What’s the benefit of a cash buyer strategy?

THE QUESTION

As a new property investor with an abundance of desire, I see my strategy will be to mortgage at 75% LTV on an interest only, refurb and leave little or no money in, then re-mortgage and live off the cash flow and capital growth.  What advantage would it be for me to buy property outright as a cash buyer using alternative financing, unless I found a few incredibly BMV unmortgageable properties?

THE ANSWER

How many properties is it your objective to own?

How many 25% deposits do you have the cash available to make?

For almost everyone, they have less cash than the number of properties that they aspire to own.  So the simple truth is that everyone will run out of cash for deposits before they acquire the amount of properties they desire.

This brings into play one vital aspect, the knowledge and ability to recycle your cash; the need to understand and be able to use the same pot of cash to buy property after property.

To an extent I can see that you have grasped this already.  You understand the concept of buy, add value, refinance, pull out your cash, repeat that cycle.

But have you considered the limitations of how you accomplish that?

This will contradict what is commonly taught on property courses.  Why? Because, as a broker, I know the reality behind the fluffy, easy-as-falling-off-a-log, misleading stuff that is often taught.

1. When you apply for a mortgage, the lender understands and expects that you will hold the mortgage for several years, not a few months.  The normal mortgage term is 25 years.  They don’t believe you will keep their mortgage for 25 years, but they do expect it to be for a few years and their cost model are generally based on the loan being held for 5-7 years.The lender does not expect you to redeem their mortgage only a few months later, when you refinance with a different lender to get your cash back out.  If you tell them that this is your plan they would decline to lend to you.

   Mortgage lenders’ minimum term is 5 years so, if you put anything less than 5 years on your application you won’t get a mortgage.  This means that your intended model of mortgage, refurb. remortgage can only work if you deliberately deceive the first mortgage lender.

2. Every mortgage you take out is fully documented on your credit file, with all relevant details show.  Crucially, what is also shown it the date you redeemed it.  So any future lenders will see exactly how you have conducted your previous mortgages.They will be interested in your repayment history showing no late or default payments.  But any early redemptions will create a black mark against you.  Some leeway may be given for one or two redemptions within a matter of months, but a pattern of early redemptions would cause getting any future mortgage a big problem.

   Making yourself unmortgageable is clearly not a smart move for someone aiming for a career in property.

3. Mortgage lenders only lend on properties that their valuers deem to be rentable immediately.  If the condition of the property is such that it is the valuers view a tenant wouldn’t pay to rent it, they will consider it to be unmortgageable.  So how much improvement and added value can you actually achieve when the property has to already be in a good enough condition to rent when you purchase it?
4. Who else are you competing with to buy the type of property you plan to refurb then refinance?  Answer, every other investor with the same intention as you.  This leads to multiple investors all trying to outbid each other to get a property.  Upping your offer has one result, reducing your profit and trapping more of your cash in a deal.
   
5. How quick can you complete a purchase when you have to wait for a mortgage to be approved?  Estate agents business plans work on the basis that, from offer accepted to completion, takes three months.

How attractive are you to a seller if you can only complete at the same speed as every other competing investor wanting to buy their property? Answer, not very.

You will or have been taught to seek out motivated sellers, the 10% or less of property sellers that need, not just want, to sell their property.  These people need a faster than average sale. What sets you apart from other investors? very little

This all stuff I teach on my Ninja Investor Programme – and for most people it’s a completely different approach to buying more properties, faster and making bigger profits. 

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