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New build property investment in North

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
santy
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Joined: February 3rd, 2017, 2:50 pm

New build property investment in North

#408736

Postby santy » May 2nd, 2021, 11:46 am

Hi,

I am considering new build residential investment in North through one of these “specialists”. They claim to sell at 15-20% less than the actual market price.

The property will be fully managed and they gurarantee an yield of about 6-8% after all the fees. This would be more of passive investment as the property will be fully managed.

http://www.regencyinvest.co.uk/

https://www.knightknox.com/

https://www.solomoninvestmentpartners.co.uk/

Any feedback or advise on investing through one of these ?

Opinions welcome.

Thanks,
santy

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Re: New build property investment in North

#408738

Postby EssDeeAitch » May 2nd, 2021, 11:56 am

My first thought is "why would a commercial enterprise sell something knowingly 20% below market price"?

Can this statement be tested? Market research on property prices and rental values sounds like more of an imperative than normal to me.

santy
Posts: 14
Joined: February 3rd, 2017, 2:50 pm

Re: New build property investment in North

#408746

Postby santy » May 2nd, 2021, 12:20 pm

So they have provided me with the RICS desktop valuation which shows the price more than what they are selling. Also the valuation report shows the prices of similar properties/flats which justifies the valuation of the flat.

The developer/builder usually sells for below 15-20% price because the development is at least is year away from completion and they want the initial 25-30% deposit or cash to continue with building development. That’s how I see it.


EssDeeAitch wrote:My first thought is "why would a commercial enterprise sell something knowingly 20% below market price"?

Can this statement be tested? Market research on property prices and rental values sounds like more of an imperative than normal to me.

AsleepInYorkshire
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Re: New build property investment in North

#408757

Postby AsleepInYorkshire » May 2nd, 2021, 1:13 pm

santy wrote:Hi,

I am considering new build residential investment in North through one of these “specialists”. They claim to sell at 15-20% less than the actual market price.

The property will be fully managed and they gurarantee an yield of about 6-8% after all the fees. This would be more of passive investment as the property will be fully managed.

http://www.regencyinvest.co.uk/

https://www.knightknox.com/

https://www.solomoninvestmentpartners.co.uk/

Any feedback or advise on investing through one of these ?

Opinions welcome.

Thanks,
santy

Before I start I have to make a quick declaration. I am not giving you any advice you can later rely upon regardless of my knowledge, expressed or otherwise of this subject.

I am a [Freelance] Quantity Surveyor. I'm not looking for work currently. My response is purely that of helping another Fool. I am currently engaged on a building site (in the North) with some contractual conflict resolution. It's a build to rent site for over 100 units.

I'm more than capable of reviewing your RICS numbers and offering feedback as to their precision. I should be it's my job and I've been doing it for 41 years :roll:

Do you want to put the numbers up on the thread? The offers there is you feel it would help you

AiY

santy
Posts: 14
Joined: February 3rd, 2017, 2:50 pm

Re: New build property investment in North

#408762

Postby santy » May 2nd, 2021, 1:28 pm

Hi AiY,

Thanks for your reply and appreciate your reply.

What RICS numbers you are interested in, is it the valuation of the property and the actual sale price that these guys selling ?

AsleepInYorkshire wrote:
santy wrote:Hi,

I am considering new build residential investment in North through one of these “specialists”. They claim to sell at 15-20% less than the actual market price.

The property will be fully managed and they gurarantee an yield of about 6-8% after all the fees. This would be more of passive investment as the property will be fully managed.

http://www.regencyinvest.co.uk/

https://www.knightknox.com/

https://www.solomoninvestmentpartners.co.uk/

Any feedback or advise on investing through one of these ?

Opinions welcome.

Thanks,
santy

Before I start I have to make a quick declaration. I am not giving you any advice you can later rely upon regardless of my knowledge, expressed or otherwise of this subject.

I am a [Freelance] Quantity Surveyor. I'm not looking for work currently. My response is purely that of helping another Fool. I am currently engaged on a building site (in the North) with some contractual conflict resolution. It's a build to rent site for over 100 units.

