The Art of the Property Deal financially – by Aaron Barry
Return on Investment or ROI is a common term and in the main investors want the highest rates of return, but the question is do you want the highest financial return or the highest percentage return? These are 2 different things – lets demonstrate with a simple illustration.
Lets say for round numbers and ease of calculus – you buy a property for £100k and spend £20k refurbishing it for 6 months and then sell it for £150k. What is your best percentage return on investment?
Answer 1. 16.3% (£24,500) (£120k Invested £30k gross profit less SDLT 3% / Legals £1k / Fees £1.5k)
Answer 2. 74% (£18,500) (as above but £25k invested/ £95k borrowed to buy&refurb less interest costs)
Answer 1 presumes the investor uses all their own cash for the project which is the lowest % return
Answer 2 uses (high rate bridge) finance so the investor doesn’t need to use their own cash.
The basic cash profit on the project is the same i.e £30k asset value increase but in one instance you only used £25k and borrowed the rest (using expensive funding in this example) so you now have lending costs and in the other you used £120k with no lending costs.
So the question is : would you rather make 16.3% profit from £120k or make 74% profit from £25k?
Now lets say you had £150k of funds to invest in property – would you use £120k of it for the deal in this example? You would make the highest amount of cash return – £24,500. Or would you do 6 projects all exactly the same as this example and make £111,000?
By leveraging funding you have been able to make over 4 times as much money. Ever wondered how the successful people in property achieve their financial freedom and more? That’s how…
If you are a Property Sourcer you can add finance to your investment pack and :
- Dramatically increase the % ROI in the investment offer.
- Widen your audience and attract new investors with maybe a lower investment fund requirement.
- Enable your investors to increase their holdings and your sourcing fees by 4 times.
Thats a triple bottomline positive outcome.