Anne has one nice semi-detached house in a quiet part of town that she has been living in for 5 years. She decides to remortgage the house and add this to her current savings giving her a total of £60,000 that she wants to invest. She joins S.H. Property Services’ Investment Club and has noticed a fantastic opportunity; she sees a ‘flip’ opportunity just outside of Edinburgh. The sale price is only £80,000 for a good-size detached house but she will need £20,-25,000 to bring it up to a good standard. Anne knows she can get a mortgage with a 75% LTV so she will need £20,000 for the mortgage deposit and will need approximately £4500 to cover her solicitors and mortgage broker fees and 4% stamp duty. S.H. Property Services consider this to be a very good investment and charge a £1000 ‘finders fee’. Anne will need a potential £53,000 in total (potential £25,000 for renovations + 10% management fee of, pessimistically, £2,500, a deposit of £20,000, ‘finders fee’ of £1000 and other fees equating to £4,500). The estimated price of the house after renovations will be £115,-125,000. S.H. Property Services have also told Anne that there is a high chance that a brand new Primary School is going to be built and a large supermarket is currently sourcing planning permission fairly nearby. The house purchase and pre-planning of renovations took 2 months.
S.H. Property Services are always very realistic in their predictions and renovation costs only came to £21,000 and thus the management fee was £400 less than accounted for, bringing Anne’s total spend down to £48,600. There was good news with the Primary School and the Supermarket has received planning permission. The house was actually sold for £130,000, equating to £121,800 after 4 months’ of mortgage payments, early repayment charges, solicitor fees and estate agent selling fees.
Anne makes a profit of £61,800 (£121,800 – £60,000 mortgage).
£16,400 of this is taxable (post-mortgage profit – (mortgage deposit + all costs (except stamp duty)) = £61,800 – (£48,600 – £3,200) = £16,400) and Anne loses £3,280 in tax (20% of £16,400).
Therefore, Anne’s total profit after all of her expenditures and tax is
£61,800 – (£3,280 + £48,600) = £61,800 – £51,880
This equates to an ROI of 20.4% in only 6 months
Since Anne used S.H. Property Services’ Investment Service, Renovation Service and Sales Service we decided to offer Anne 30% off her next service with us.
Alternatively, Anne could have kept the property and rented it instead and remortgage this property after 1 year and repeated this strategy. Most lenders only require a minimum of 6 months after your property purchase has gone ahead but to help minimise the risk of disappointment we would recommend waiting 1 year before getting your property re-valued.
All our case studies are all hypothetical and as such, the outcomes are hypothetical too.