There is an interesting deal we are looking at. It consists of retail and uppers; the retail is empty. In this environment, if you’re buying a retail premises occupied, you should carefully scrutinize the accounts and business very carefully.
This property consists of three flats above the premises, all of which are occupied and bringing in £50K of rent; which comes to about 4.5% yield based on the asking price.
This is a very decent yield given the strength of this property’s location, which is in the midst of four stations, all about 10 mins walk and a 5 min bus ride away.
The location is in a part of London which is still likely to experience growth in the coming years, due to its attractiveness to first time buyers.
The 4.5% yield will be enhanced once the ground floor commercial is occupied. Our plan for the ground floor would be to turn it into flats. This would enhance the rental to £85K, giving a very healthy yield of 6.9%, plus an element of commercial rent as well. This includes allowing £100K for construction.
We believe the rent being achieved is under market value, and there is room for enhancement.
The above would be the first stage. The second stage would be to apply for planning to push upwards and to the rear.
There is a generous back garden to the rear of the building, 1,500 sq. ft. Gardens may look nice but they don’t bring in income. Therefore, there is a strong possibility to extend outwards and upwards on this property.
This will be phase 2 of the project. The first part has certainty to it as it falls under permitted development. Another interesting point is that the conversion cost under permitted development will only attract 5% in VAT. This is something which gets overlooked in the midst of a project. It’s not often you get discounts in taxation, so every available saving should be utilised. In phase 2, if your eligibility criteria is met you will qualify for zero rated VAT.
You should be aware of these points. Do not expect your architect or builder to point this out to you.
From a cash flow perspective, there will be a stream of income from day one, and a healthy one at that. This deal is in a solid location which is the first mantra of property investment.
So, the upside potential for this property over a 5 year hold is massive and the down side is very well protected. The investment required would be about £600K. It could possibly be done for less, but this is a safe number.
If you are interested in this deal, do get in touch.