I'm more than capable of reviewing your RICS numbers and offering feedback as to their precision. I should be it's my job and I've been doing it for 41 years :roll:

Do you want to put the numbers up on the thread? The offers there is you feel it would help you

AiY

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Re: New build property investment in North

#408776

Postby Mike4 » May 2nd, 2021, 3:11 pm

EssDeeAitch wrote:My first thought is "why would a commercial enterprise sell something knowingly 20% below market price"?


This was my first thought too.

My second thought was new-builds usually sell at a premium to real life market value, and that premium usually gets scrubbed straight off the day the keys are handed over and the property changes from being "brand new" to "second hand".

Where I feel the OP is going wrong perhaps is they are getting sucked in by the twin misleads in the marketing of this flat:

1) The notion of a "RICS valuation". Nobody cares what some tame RICS surveyor values it at (except naïve first time investors with ££ signs in their minds). What counts is the Land Registry sale prices of equivalent flats nearby. Or as a proxy look at the asking prices in estate agents of similar flats then knock off 5%-10% for the real life price they get sold at.

2) The return on capital of 6%-8% after fees. Again, look in estate agent windows to find out what these flats rent actually for to tenants you would want who actually pay the rent. Broadly speaking, the higher the headline yield on a tenancy the lower the 'quality' of the target tenant i.e. their financial status and likelihood of paying the rent and not wrecking the place and/or generating a stream of neighbour/council/management company complaints against you.

3) Frankly, if you think "fully managed" make this a "passive investment", I think you possibly have a rude awakening coming and the vendor is taking advantage of your naïvety. Renting property is always a "people business", cliché though it is and any attempt to make it otherwise is doomed to failure.

Ok that was three points. And a forth is don't mix up capital appreciation with yield in your mind. When investing in property for yield, look at the rental income less costs. Management fees, voids (empty periods of no rent), defaulting tenants etc etc all have been taken into account. Once you do this honestly with yourself the deal is unlikely to stack up against the borrowing costs or return you can get on the same capital in truly passive investments like shares et al. You'll probably find yourself looking for the value of the flat to rise to get this deal to make sense. But to get your hands on that return you have to sell the flat!

Just my ramblings. My own personal experience is buying anything leasehold risks walking into a world of pain to could have avoided by sticking with freehold. Look no further than the "cladding" debacle in the news for an illustration.

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Re: New build property investment in North

#408788

Postby AsleepInYorkshire » May 2nd, 2021, 4:38 pm

santy wrote:Hi AiY,

Thanks for your reply and appreciate your reply.

What RICS numbers you are interested in, is it the valuation of the property and the actual sale price that these guys selling ?

santy

I'd like to understand are they selling or renting? There are slightly different models out there. Square footage, selling price and location would be a start.

A discount of 20% is achievable in todays market dependant upon the business model being employed. And a return 0f 6-8% is also a figure that rings true to what I expect and witness. But there are some bottlenecks and if they aren't ironed out from the outset ... well then someone has to pay more than they were told. Now is the time to understand the business model in depth and check that the figures are robust. I've seen many flimsy numbers over the years.

AiY

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Re: New build property investment in North

#408841

Postby brightncheerful » May 2nd, 2021, 9:51 pm

Almost every day in my inbox is a circular from a residential investment company promoting / offering high yield returns. I always click junk.

However, I often wonder who would be daft enough to fall for the con?

In principle, it is possible to buy new build residential at a discount to market value because developers of new build are sometimes (often) under capitalised so need to forward-sell to have the money to complete the development. It is also cheaper from the developer's point of view to forward-sell ostensibly at a discount than borrow more money from the bank to finish the development because wanting to borrow more is tantamount to telling the bank the developer got its figures wrong and the flats aren't selling at the asking price or quickly enough. However, one would have to be certain that the developer would finish the building and not go bust beforehand. And since obtaining that certainty would be nigh impossible, it would be prudent to wait until the development is finished before buying a flat and forgo the discount price

Market value is a moot point. Unless other flats in the development have been sold to occupiers, as distinct from investors, and more importantly occupiers who have bought on mortgage then who is to say what the market value is? Market value is objective, not subjective. Occupiers who've bought with a mortgage are generally a better indicator of market value than cash buyers because the lender will first get a professional valuation of the property, the result of which determines how much equity the borrower would need. Bearing in mind Government schemes (some would say interference in the market) such as Help to Buy, first time buyers do not need very much money to buy so generally overpay because developers can get away with charging more. Cash buyers can pay whatever they like and their prices often distort market value.

