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Don’t let the tail wag the dog

23rd April 2019

We have secured a property only this morning, off market, it is at a small and digestible level.  The property is a 635 sq. ft. garden flat, in Wembley, currently arranged as a one bedroom and rented for £950pm.  This property can very easily be configured as a two bedroom within the existing fabric of the property, without the need for any major works.

This simple maneuver should enhance the rentals by 37% to £1,300 per month.  Believe it or not, the value of the property will also increase with a simple reconfiguration, without adding any square footage at all.  We have previously done this for a client.  We sourced a one bedroom duplex in Marylebone, and with about £10K of work the property had been turned into a two bedroom.  The valuation jumped from £237K to £325K, this was way back, around 7 or 8 years ago.

Applying the same principle to this deal, the price is expected to jump up to £330K, which, in proportion to the work put in, is almost too easy.

There is also scope to extend the property further back subject to planning, this will add another bedroom and is expected to increase the price even higher to £375K, possibly higher.  The closeness to the station will always ensure it is well rented.

In order to enhance rentals, this property should not be marketed in Wembley, but rather in Baker Street or Marylebone.  I am very doubtful whether the average person who works in this location knows how much they could save on their rent by being 11 minutes away instead.  The average rental for a two bedroom in that area is at around £3K.  Our flat in Wembley is only £1,300, this is a saving of £1,700 per month, equating to £20,400 per annum.

Perhaps for some this saving will be well worth the short commute.

You can currently get a mortgage priced at 1.74%, fixed for 26 months (subject to mortgage criteria), therefore you’d be paying only £310 per month.  This means you will be getting an income of £640 per month for the first couple of years.  The amount of money required to do this investment will be 25%, which comes to £71.25K.  There will also be stamp duty of £12,800.  Therefore, the full amount will be shy of £85K (not including the works and other miscellaneous costs for simplicity).  With this investment you would be expecting an income of £7,680, giving a yield of 9% per annum.

Subject to an extension at the rear, the property can be turned into a 3 bedroom, further increasing in value and attracting a rental of about £1,500.  At this point you should be able to extract £281,250, on a refinance, meaning you will have extracted almost all your money out of the deal.  This whole process can be done over a shorter time period, perhaps even as little as 6 months.  However, you would be looking at a higher interest rate, to reflect the shorter period and no redemption penalty.

These are the deals I used to see well over a decade ago.  They are coming to the surface again.  Admittedly, stamp duty has jumped up significantly, and mortgage products are not as favorable as they used to be.

None of these are deal breakers, and one must be mindful of not letting the tail wag the dog.

It’s only a 5 minute walk to Wembley Stadium station.  Trains from here bring you right into Marylebone within 11 minutes.  In my experience, the trains tend to run on clockwork timing.  There is not much deviation.  The crowd tend to be country folk, those who chose to live in the country and commute into town.

Do get in touch if you are interested in this deal.

Suresh Vagjiani

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