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Going Solo…

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

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