As for investors, the general feeling is so I gather amongst flat owners is that they'd rather their neighbours weren't transient or short-term. Of course, it does depend upon the location and price range but the higher up the scale the less enamoured flat owners are of tenant occupants.

I have no experience of the promoters of such investments but judging from the websites of the three in the op, personally I wouldn't touch them with a bargepole. Property investment is only simple if you don't know what you are doing. In any event, investment is about becoming better off than you are now. The property investment market is awash with cash. If these propositions were any good and would be expected to perform (ie, increase in value) then the developments would be bought en-bloc by professional investors and not sold piecemeal to amateurs.

santy
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Re: New build property investment in North

#408846

Postby santy » May 2nd, 2021, 10:14 pm

Thanks for your feedback, Mike.

I will address your points based on how much I have known so far about this particular investment -

Yes, I do agree that new builds usually sell for a premium but it really depends on the area. So this property which I am discussing about is very close to city centre and I believe the value here will hold or even appreciate due it's proximity to town centre as well it is walking distance to train station.

1. So the RICS valuation report is based on the comparable valuation of three property/flats in the vicinity of the flat to be sold. Also, my plan is to take about 70% mortgage for this investment. So I believe, the mortgage wouldn't be anyway approved until it clears the bank's own valuation criteria.

2. The 8% yield is guaranteed and it is also confirmed that the flat would be rented to professional tenants rather than to students or others. The tenants would be credit checked and those passing certain criteria would be offered the tenancy.

3. Yes, I do agree on this point of renting not being completely passive investment even if it is fully managed. This would be my first buy to let investment (if I get through this) and probably I have to learn more about renting and managing.

You make an excellent point of going for freehold instead of leasehold because of the risks associated which could be tedious when it comes for selling.

Do you have know of anyone or any service who offer investment service in freehold properties ?

Thanks again for your reply.
Santy


Mike4 wrote:
EssDeeAitch wrote:My first thought is "why would a commercial enterprise sell something knowingly 20% below market price"?


This was my first thought too.

My second thought was new-builds usually sell at a premium to real life market value, and that premium usually gets scrubbed straight off the day the keys are handed over and the property changes from being "brand new" to "second hand".

Where I feel the OP is going wrong perhaps is they are getting sucked in by the twin misleads in the marketing of this flat:

1) The notion of a "RICS valuation". Nobody cares what some tame RICS surveyor values it at (except naïve first time investors with ££ signs in their minds). What counts is the Land Registry sale prices of equivalent flats nearby. Or as a proxy look at the asking prices in estate agents of similar flats then knock off 5%-10% for the real life price they get sold at.

2) The return on capital of 6%-8% after fees. Again, look in estate agent windows to find out what these flats rent actually for to tenants you would want who actually pay the rent. Broadly speaking, the higher the headline yield on a tenancy the lower the 'quality' of the target tenant i.e. their financial status and likelihood of paying the rent and not wrecking the place and/or generating a stream of neighbour/council/management company complaints against you.

3) Frankly, if you think "fully managed" make this a "passive investment", I think you possibly have a rude awakening coming and the vendor is taking advantage of your naïvety. Renting property is always a "people business", cliché though it is and any attempt to make it otherwise is doomed to failure.

Ok that was three points. And a forth is don't mix up capital appreciation with yield in your mind. When investing in property for yield, look at the rental income less costs. Management fees, voids (empty periods of no rent), defaulting tenants etc etc all have been taken into account. Once you do this honestly with yourself the deal is unlikely to stack up against the borrowing costs or return you can get on the same capital in truly passive investments like shares et al. You'll probably find yourself looking for the value of the flat to rise to get this deal to make sense. But to get your hands on that return you have to sell the flat!

