QA08: How Do You Work Out If Its A Good Deal For An Investor
UPDATE: Read our new 2021 guide, How To Find Investors.
This is the eighth episode in our special Q & A Series. We look at how to know whether a property deal is is good for an investor or not.
- Sourcing for a VIP makes it easier
- Understand the basic investment assumptions for each strategy
- Rent to rent minimum cashflow requirements
- Lease options cashflow and purchase price
- Purchase cost minimum BMW
Mark: So Claire Brown asked, how do you work out if it’s a good deal for an investor?
So just to give this question context. I think the question was kind of based around you know how do you really know what an investor considers to be a good deal. So you know you might go and offer on a house and offered 10 percent below market value. Is that a deal that an investor might find useful. Maybe, maybe not. But how do you know? So if I’m right Claire if you’re listening I hope that was about right. And what you’re sort of thinking. Because that’s how I answered (laughters). If I’m wrong let me know and we can have a chat. But the first thing to do, sourcing for VIP clients makes this a lot easier. And the reason for that when you saw the order. You know what client wants. So you know your investor is are looking for. You know their particular criteria in terms of whether they want cash flow, whether they want equity whether they want bmv and a certain percentage bmv. Whether they’re working for minimum cash flow on a rent or rent. All this stuff is so much easier when you’ve actually had a direct conversation with them about what they want. So first of all the easiest ways to do that is the find an investor ask them what they want and then go find it. And the other thing is when you’re using, when you’re just sourcing to a list and you’re just going out there willy nilly and then well you won’t be at it tonight because you’ll be focused on one strategy. But it is more difficult to predict.
So what I’ve done here is I’ve just created some basic investment assumptions, for each of the main strategy. Just to give people an idea especially complete newbies to give you a rough idea as to what minimum standards an investor wants.
And just remember that with the minimum standards that investors want you will tend to find that the fees that you can charge are at the lower end of the scale. So with this scale up and down the more cash flow the more equity, the more BMV, the more you can play with the numbers and the better fee you will charge. Needless to say again if it is less, if the cash flow is nearing the bottom end of the acceptable minimum. You’ll tend to find that you’re fee is less as well. So, first one Rent to Rent. Most popular strategy out there at the moment at that service accommodation. I would say they need to.. Sorry. Ignore service accommodation for this example. Rent to rent, cash flow needs to be a minimum of 500 pounds per calendar month net profit. So that means after all bills, all fixed rental payments and the 500 pounds per calendar month has to be a minimum cash flow. In order to source some package on the rent to rent deal.
Then lease option you’re usually looking at a minimum cash flow of around about 200 pounds per calendar month net. Then a purchase price usually of today’s value and over a decent contract. So that’s kind of the minimum requirements. I mean needless to say there are so many variants in in this but, just for the purposes of letting you know what a good deal might be or where you need to be when you’re negotiating with people, these are the sorts of numbers that an investor is working for. And then with a purchase with an outright purchase what we want to be doing is we want to be looking at usually, a minimum of 15% below market value and that’s net BMV.
And what I mean by net bmv, I mentioned it earlier on, is the bmv after you’ve taken off your sourcing fee, the stamp duty and any other legal cost surveying costs et cetera. So that 15 percent BMV is a genuine 15% BMV. Actually ends up being around about, sort of 17, 18 percent of gross above 15 percent net is probably the minimum I would expect and investor to accept for a sauce deal. And also just purchased for flip’s you probably again looking for sort of a 20 percent net profit at the end of the flip deal as well. So at the end once that property is being refurbished then it’s resold, minus all your costs, selling costs etc.. You’re probably looking for around about 20 percent net profit. So that in my opinion is what we would consider to be a very good deal for a minimum standard sorry for our investors. If we were just sending to a list.
Brad: So John’s got a question he says I often find many investors I come across don’t even know what metrics they’re looking for when I asked them. How do you get around that?
Mark: Really good question.
Really good question. And first of all I would tend to suggest is that if they don’t know they’re looking for you are really going to struggle to have a good deal. And but B, it’s our role sometimes to sort of do a little bit more digging into what they want to achieve. So you need to be asking them questions for them to realize what they’re looking for. But it’s kind of like walking into an estate agency office and I am looking for a house. Alright. So what are you looking for? Just the House. Sure yeah. Just the house. I know that I need to be property investing but I just need an investment deal. I don’t know what I want.
You know that’s kind of what they’re doing? So you know as an estate agent or as a source or as a property professional what you want to do is then dig deep. What do you want to achieve? Are you looking for cash flow? Have you got a pot of cash? Have you got no money? Are we looking at no money dangers? Are we looking at lease option rent to rent. Are we looking for a purchase?
What sort of deposit money have you got? What what liquid cash, liquid funds have you got access to? Have you got a mortgage agreement in principle? Are you ready to go with a with a purchase?
All these questions will really start to narrow down what that investor wants. And once you know what that investor wants, you can then tell, you can go and then find a deal. You will very quickly realize in the world of sourcing that there are probably about 70 to 75 percent of people that you speak to sound like they’re serious and they’re not.
And they will not commit to stuff they will mess you around. Some will even get really late in the day in and pull out. So the more you can qualify at the beginning and the more you can do a check at the start to make sure that they are serious they’re ready to buy, they’ve got the funds, they’ve got the income, then the better your deals in sourcing career will be, the better fees you’ll achieve, and the better reputation you will get in the industry.
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