A common discussion with BTL investors and smaller scale developers is how fast they can get their cash back out of a project. With BTL, the idea is to buy at a good (bargain) price, add value and then ask a lender to provide a loan which will ideally - in their opinion - leave none of the original cash in the deal. ‘No Money Left In’ is the mantra for the buy and hold investor who wants to ‘grow fast’.
Developers have less to recycle using debt refinancing. Their plan A is to sell the completed project and pay off the construction financing. Only when a developer is struggling to sell the finished project will they contemplate refinancing as a plan B. When plan B becomes the focus, the developer will look more like a buy and hold investor.
The simple version for both strategies is to get in to a deal at a good price, limit the cash invested and then pull out all of the original capital. The original capital is the investor’s working capital. If most or all of the cash gets left behind, the investor is a bit ‘dead in the water’. The business will grind to a halt as there might be none or little available cash to use for the next deal.
Looking a bit deeper, the future value of the finished property is not something the investors can control. Market forces determine the end value. Finish a project at the wrong time in a property cycle and you will get a ‘down valuation’ compared to what had been expected as some in London have recently experienced. This risk increases with the project’s length. The risk is increased by the use of deferred interest loan products where interest is compounding into a larger problem in an uncertain future.