Beginner's Corner - How to 'stack' property deals

Knowing your numbers is property 101 so if you want to succeed stacking needs to become second nature. In the third outing of our Beginner’s Corner Alex Daley explains more… (PLUS: Scroll down to download your free stacking sheet!)

We’ve explored what strategy to choose, we’ve explored where you might want to set up camp, and today, we discuss deal stacking. Ensuring your deal stacks is make or break when it comes to your property success. And it’s the area that, unfortunately, has meant lots of property investors have been stung recently.

There are countless examples of investors who bought properties over the last few years, took advantage of the very cheap debt, fixing mortgages at 1,2%, which made their numbers look much more attractive than in reality, they would continue to look. Investors were seeing a few hundred pounds in profit each month and enjoying the capital appreciation.

Unfortunately, when they came around to refinance or perhaps are yet to do that, when they do, they suddenly see rates that are often well over double what they’d previously been on. Suddenly, many BTLs are barely paying for themselves, let alone when major expenses come around.

We don’t want to paint a really bleak picture, but it’s important to realise the truth, lots of people’s BTLs make very, very little money. Gone are the days where you could pick up any property and make a really solid return. What the last six months have shown, is finding the right deals is a skill. Being honest about figures and potential future figures is crucial. And hiding from inevitable costs is a recipe for disaster.

Luckily, at OTH Magazine, we’ve got you covered.

TOP OF THE STACK

Let’s start from the top, what is deal stacking?

“Deal stacking is an integral part of determining whether a deal is worth pursuing or not. It involves using all known financial data i.e. works costs, rental amounts, refinance after works, value uplift etc. Get the numbers right in order to get the deal right. Never manipulate the numbers to try to make the deal work,” explains Wes De Leur, the Buy To Let Property Group founder and long-term investor.

So where do we start?

Well first, let’s gather the information that won’t vary massively so we have that to hand to build our deal stacking sheet.

As often is the way, this means a call to a broker, to get an idea of what rates you’re going to have access to. There’s no point in Googling to find out what the lowest BTL rate is, when you may not qualify. You want to get a feel for interest rates and any fees, which could be valuation fees, product fees, their fees etc.

Rental figures

The make or break elements to seeing if deals stack is getting good

info on what potential properties will rent for. This can’t be guesswork, if you’re £100 out, that’s £100 less profit, and could be the difference between buy or no buy.

What we look at here are called ‘comparables’, properties that are similar enough to the one you’re looking at buying as to give us a good idea of what the rental market is like. The best place to start is Rightmove, rent section, within 1/4 mile of your prospective investment’s postcode, inputting the key details - terrace, semi, detached or if it’s a flat, number of bedrooms and click ‘include let agreed’. If nothing really shows up, you can expand that radius to 1/2 mile. But you’ll need to rely on your knowledge of the area to know whether certain areas within the search are too different to be direct comparables. There are plenty of places in cities where a couple of streets will make a world of difference between rental income and desirability.

Once you have your list of properties (pay more attention to ‘let agreed’ as it gives a better indication of what’s being let not just offered) look through each one, and get a feel for the quality of finish and what that means rent-wise. You’re looking to be quite strict with yourself here, if someone has a much higher spec than you’re going to do, is it really worth the same? Soon, you’ll build a picture of what your property will likely be worth on the rental market. You can also phone a letting agent to sanity-check you.

Stress testing

This is key and will be the moment you see whether your potential investment can stack up as a good deal in tough times, as well as good. It’s where many investors got complacent during the 2% interest days. Previously, the general standard was to stress test at 5.5-6% and see if the deal still makes sense. If these last six months have taught us anything, it’s that it’s better to be more conservative with these calculations than sorry. Right now, we’d suggest you stress test deals to at least 8%. Now, that would have seemed bonkers this time last year. If you can make your deal work at 8%, the likely case is, you’re looking at the right type of property.

On your spreadsheet, it’s good to have two profit calculations, one at the expected interest rate and the second at the stress-tested rate - to see if you’ll you survive if the proverbial hits the fan and rates go up. Lendlord (free version) has a really neat deal analyser which allows you to track future performance, we encourage using that, alongside your own spreadsheet to get a full picture.

Counting the Costs

COSTS YOU MAY NOT HAVE CONSIDERED:

• Insurance

• EICR (this can be over £1,000 if there’s remedial work that needs doing).

• Annual gas certificate

• Holding costs until you get it rented out (council tax, utilities)

• Independent legal advice

COSTS THAT ARE OFTEN UNDERESTIMATED

• Maintenance - read our article on predicting long-term maintenance costs, much better to manage your expectations now than get a few years down the line and feel like the costs have come out of nowhere. Read this to get a real feel of the true costs.

• Renovation costs - whatever you think it’ll cost, it won’t! And it’ll take longer which adds to those holding costs. Renovation master Martin Rapley gave us a masterclass in this here.

FREE DOWNLOAD: STACKING SHEET

Building a spreadsheet can take hours, but we’ve built one that will get you started, copy it, edit it, make it your own and populate it with a bunch of deals. You’ll quite quickly see which deals work already and which you need to negotiate a big sum off the price. And that’s what this tool is all about, giving you a quick and easy way to see at what price, each property is worthwhile to you.

DOWNLOAD THE STACKING SHEET HERE: https://bit.ly/3zL9q9Q

Happy stacking!