Can you really buy property with one click?
Can you really buy a property with just one click?
By Charles Kelly
Author and creator of Money Tips Podcast
Joseph Kennedy, the father of John F Kennedy, once said that when shoeshine boys were telling him to get into the stock market, he knew it was time to get out. That’s exactly what he did just before the 1929 stock market crash, which was followed by a bear market which lasted for decades.
Sometimes I feel the same about property when everyone seems to be jumping on the bandwagon. Now, there is even a company offering investors a way to buy a buy-to-let property with the click of a mouse.
Can you really buy a property online just like ordering something on Amazon? Well, not quite.
Dot, a Californian company with offices in Manchester, effectively gives you the facility to reserve a property online, leaving completion and the legal work to be done later on.
Investors are told that they can buy one and two bedroomed properties costing up to £200,000 in a “few pain-free minutes”, with just a few clicks, and enjoy a yield of up to 6% pa. Once you have selected a property, the company sends out a computer generated image of what the property would look like when refurbished, without investors needing to visit the site themselves. I guess this would be of more benefit in America where a site visit could involve thousands of miles of travel and even a flight.
The company is currently packaging up to 40 flats in Manchester, Birmingham and Leeds, Cities which it has identified as rental growth areas.
They told the Sunday Times that they expect it “will be completely normal for an investor to acquire, renovate and hold properties without ever visiting them in person”.
After the property has been reserved and Dot has carried out a credit check and verified that the investor is earning at least £30,000 per annum, the company lends investor the money to purchase the property and pay all of the stamp duty and legal costs, plus Dot’s 3% fee – which is £6000 based on a typical £200,000.
The loan, effectively a bridging loan, is offered at 0.6% per month or 7% per annum for 12 months. Investors are required to contribute a minimum 25% deposit.
Dot also sets up a limited company in the investors name, so that tax on the profits will be paid at the corporate rate of 19% rather than personal rates of 20%, 40% or 45%.
After the sale has been legally completed, Dot will offer to refurbish the property for an agreed fee, which can take up to three months.
Before refurbishment starts, the investor takes out a second mortgage with Dot, on the same terms as the first bridge, to cover the interest accrued on the first loan plus the cost of the works.
Note that at this point, the investor has still not paid anything more than their initial 25% deposit.
When the works on the property have been completed, the investor takes out a new long-term mortgage to refinance the first two bridging loans, based on the new higher value of the property. Dot then arranges a mortgage at an annual interest rate of between 2.89% to 3.99% for up to 30 years.
This reflects the higher mortgage rates paid by limited companies. It is still a mystery to me why the mainstream lenders have not got in on the market for lending to limited companies at more competitive rates than those offered by some of the more expensive challenger banks.
Investors are free to arrange their own mortgage and find their own letting agency to manage the property.
Bear in mind that unless the property has dramatically increased in value, you will need a bigger deposit than 25% (you are unlikely to be able to raise much more that 75% and may be lucky to get 70%) to take out the previous Dot loan, fees and refurbishment costs.
Based on their current projections, investors who stay with the company would make £3358 per year from a two-bed property worth £207,000 and rented out for £1000 per month or £12,000 per year. The rent looks a little high to me. A quick search on Rightmove showed that you can rent older 2 bed flats for £575 pcm and the only luxury city centre new-build flats command an asking price near to £1000 pcm.
Based on my calculations, this means investors will only receive less than 40% of the rental income. Mortgage payments, ground rent and service charge of roughly 30% (for insurance, tax reporting services and a management fee) are deducted from the rental income.
That doesn’t sound like a 6% rental yield to me and in in reality is more like 1.76% after costs.
Dot claims it will make it easy for people to purchase a buy to let investment without doing any work or research for themselves. However, nobody is going to do all this for nothing so there are quite lumpy fees and charges involved.
On the face of it, the Dot deal looks like an innovative scheme using technology to make it easy to get into property, but there are drawbacks.
Firstly, the advertised 6% yield is a little exaggerated, even without mortgage costs, when you take into account the hefty management fees. You may argue that any property will involve some sort of management fees, but Dot are selling a buying a package.
Secondly, buying a property remotely is always risky.
Thirdly, much of your profit will be eaten up by bridging loan interest costs, which of course are adding to the profits of Dot.
Fourthly, you are almost totally reliant on this company to fulfil the refurbishment and management and you have very little control over either. If the company releases 40 flats onto the market at once, there is a risk that you may not be able to find suitable tenants.
Finally, and most crucially, the scheme relies on a new higher valuation in order for you to remortgage out of the expensive bridging loan. If your lender’s valuer does not agree with Dot’s higher valuation, or the market dips or Dot just gets it wrong, you may end up having to put in a lot more of your own cash than 25% into the deal in order to get out of the punitive 12-month bridging loan.
The scheme could either be a major flop, leaving hundreds of investors out of pocket, or become the “Uber” of property investment.
In the meantime, I’ll stick to my own research and deals.The best way to get into property is to do your homework and learn from experts. If you would like further details on how to learn about property and become a professional property investor, email firstname.lastname@example.org
Word of the Day
Land Registry is the official government body that registers most property titles in England and Wales.
Your solicitor will normally do a search to check ownership as well as registering your interest in the property once you have completed your purchase.
There are more examples and practical steps to getting rich and being happy in my book, Yes, money can buy happiness, I cover the 3 R’s of Money Management, the Money B.E.L.I.E.F System and much more. Check it out on Amazon http://bit.ly/2MoneyBook.