What do you guys do when the market's ROI is not longer profitable? The current asking prices are too high to cash flow, and deals are drying up.

What do you do in the next 1-2 years? Do I just force a deal and use it as a tax / depreciation play or do I chill and wait til prices/rent stabilzes?

You keep looking. Off market. You need deal flow. If you lack deal flow, do what it takes to get more deal flow.

I bought 2 buildings this year and have a 3rd under contract in a super insane hot market.

What do I do the next 1-2 years? Keep following the business plan: Buy run down properties, turn them around, renovate, rent, refinance pull all money out. The "BRRRR" method or whatever they call it. This strategy works in all markets that have stable economy.

I dont see this changing in the next 1-2 years. It will only get worse in the short/medium term.

5-10 years now is gonna reverse and be very different imo.

If you really like RE a deal is still a deal, so look for that 5cap in a 4cap market.. good luck

In terms of your current portfolio, you start by calculating your return on equity (adjusted to include likely selling costs). If it's lower than you want (which is likely is given the market scenario you described) then consider selling and seeking higher yield investments.

For portfolio growth, probably time to seek new markets.

I've always wanted to do this! Thanks for the detailed post - it really gives insight into the various factors that go along with it. I found it to be very helpful.

What do you all make out of this deal?

Got a friend who is an old guy, I am know his son.

He has a property on a lease and 10 years left on it.

Downstairs is a nightclub. The guy who has the club has another 2 years there. He pays 40k rent. The place also is one of the few in the area which has a license until 2am.

Upstairs there are quite a few flats. Studio, 2 bed etc. He takes 90k rent a year for upstairs. He also pays for bills. I could improve upstairs by renovating it and making more.

So 130k total income. The landlord gets 73k rent.

This guy wants 250k for it. He also claims the landlord is a really rich guy in another country and just happy to collect the rent. He says I could get another 10 years on the lease for 10k.

"property on a lease".

You mean he owns the property but leases the land from the land owner?

So you can extend the land lease another 10 years for 10K a year or 10K total?

Yes, a lease here means he has the building until the lease runs out (10 years in this case) and then it goes back to the person who owns the land (freeholder), unless he extends the lease.

I can extend it for another 10 years for like 7k total!

I assume its UK. But you have 10 years right now with only a right to extend another 10. Thats 20 years.

Thats too little time left for any bank to finance you for a normal loan.

So you most likely will have to finance it cash.

I would ask a bank first how many years left on a lease would they consider lending.
Use that information to negotiate with seller and lease holder for a longer time left.

You gotta turn this into a normal real estate deal and that starts with getting longer lease term.


You have to think about resale in mind and if you increase number of years left to a long amount, you unlock the value of building to be worth more.

65k gross income. That's about 4x gross rents. With a club contributing 3.5k a month.

Thats a high cash flow deal. If you can find a way to get a really long lease extension.... i hate the 70k a month to the leaseholder. At a 5% yield his lease is worth 1.4M while ur building worth 250k to 300k!

May be just a short term play for yield.

I'm not certain about the specifics of this deal, but if this deal is a really good one with relatively low risk you could try to find another way of financing it. Lots of people with cash would jump at the opportunity to get some interest on their money.

I'd say the reason the cash flow is so high is because the deal is very risky. You're talking about 1) a land lease deal, 2) a commercial business, 3) a specific type of commercial business -- nightclub, 4) apartments that need to be renovated. Each of those is a specialty area. I would, after decades in the business, knowing my attorneys well, feel somewhat comfortable with this deal. (I wouldn't do it though because I have no desire for a lot of complexity in my life). IMO this is an advanced deal, not for noobs or even intermediate skillsets, and *especially* if you can't afford to lose your entire investment on this and *especially especially* if you're going to leverage it. I'm also assuming that you have a legal team that you're confident can make sure you don't get burned if things go sour with the nighclub owner, a drunk ******* suing you for getting hurt, an alleged rape/attack/robbery in the parking lot, etc etc etc

All in all, there are a lot of ways this could end up being bad, and it requires knowledge of a lot of specialty areas of investing. Which isn't to say don't do it, I'm just saying if you're going to do it go in with eyes wide open.

What do we think about interest only mortgages or do we prefer repayment for buy to let?

If I can get very low interest only payments I would do it.

I don't like paying down 2% money if I had a choice.

Save up the extra cashflow and buy more prop.

I can borrow a sizeable chunk and around 3.6%. The rent I can get will be around 5%. It will be fixed for 5 years. The danger is if they put me on a variable rate after that which is quite a lot higher but I think chances are fairly low. With not missing a mortgage payment that should make me attractive to other lenders too.

