: (£)200,000
  • Total SDLT due: (£)10,000

 

Uninhabitable buy to let property owned by a foreign national and purchased through a limited company.

  • Freehold or leasehold: Freehold
  • Residential or non-residential: Non-residential
  • Results based on SDLT rules from 17 March 2016
  • Non-UK resident: Yes
  • Individual: No
  • Purchase price (£): 200,000
  • Total SDLT due (£): 1,000

 

Simply by purchasing a property which is classified as uninhabitable, you can have a 90% or more reduction on stamp duty.

Reiterating. by selecting the right property, accurately documenting the property condition and assembling a strong case file, you would be able to submit a stamp duty application as ‘non-residential’.

Aside: For properties where buyers have paid the full rate of stamp duty, we work with TYHclaims.co.uk on claiming stamp duty refunds. We produce the case files, assemble all the necessary evidence and pass this to TY Claims who then claim the stamp duty refund on your behalf.

This client property had an SDLT refund of £8532.44.

Client SDLT refund

You flag up some properties you like

Nick calls the agent

Nick reports back to you.

If the seller is NOT motivated...

But you like the property then we put it on a watch list and review the property every week or so to see updates

If the seller IS motivated...

We go through the calculations with you and if you like the property, Nick will talk to the agent and see if the vendor/seller would consider a suitable offer based on a yield target that you agree to.

If the seller would consider your offer, we book a viewing

Viewing admin is done

Viewing costs £45 and we will invoice you for payment. Very important! We will offset all of these costs against commission on completion of the sale of any property you purchase with us. Full explainer here:

We get photographs and video of the property.

Martin and Nick do an assessment and share the video with you

Here’s a playlist of previous assessments: YouTube playlist

You tell us if you want to make an offer.

Nick enters negotiations with the selling agent.

Offer is accepted

Conveyancing process proceeds

If appropriate, reduced stamp duty is paid.

Property completes and is rented out

Why clients love working with us:

  • We have an end to end process flow for buy to let property acquisition
  • We have proprietorial technology unique to Invesmore. It means we can identify properties of interest throughout England and Wales by understanding demographics, crime, capital gain and local market robustness
  • We have 3 property researchers constantly finding deals that make financial sense
  • We may be able to help you secure up to a 90% SDLT/stamp duty reduction for the right properties
  • Nick Garner is an accomplished property negotiator and will negotiate on your behalf
  • We have a rigorous process for assessing property. See example property assessments: Youtube Assessments
  • For conveyancing we have a panel of solicitors who are trusted and efficient
  • For property surveys, we have an excellent firm of surveyors we use. We also analyse property surveys on behalf of clients to identify any issues. YouTube survey assessments
  • We have 4 renovation contractors who deliver excellent work at a fair price, all working under a very tightly controlled renovations process we oversee ->  invesmore.com/renovations
  • Our shareholders are a successful estate agency in Manchester, with lettings management usually undertaken by them -> charleslouishomes.co.uk
  • And when you want to refinance, we have a panel of knowledgeable and trusted mortgage advisers

Ready to start searching? See our onboarding process and contact us today.

TL;DR Explainer. Property cycles. Cash or finance.

Capital gain in a rising market explained | Top

Let’s assume:

  • You have £230,000 in cash for a ‘buy to let’ purchase
  • You buy a £210,000 property
  • Spend £20,000 on fees SDLT and renovations (remember – buy the right house and you might pay minimal SDLT)
  • You buy & renovate 1 properties now worth £220,000
  • Over 4 year period, property prices rise by 20%
  • Your property is worth £264,000 4 years from now.
  • Nominally, you make £44,000 in value & capital gain. Nice!

However, if you could get finance at a low cost and:

  • You purchased the same £210,000 property with a 75% buy to let mortgage
  • Each property would cost you about £69,300 (fees & stamp duty) + about £7,700 on renovations
  • You buy 3 properties, now worth £220,000 each after renovations
  • Over 4 year period, property prices rise by 20%
  • Your 3 property portfolio is now worth £792,000
  • Nominally, you make £132,000 in value & capital gain! Very nice!!
  • As long as interest rates are low enough, you also get a net cash flow.

 

When a market is going sideways or declining | Top

Let’s assume:

  • You have £230,000 in cash for a ‘buy to let’ purchase
  • Interest rates are high so if you borrow at 75% loan to value, you will make a net cash loss each month
  • Property market does not rise over a four-year period
  • Nominally, you make no capital gain. Not so nice.
  • But, you get good cash flow in these hard times
  • When the market moves into a capital gain phase, with reasonably low interest rates
  • You refinance your property
  • Get some cash flow and maximise capital gain.

 

And there’s one other dimension to consider: psychology. | Top

When inflation occurs it’s because people are competing for a limited number of services or products. When interest rates rise, it drives money into unproductive use: paying more interest. With more money paying down cost of debt, there is less money available to buy those services and products which are inflating in price.

Since humans are ‘herd’ animals, we tune into the ‘Zeitgeist’ and all act like a mob given similar circumstances. Right now governments are driving down demand to reduce inflation. In 2008, we had a property crash. Interest rates dropped to near zero and by 2010, the fundamentals for the UK property market were excellent. Yet, the market went sideways for 4 years. Why? I put this down to:

  • Humans behaving like herd animals
  • Lacking confidence in the future

if we could go back in time, by up loads of property with cheap money, we would be much richer today. The good news is property markets work in cycles. History tells us so. And this property cycle is just another of the 9 distinct property cycles we’ve seen since 1845.

The main points

  • Always look at the fundamentals
  • Watch market sentiment objectively
  • Markets go in cycles
  • Different parts of the cycle demand different strategies
  • Right now the best strategy is cash purchases from motivated sellers.
This chart shows the previous property cycle and when it made sense to buy with cash or finance. The future never repeats itself, but it often rhymes with past cycles.