Just my ramblings. My own personal experience is buying anything leasehold risks walking into a world of pain to could have avoided by sticking with freehold. Look no further than the "cladding" debacle in the news for an illustration.

santy
Posts: 14
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Re: New build property investment in North

#408847

Postby santy » May 2nd, 2021, 10:29 pm

AiY,

So this property investment guys are selling, renting and managing as well. Though renting and managing from them is optional. The place is Newcastle city centre. The flat that I am interested is one-bed, about 398 square foot and is priced at £148,000. There is an optional parking space which they are selling at £10,000 but if bought would also receive a 8% yield on it.

Let me know what you think of these numbers.

AsleepInYorkshire wrote:
santy wrote:Hi AiY,

Thanks for your reply and appreciate your reply.

What RICS numbers you are interested in, is it the valuation of the property and the actual sale price that these guys selling ?

santy

I'd like to understand are they selling or renting? There are slightly different models out there. Square footage, selling price and location would be a start.

A discount of 20% is achievable in todays market dependant upon the business model being employed. And a return 0f 6-8% is also a figure that rings true to what I expect and witness. But there are some bottlenecks and if they aren't ironed out from the outset ... well then someone has to pay more than they were told. Now is the time to understand the business model in depth and check that the figures are robust. I've seen many flimsy numbers over the years.

AiY

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Re: New build property investment in North

#408857

Postby Mike4 » May 2nd, 2021, 10:55 pm

[quote="santy"]

2. The 8% yield is guaranteed and it is also confirmed that the flat would be rented to professional tenants rather than to students or others. The tenants would be credit checked and those passing certain criteria would be offered the tenancy.

Really? My bullshine antenna is twitching off the scale...

I have to fess up though and say I'm a southern softie market town investor so really don't know the market in norther town centres. I do however meet a helluvalot of city centre small time LLs in my work who bought new build flats in Reading just like yours sounds to be, and I've yet to meet one who's found the lies peddled by the builder's marketing department turned out not to be lies and it has all gone swimmingly.

However, given you seem to have swallowed this bait whole I guess the questions you need to ask are:

1) Who is guaranteeing this 8% yield and what happens to your guarantee when they disappear/go bust/get wound up?
2) How is this guaranteed yield calculated, i.e. is it headline yield or after all costs are taken into account? You need all the allowable costs defined in writing.
3) How simple is it to claim (as I'm sure you will be!)
4) How often is the yield re-calculated to compare it with the 8% guarantee?
5) In the event of a non-paying tenant, who pays the legal costs of getting rid of them? And who pays the missing rent for the two years it is likely to take given the current congestion in the courts?

To me, the whole thing stinks but I'm willing to be convinced otherwise. I have a few bob wasting away in the bank for want of a good proposition.

My advice is cut your teeth on the simplest residential property investment possible. Buy a ten year old one bedroom starter home, choose a well regarded local letting agent and rent it out with them making sure they stick to the 'no smokers, no pets, no children' mantra. Watch carefully their every move and learn how it is done. Then sack them at a tenant change and do it yourself. Use OpenRent to find your tenants, buy your rent guarantee (if you feel you need it) etc. This way you avoid exposing yourself to avaricious freeholders and management companies who will rinse you for every penny their expertise allows. Quoting the sales brochures from when you bought the flat will cut no ice. They will quote back the lease full of holes you signed.

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Re: New build property investment in North

#408862

Postby AsleepInYorkshire » May 2nd, 2021, 11:20 pm

santy wrote:AiY,

So this property investment guys are selling, renting and managing as well. Though renting and managing from them is optional. The place is Newcastle city centre. The flat that I am interested is one-bed, about 398 square foot and is priced at £148,000. There is an optional parking space which they are selling at £10,000 but if bought would also receive a 8% yield on it.

Let me know what you think of these numbers.