I guess you owe the principle but after 25 years that should be worth much much less than now. Also property should go up. I am talking central London.

A repayment makes repayment higher every month. I want to invest that money elsewhere at a better rate.

Am I missing anything?

The principle today is not going to be worth the same as the principle 5 to 10 years from now as long as the building keeps appreciating.

Which is normally the case if rents keep going up.

Where I live, interest only payments are not possible unless its at higher rates, or 6 month only for a construction project.

If I could get int only I would do it. But don't spend that money, gotta save it and reinvest.

Thanks.

If I borrow 500k at 3.84% I have to pay back £1600 a month. I could borrow 400k and repay £1,280 a month.

I guess the question is whether I can earn more than 3.84% on the 100k and instead put that to use elsewhere. Would I want to borrow more since the money will lose value over time? Or do you think I am better off borrowing slightly less? Combined cashflow with the two properties I will own will be around £4,900 a month. I will just have 1 mortgage on 1 property. Section 24 tax here in the UK has affected things a lot. You can't deduct all of the mortgage interest, only 20%.

My figures will be the following:

Total income from these two properties will be £58,800

£12,750 will be taxed at 0%.

£37,700 will be taxed at 20% (£7,540)

£8,530 will be taxed at 40% (£3,412).

I think I can also claim £3,840 as a tax credit (20% of the interest only mortgage)

Leaving me with a tax bill of £7,112.

Adding this the mortgage payments = £26,312.

I am getting £28,800 from my current property (owned outright). So I am pretty much breaking even after tax. I am simply paying the interest only mortgage. I guess I am speculating that the property will go up in value over time and that the currency will go down with inflation. Fairly confident this happens but there is risk with everything. From these numbers, not exactly great.

Am I missing anything else?

you need to add in all the rest of the expenses.
In Canada, I manage many properties with ..

repairs and maintenance, (electrical, mechanical, plumbing)
vacancy loss
insurance costs
snow removal,
landscaping
possibly utilties, water/electricity/garbage
advertising
management fees
those are typical, for multi family properties add in
fire inspections
gutter cleaning
window cleaning
dryer vent cleaning
pest control
Cap EX (capital expenses, such as a re-roof every 25y.) this is added as a yearly reserve .. the list goes on.

I would never buy a property with 0 cash flow, after expenses and mortgage expenses, and hope that the property goes up in value. Just my 2c. Essentially your debt Coverage Ratio (DCR) is 1.0 The bank wants to see a DCR of 1.25 That way you have a cushion and +cash flow each month and should have enough leeway if there are problems that come up as they always do.

Thanks for the reply.

I am borrowing against a property I own.

Say 500k at 3.84%. Repayment is £1600 a month and I get £2400 rent a month.

I am then using that to purchase another flat for 550k and I will get around maybe £2.6k a month (great yield for the area it is).

I think taxes and the interest rate ruins it a bit.

This is in central London, UK btw.

Really hard to cash flow buying apartments in central metropolises around the world.

It's really just an appreciation play.

I wouldn't do it. But every person's investment criteria and acceptable return is different.

Pretty great yield for central London imo. Shame about the interest rate.

I heard rates might be going up a bit next year. The 3.84% would be fixed for 5 years. I am thinking of putting more down in deposit and then borrowing less. Maybe 150k down and borrow 400k.

I guess it is a speculation of property prices going up but I do wsnt to hold this for more than 20 years. Plus currency will surely be worth much less than when paying back the loan.

When you own properties in a megalopolis supply / demand are very heavy factors in the appreciation play.


I would argue the strategies used in Manhattan / Paris / Tokyo / LA / London are different than the rest of cities of the world.

Just realised I did this wrong since I did not include the tax on the mort interest.

Income: ~£56,000

Mort int': £19,200

Taxable profit: £75,200

Tax payable: £12,571 to £50,270 @ 20%

£50,271 to £150,000 at 40%

= £17,511

tax relief, 20% of mort interest back (£3,840)

=£13,671

So I would be laying out £33,000 with the tax and mort interest and barely making this back in rent.

Yuck!



Sorry it took me so long for the penny to drop. I am new to this but now know how to go through the numbers. I think I was blinded by the decent yield that this property offered. As someone pointed out earlier, the interest rate kills the deal.

Changes to section 24 tax (where you now have to pay tax on 80% of the mort interest) also makes things much harder. Maybe a government plot to get rid of small land lords and get property into the hands of the corporations...who probably bankroll them.

Have to look into the above calculation re mort tax actually.