23rd September 2017
We have started work today on a small property in NW8.
The property was sourced originally for £233k, the investor was a no nonsense type buyer who lived abroad. The property is an ex council flat on the ground floor of an estate, a one bedroom flat built in the 70’s. It was in poor condition, and was crying out for conversion, as for a one bedroom apartment you do not need a large kitchen. This was built when people used to cook at home daily, three times a day, with tea in between as well. Times and trends have changed, and having a kitchen the size of a bedroom does not suit the current needs of tenants. Neither is it very profitable. Therefore, the obvious move to make on this property was to convert the kitchen into a bedroom, and have the kitchen as part of the living room. Perhaps this is the easiest way to make money from a property, almost instantly. We have done this numerous times. It increases the rental amounts and amazingly the capital value as well, despite the fact there has been no increase in the square footage. The property moves into another league, from a one bedroom to a two bedroom. We have had properties increase by £80k just on the basis of this simple conversion. The entry price on one deal was £250k, the cost of conversion was just over £10k and shortly after we had an offer for £330k.
The investor never saw the property, he let us see it for him. Before purchasing, he wanted to know the works costs upfront. We had it estimated at £10,000. Unexpectedly, he wrote the cheque out for the exchange amount and the work costs there and then for the deal to be done. The total investment required in cash, including the works and all fees was £69k, the rest was raised by way of a mortgage. The mortgage was only £510pm, against a rental of £1,600. This means there was a positive cash flow of £1,000 per month. The same tenants stayed there for five years. This is good, as this means no void periods, and normally no major repairs.
The builder told me he couldn’t do the conversion for £10k. I responded by telling him that by hook or crook he needed to get the job done. It needed to be rentable as a two bedroom, that was the criteria.
Somehow or another the works were completed within the budget and the property was rented for £1,600pm. The cash used to purchase the property was only £69k.
Five years later, the owner needed some cash, so a quick sale was required. The property was naturally in rather a bad state after 5 years of council tenants occupying it and it did not present very well on resale; therefore, the only way it could be sold on was to an investor. Another of our investors purchased this property for the sum of £375k. Work has even started prior to the completion, as both the seller and the buyer are ‘in house’. We took several quotes for this rather small project, but in the end the investor opted for a clean up and fresh paint rather than doing anything of substance. The cost of works will come to approximately £3,500. The property, in my opinion, will be worth £450k post works, in a few months.
In summary, the original investor put £70k into the deal in February 2012. He made roughly £1k per month, which is a 17% gross return on his money. After five and a half years he has made £142k, which is a 200% return on his money after 5.5 years. This equates to 36% per annum.
We are confident the current investor will experience similar returns in time.