AsleepInYorkshire wrote:
santy wrote:Hi AiY,

Thanks for your reply and appreciate your reply.

What RICS numbers you are interested in, is it the valuation of the property and the actual sale price that these guys selling ?

santy

I don't see a discount in the sale price. It's a sale price of £370/FT2. That's supposed to be a 20% discounted price. Or put another the [alleged] value of the flat is £462.50/FT2 or £185K. Two years ago I was working for a very small builder selling in one of the most expensive post codes in East Yorkshire. The homes were valued at between £1.2 and £1.8m. The average selling price was less than £300/FT2.

If you're investing £148K and want a yield of 4% that's £495/month. To achieve 6% that's £740/month. And 8% is £986/month. All those are after the letting agency's fees and management costs.

Leasehold when operated correctly is reasonable and acceptable. However, recently some firms have operated outside the original scope of leasehold and seen it as a means of additional margin instead of a key to unlock the original margin.

I'm not convinced that any of the figures or the business model itself are worthy of investment. It looks more like a means of risk transference.

I'd suggest great caution. Huge caution. If the property looses value who picks up the loss?

AiY

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Re: New build property investment in North

#408865

Postby AsleepInYorkshire » May 2nd, 2021, 11:25 pm

AsleepInYorkshire wrote:
santy wrote:AiY,

So this property investment guys are selling, renting and managing as well. Though renting and managing from them is optional. The place is Newcastle city centre. The flat that I am interested is one-bed, about 398 square foot and is priced at £148,000. There is an optional parking space which they are selling at £10,000 but if bought would also receive a 8% yield on it.

Let me know what you think of these numbers.

AsleepInYorkshire wrote:

I don't see a discount in the sale price. It's a sale price of £370/FT2. That's supposed to be a 20% discounted price. Or put another way the [alleged] value of the flat is £462.50/FT2 or £185K. Two years ago I was working for a very small builder selling in one of the most expensive post codes in East Yorkshire. The homes were valued at between £1.2 and £1.8m. The average selling price was less than £300/FT2.

If you're investing £148K and want a yield of 4% that's £495/month. To achieve 6% that's £740/month. And 8% is £986/month. All those are after the letting agency's fees and management costs.

Leasehold when operated correctly is reasonable and acceptable. However, recently some firms have operated outside the original scope of leasehold and seen it as a means of additional margin instead of a key to unlock the original margin.

I'm not convinced that any of the figures or the business model itself are worthy of investment. It looks more like a means of risk transference.

I'd suggest great caution. Huge caution. If the property looses value who picks up the loss?

AiY

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Re: New build property investment in North

#408867

Postby Mike4 » May 2nd, 2021, 11:41 pm

Ok, here is a comparable, the first result on a rightmove search for Newcastle flat.

https://www.rightmove.co.uk/properties/79931853#/

One bed city centre posh flat for £710 per month. I'd suggest they actually want £700 a month and will get maybe £675 on good day. That's £8,100 a year less all costs. A letting agent/management company is likely to want 10% of that. So that leaves £7,290. Form this you need to deduct management charges levied by the freeholder, my total guess for this is £200 a month or maybe £300 if the site has a lift (important!) Lets imagine there is a lift in such a prestigious development, so knock off another £3,600. Now your net rental is £3,690.

On a purchase price of £148k (plus frictional costs) your yield is 2.49%.

To be getting the supposed guaranteed 8%, this flat would need to be rented for £17,155 a year. £1,430 a month. I just don't see this happening. Does anyone else here?

santy
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Re: New build property investment in North

#408868

Postby santy » May 2nd, 2021, 11:41 pm

Thanks AiY and Mike.

Appreciate your reply. I am now pretty much convinced that this would be a bad investment.


AsleepInYorkshire wrote:
AsleepInYorkshire wrote:
santy wrote:AiY,

So this property investment guys are selling, renting and managing as well. Though renting and managing from them is optional. The place is Newcastle city centre. The flat that I am interested is one-bed, about 398 square foot and is priced at £148,000. There is an optional parking space which they are selling at £10,000 but if bought would also receive a 8% yield on it.

