Momentum Investing Case Study

Is Momentum Investing Still Alive in 2017?

We’ve seen the buy to let is dead headlines and the tax changes will kill property investing discussions on property fora, and we’ve been quietly carrying on business as usual with our portfolio building. Jesse guarantees that he wouldn’t let a Fossey Taylor client buy anything that he wouldn’t buy himself, and here’s an example of a property he bought with the intention of recycling his own money using momentum investing.

The Fossey Taylor Guarantee

What does a guarantee mean in this case? It’s not hollow words written on a piece of paper. It’s an actual guarantee. It means that Jesse will literally buy anything that a Fossey Taylor client would, and in fact sometimes does.

In this case study, a client had agreed to buy the property in question but had to pull out. Jesse stepped in and took over the purchase. He did this for a few reasons. The first is that he wants to build his portfolio, though he’s always behind clients in the queue. The second is that Fossey Taylor have to maintain credibility with the estate agents that we buy houses through. If we say we’re going to buy and agree a great price, the offer is accepted based on our reputation for completing quickly and consistently. That’s our guarantee.

There’s been rumbling that the new rental stress tests will mean you can’t recycle your funds. That’s true in areas with low rental yields, but this one was in Nottingham where we enjoy very healthy yields with the prospect of long term capital gains.

Here are the numbers and the documentation to go with it. Obviously we’ve had to redact some of Jesse’s account details and the address.

The Original Property Investment Brochure

Here’s a screenshot of the brochure we sent out to our client (the one who dropped out) with the property details before purchase.

The Figures We Promised

  • Purchase: £79,000
  • Renovation: £18,000
  • Estimated Rent: £550 to £600 per month

The Property As Purchased

The property was in quite a state when it was purchased. As with any Fossey Taylor purchase, the buyer team took photos before purchase as you can see below.

When our client dropped out, Jesse stepped in.

Here’s the completion statement showing Jesse’s purchase back in June 2016:

 

With costs, Jesse had spent £82,143 and £18,000 on the renovation so his outgoings were £100,143.

The Property After Renovation

The renovation was completed in 7 weeks, and here are the photos of the home afterwards:

Property Investment After Renovation

Renting Out The Investment

He rented it out for £600 per month (at the upper end of the estimated range) and then applied for finance.

The Refinance Valuation

The valuation came back at £125,000, at the top of the anticipated valuation range. You can see the spread in valuations through this report from the back end of Rightmove:

 

Jesse went for a 70% loan to value product, and you can see he pulled out £87,725 in this completion statement from February 2017.

The lender he went with stress tests to ensure 140% of coverage at an interest rate of 5.5%. 5.5% of £87,725 is  – so the minimum rent to support this loan would have been 140% times £402.07 or £569.20 per month. With high yielding property in Nottingham renting for £600 this presents no challenge.

As you can see from his mortgage statement, his interest only mortgage costs £202.71 per month.

Cash Left In The Deal £13,073

So after putting in £100,143 and pulling out £87,070 after costs, his cash left in was £13,073.

The Figures We Attained

One metric used to measure the success of momentum investing is net return on cash left in.

So what is the net profit?

Reducing the gross rent by 20% to cover voids, lettings, maintenance and insurance, and taking away the mortgage payment Jesse is left with £277.29 every month or £3,327.48 per year.

With cash left in of £13,073 and an annual net profit, that gives:

Annual cash yield on cash left in = 25.4%

If you would like to get access to the deals before Jesse does (he really is at the back of the queue) then come along to one of our Discovery Days.