Time to get creative
2nd April 2016
As prices are dampening towards the upper end of the scale, it’s time to get creative. We had a beautiful property in St John’s Wood, freehold and with potential to extend to the rear up to the top and even out into the front garden. The property was purchased for £2.625m, we had comparables, both next door, in fact on one side a property had been sold for £3.9m and the other the property was being developed and due to go on the market for £4.5m. The deal was looking good.
We got the necessary planning and even did an internal strip out. We received quotes and even had a builder lined up for the job. We were waiting for the development funding to come through.
However, I was getting cold feet because the property for sale next door hadn’t sold, and the market in general is getting a bit nervous towards the higher end, this is the word on the street. From a rental perspective the yield would have been poor, maybe 2% at best. This would reduce the amount we could borrow on a BTL basis, as the borrowing is based on the rental income achievable.
Properties at £500k to £1m are still flying out the door. Therefore, it was time to revisit the drawing board before we started the work.
Through some investigation and research, we discovered you can get six rooms into a property with communal facilities and rent them out legitimately without the need to get licensing for use as a HMO. I had this point checked out by the planner and the architect. It was bona fide.
What made this even more suitable for this particular property was it had been purchased as two flats and not as one house. Therefore, we could get 6 studios on the top flat and 4 on the bottom which would give a yield of approx. £250pw for each property, this means a rental income of £2,500 per week, which is £132k per annum which is an excellent yield given the location.
The construction cost would be less, as we would not need to extend the top, there would be no point as we cannot get more than 6 units in the upper unit. The bottom flat would be extended to accommodate an extra studio.
In a nut shell we would then end up with a property with lower build costs and a higher yield. The yield is important but so is the occupancy rate. Someone I know who focuses on studios commissioned a report which found that studios in London have an occupancy rate of 98.6%, the 1.4% time they are empty is apparently due to repairs and maintenance.
This seems the right direction to go in. The point here is the property does not get labelled as an HMO. This is a label which can be difficult to peel off once on there, and therefore to convert back into a house at a later date is viable if it’s done in this way.
It’s not just the solution we arrived at that’s interesting, but also the actual way these studios will be done. We have sourced a cabin style room where the bed rises with the press of a button. When property is being sold at £1,500 per sq. ft. and a bed occupies 28.125 sq. ft. the cost of this is £42,187!
The bed is only used for 8 hours, unless one is hung over, therefore the rest of the 16 hours it is a waste of space. This means 2/3rds of the time this space is not being used efficiently. A rising bed is the perfect solution. It rises on the press of a button, unlike the foldable ones where all the bedding becomes an issue when the bed is folded.
This represents an elegant solution, not just to this building but becomes a model for another couple of properties we manage on behalf of our investors. This sorts the rental yield problem out and allows a viable long term solution to holding property in Central London.
The plans have been drawn up and the pods have been sourced, we are just waiting for the development funding to come through and then we are good to go on this.
Planning is best in bite sizes, it makes it easier for the council planners to digest. Therefore, if it’s an existing house it is better to first increase the size as one house and then apply to chop it into flats. Especially as many of central London boroughs may be averse to the loss of single dwelling houses.
After this the plans of mini studios can be implemented without the need for planning. This seems straight forward for one of the properties we have in Notting hill where we aim to pursue this model. Another property in W1 may be a little more challenging, as the property is in a conservation area, and therefore the council just seem reluctant to do anything. Their default position is to say no. Unless you can make a case to the contrary the onus remains on you. Our architect is good, that’s why we use him, but in order to get him more focused it often helps to incentivise him. Where there is a will there is a way, therefore on the last block I will be doing a deal where if he gets the planning he gains more than he ordinarily would and if he doesn’t he hurts, like I would. In this way he achieves a more solid focus on the goal.
At times things don’t always go to plan, therefore you have to go back to the drawing board and adapt to the current situation as it evolves. So it is not just about buying a property but the ability to squeeze the most out of a deal.
The Real Deal
Kensington, London, W11 Purchase Price: £450k
- A spacious studio flat in a popular modern block
- Share of freehold
- Designated off street car parking space
- Low service charges
- Close to the shops and amenities of Westbourne Grove, Portobello Road and Kensington Park Road
- We expect the value of this property to be more than £550k and therefore it won’t be around for long!
Call us now to secure this deal!
!Tips of the Week
While looking to invest in property keep an eye on transport and regeneration plans, as well as any employment initiatives, as these factors can give a boost to capital growth.
You don’t need to own bricks and mortar outright to invest in property. There are a number of property funds which can give you very good returns without the hassle factor.