Auction Properties – How To Generate Quick Profits

There are thousands of auction properties sold off for greatly reduced prices each year, but how do you find the one that will allow you to see profits right from the start? The answer depends to a large extent on your budget.

Working out your budget

Your budget for the purchase of auction properties is dependent on the amount you have available to use as a deposit. So let’s say for example you have £30,000 available as a deposit and you have a ‘mortgage promise’ from a lender based on a 30% deposit. This means that in principle you can afford to spend £100,000 in total on a property.  

Now you know what your budget is you can start looking around for auction properties that have a market value of around £100,000 or a guide price of £100,000.

Making a quick profit

If you want quick profit i.e. a positive cash flow each month, then you should look for auction properties with market values of around £100,000. Because they are being sold at auction you can expect to buy such properties for between £60,000 and £70,000 depending on their condition. It makes sense to buy a good condition property at a slightly higher cost because then you can get it onto the rental market virtually straight away.

So, let’s say you pay £65,000 for an auction property worth £100,000. You pay a deposit of £30,000 because that is the amount you have available. This means you only require a buy to let mortgage for £35,000. You, however, now own a rental property worth £100,000 and you can charge the rental amount normally charged on similar priced properties (you can use a buy to let mortgage calculator to work this out). The difference between the amount you charge in terms of rent and your monthly mortgage payment (minus insurance costs) is positive cash flow, and thus money in your pocket.

The other way to produce a positive cash flow from the start is to look around for auction properties with a guide price of £100,000. You can still afford to buy these properties because you have the required deposit and a mortgage promise. Auction properties with a guide price of £100,000 might have a market value of between £140-150,000 though, and again you can rent the property out for an amount equal to that of similar value properties.

The main difference between the two examples above is the amount of money you spend purchasing the property. If you choose to spend your entire budget you obviously get a more valuable house, but in the present economic climate it isn’t always easy to rent out larger, more expensive properties. Smaller auction properties can often be bought with a fraction of your budget and they can be much easier to rent out.

Bear in mind though that the positive cash flow per month on a smaller property may not be as great, and if you decide to sell the property at a later date you probably won’t see the profit you would on a larger house.