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.
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Agony Agent is here to help!
Before the really cold months set in, here are some of my top tips for winter proofing your property:
1. Don't ignore the small print
Is the tenant aware of what is required as agreed in the tenancy agreement? Most tenancy agreements require tenants to take such reasonable actions expected of a householder, particularly between the months of October to February, by heating the premises to prevent damage by frost or freezing.
2. Decide on responsibilities
If the property will be vacant for any period of time, over Christmas for example, the tenant should ensure that the last person to leave the property for the unoccupied duration carries out simple tasks like clearing out fridges/freezers and turning off electric devices at the wall.
3. Heating is key
While the most effective way of heating a home will vary from property to property, tenants planning extended periods away should always remember to leave heating on at a low level, for example 12c, which avoid the possibility of freezing to the plumbing/heating systems, prevent condensation and also which should be enough to prevent mildew and mould growth. The most effective way to achieve this is not to have the heating on for one hour in the mornings and evenings, but to leave it on constantly, with the boiler thermostat set to "low" or "min" and the room thermostats set to 12c. Radiator valves should be left fully open, and any thermostatic radiator valves turned up to "max". If the tenant is out daily, they should ensure that the heating is put on for a period of time in the evening, the easiest thing to do is to set the timer. This will ensure pipes do not freeze and avoids damp in the property.
4. Water systems and pipes
Leaks must be reported to you as soon as possible, and the leak lagged until it can be dealt with. Make sure that the tenant is aware of the location of stop taps and that they are easy to shut-off in case of an emergency. Advise them to check on waste pipes and heating boiler overflow pipes to ensure they are not getting iced up.
5. Get to know the neighbours
If your tenant knows their neighbours, they may wish to ask them to keep emergency contact details and also your contact details or your agent’s contact details. This is particularly vital in flats and apartments where an issue could rapidly cause problems for other homes in the block.
Look out for more tips in my next article. In the meanwhile, if you need my help, please get in touch!
