This week I was approached by a landlord local to the area. He had made his fortune by purchasing property locally. He would buy a one bedroom, put a plaster board up and then rent it as a two bedroom, and he would replicate this with studios, three bedrooms etc.
It’s a good formula whilst the council is renting from you and ther trong over supply of DSS tenants and little supply of properties.
His model was simply to purchase say a one bedroom at £240,000 then spend a few hundred pounds putting a plaster board in, turning it into a two bedroom.
And then have it rented to the council for £500-£550 per week and then refinance at £290-£300,000. Giving an instant equity of £50,000 and an average rent role of £27,000. This gives a 12% yield on a one bedroom property.
He heard through the grapevine that we were purchasing aggres-sively and came to see me to offload. I have seen the properties previ-ously and knew of them. The figures are correct, and I am sure they will value up. Because we know the blocks it was apparent the sq footage did not match up to the bedroom size.
We do not want to be on the receiving end on one of these types of
deals. Rather we would like to do these types of deals with our clients.
On another subject, a client of ours initially started the search with
us for a property and we introduced him to a few, but then he decided to go solo and do this himself, eventually coming back for us for rental. He liked the formula we have been promoting of instant cash flow underpinned by strong location.
What he ended up purchasing was a one bedroom property beautifully done up on an ex-council estate with the works: granite work tops, plasma etc. It had formally been a two bedroom and was being sold by an end user hence it was priced as a two bedroom at £290,000. Great……….if you’re an end user, meaning you want to live in there. Not so good if you wanted a cash flow producing investment. As pretty as it is, it simply does not make sense to purchase as an investment. You are purchasing one bedroom for a two bedroom price. No one was going to pay £450pw rent for a one bedroom in this location. He would get the going rent of £350pw to £370pw. To redo this property will cost more than a dilapidated property because it involves ripping the whole flat out.
It did not make sense to redo this property as a two bedroom, as there has been too much money put in to make it into a pretty 1 bed-room.
The effect of this purchase is not felt in only renting the property but also in its resell. The market for resale will be restricted to an end user and investors will be put off .
The biggest beneficiary of this deal is the council tenant who has occupied the property. I bet they did not dream they could live on ben-efit and live in a flat like this.
It does not make sense to be penny wise and pound foolish. The same can be said when choosing a solicitor. Most people go for the cheapest. They forget they are paying for a service and you get what you pay for. It is better to spend a few hundred more and get a professional dealing with your case, you will only realise this when something goes wrong and needs tweaking. A factory production type law firm will get stuck or give you the wrong advice. Indians generally are happy to pay for goods but generally don’t see the value in paying for professionalism and advice.
Suresh Vagjiani
MD Sow & Reap