Let me know what you think of these numbers.


I don't see a discount in the sale price. It's a sale price of £370/FT2. That's supposed to be a 20% discounted price. Or put another way the [alleged] value of the flat is £462.50/FT2 or £185K. Two years ago I was working for a very small builder selling in one of the most expensive post codes in East Yorkshire. The homes were valued at between £1.2 and £1.8m. The average selling price was less than £300/FT2.

If you're investing £148K and want a yield of 4% that's £495/month. To achieve 6% that's £740/month. And 8% is £986/month. All those are after the letting agency's fees and management costs.

Leasehold when operated correctly is reasonable and acceptable. However, recently some firms have operated outside the original scope of leasehold and seen it as a means of additional margin instead of a key to unlock the original margin.

I'm not convinced that any of the figures or the business model itself are worthy of investment. It looks more like a means of risk transference.

I'd suggest great caution. Huge caution. If the property looses value who picks up the loss?

AiY

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Re: New build property investment in North

#408884

Postby EssDeeAitch » May 3rd, 2021, 5:29 am

santy wrote:Thanks AiY and Mike.

Appreciate your reply. I am now pretty much convinced that this would be a bad investment


I honestly think you have done well to ask the question and to listen to the replies. The deal seemed to good to be true and almost certainly is.

santy
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Re: New build property investment in North

#408891

Postby santy » May 3rd, 2021, 8:06 am

Thanks. Yes, if I hadn’t ask about this investment and listened to the feedback, I would have got sucked into this.

I am providing more details on how these guys are claiming to give 8% yield. Also, it is not “guaranteed” yield but “assured” rent they claim.

Apartment price = £148,000
Parking space = £10,000
Total price = £158,000

Assured annual rent (gross) = £12,640
Initial monthly assured rent 8% = £1053

Annual Anticipated service charge = £676
Annual Ground rent = £158
Annual Management fee (8% of gross rental income)*= £1011

Annual Rental income (after deductions): £10795

This actually brings the yield to 6.8%


EssDeeAitch wrote:
santy wrote:Thanks AiY and Mike.

Appreciate your reply. I am now pretty much convinced that this would be a bad investment


I honestly think you have done well to ask the question and to listen to the replies. The deal seemed to good to be true and almost certainly is.

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Re: New build property investment in North

#408893

Postby Mike4 » May 3rd, 2021, 8:41 am

santy wrote:Thanks. Yes, if I hadn’t ask about this investment and listened to the feedback, I would have got sucked into this.



Yes I too congratulate you for asking the question in the first place and understanding the answers. The avalanche of negativity you received must have been a bit of a shock!

The thing is, there may well be good deals out there from developers but personally, I've yet to see one so I'm reasonably sure they are rare if they exist at all. But the answers will help you see how to analyse the offerings of all developers you find and spot all the traps (sorry, areas of uncertainty) built into them.

Thank you for posting the figures from this particular development. You can probably see now that even that headline rent of £12,640 seems impossibly ambitious when comparable flats are on the rental market on RightMove for £8,520. There is at least one other major "gotcha" missing from those figures which makes the deal look even worse, apart from that ridiculously low monthly 'anticipated' service charge of £57 per month. Can you spot it?

Basically, when looking at offers like this you need to tune into and question weasel words like "anticipated" and "assured" and demand clarification. And also spot the (inconvenient for the sales people) factors that have been completely left out from the figures.


(Edit to fix the html.)

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Re: New build property investment in North

#408895

Postby flyer61 » May 3rd, 2021, 8:52 am

Santy,

you have been blessed with fabulous observations concerning your proposed investment. The posters above are to be congratulated for the time and effort they have put in to explaining why these purported investments are not quite what they appear.

It is a shame a copy of this thread is not put with every bit of advertising for this and other schemes.

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Re: New build property investment in North

#408903

Postby scrumpyjack » May 3rd, 2021, 9:22 am

It all really screams don't touch with a bargepole. Personally I think you would be far better advised to buy some Persimmon shares where the yield is not far short of 8% (but that is not investment advice!)


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