As the refurb on our current project got underway this week, starting with the rip out (some progress pics attached), we moved a step closer to the monetising stage. Whilst not there yet, it’s this end game where all the planning and reverse engineering began. This final phase in our refined approach is what has really injected a solid layer of confidence in our buying. The reason why we can have such peace of mind is because we start out with the end in mind – that end being to set ourselves up for maximum returns and for multiple possible exits.
This 3rd phase in our approach is all about ‘Monetising’ the investment and we see this part as having 2 main steps – Cash Exit 1 and Cash Exit 2. Once the transformation of the refurb is complete we look at cash exit 1, in other words, what can we do to quickly start making some money from the investment. Selling straight away would likely return a nice little lump sum however the timeframe would be unpredictable. In the immediate term, cash flow could (and should be coming in) and this could come from either a standard single let or via serviced accommodation. We favour the latter for a multitude of reasons.
Over the last couple of years we have built up a decent SA business serving predominantly contractors but also some tourism stays. Our growing strength in this area has proven it to be the most profitable and attractive first stage exit for any property we would choose to acquire. The house we purchased a year ago has proven to be a phenomenal cash flowing asset operating as serviced accommodation. It has performed at over 82% average occupancy since we began operating it and the profit margin is over 40% of the monthly booking revenue.
If the reference to cash exit 1 is sounding confusing or cryptic, forgive me I’ll explain the rationale. If you have read Post 1 you may remember we made the admission that Chris and I are fairly risk averse and we were stuck not buying property for 2 years, not for lack of desire I might add. So, in order to de-risk our investments and pull the trigger on something we had to force ourselves to identify multiple potential exits.
The power of looking at an investment from this perspective is that it really takes the pressure off from one single exit having to go your way. Not only, that it can provide flexibility further down the line. As an example, an investor may be looking to simply cashflow a newly acquired and refurbed property for the foreseeable future. The investor may not have to sell the property, but if they did need to (or choose to) wouldn’t it be comforting to know they have created a premium uplift in the property that is waiting to be released at a future point?
Vice versa, if the objective was to sell, wouldn’t it be nice to know you can generate an income from the property until the sale actually happens?
Interestingly I sort of did this unknowingly with my first buy to sell. About 6 years ago, I was eager to try out a flip project and bought a 1 bed flat in Edinburgh with this intention. It needed a facelift, and having improved the layout (ie opening up the kitchen/living, moving the bathroom and decorating throughout) my plan was to flip it for a quick profit. With the sale taking a little longer than hoped I was able to secure a few short lets (not serviced) through a brilliant agent. Within the space of 9 months from start to finish I was able to achieve my desired result of selling for a profit (just over the personal CGT allowance), plus with the added bonus of some rental profit to cover some of the professional costs and selling fees.
The monetising phase definitely warrants a little more attention so we will follow up with a little more on Cash Exit 1 and 2 in the next post.
CLICK HERE FOR PART 5 ON MONETISING YOUR INVESTMENT