With the heady days of the property market back in full swing, I’m sure you’d agree that not much beats sitting there watching your property rise in value before your very eyes with little or no effort on your part. It is one of the most beneficial aspects of owning property and is the reason why many of us turn to property as a long-term asset, which we trust to support us financially. This is all very well whilst the market is in an upwards trend; however what happens when the market is not so much in our favour? If, like me, you have been in this business for a while, I'm sure you will have experienced this first hand at some point in your investing career. With the memory of the last six years still very poignant, it is wise for us to mitigate our risk as much as possible when buying our next deal.
With this is mind, I’d like to touch on the subject of increasing value from the word go, AKA, ‘forcing appreciation’. No, this does not mean twisting someone’s arm to like your property! It means re-engineering the property in some way to immediately increase its value as soon as you have bought it. Perhaps the best way for me to explain would be to illustrate my point with an example.
Let’s take a typical two bedroom terraced Victorian house in need of modernisation. By virtue of the fact that it may be stuck in a time warp or has been neglected over the years, you have the immediate opportunity to bring it up to modern standards. If it also has a double-aspect top front bedroom, which has enough space to put up a stud wall therefore splitting the room in half to create two decent sized bedrooms, you could further enhance the value of the property. If you then, in addition, went on to reconfigure the downstairs area to maximise the floor space opening up what may typically be a narrow hallway, lounge and dining area to reveal a light and airy open-plan living space, you would be making the most of the property’s potential. If you ensure that you have done your research and maths correctly to start with, you can create a decent profit from day one. This is what property developers do and what we as property investors or landlords need to think about doing also.
Let’s take a look at the figures:
Property purchased for: £50,000
Full refurbishment (inc. project management): £30,000
Costs to purchase and refinance: £3,000
Total Costs: £83,000
Refinance value: £105,000
Mortgage at 75% LTV: £78,750
Therefore money left in the deal: £4,250
(This is the original total costs figure minus the new mortgage amount)
Why is this important? Well, if you were to purchase the property ‘already done’, then you would be buying it for £105,000 with purchase costs on top of around £2,000. With a 25% deposit of £26,250 and the fees to purchase, your ‘money in’ would typically be £28,250. Instead, if you can find yourself a property which lends itself to this type of treatment and can negotiate a good purchase price, you could save yourself £24,000. Pretty good! The caveat I must make here is that whilst this is a simple idea in theory, in practice it’s not easy! We've taken years honing our craft so that we are now able to execute this type of deal on a regular basis. The advantage of this methodology is that you significantly increase your cash-on-cash return compared to the more traditional way. It also means that you hugely reduce your risk when it comes to interest rate rises or a drop in the market at any point because you have built in margin both on the equity in the property and on the cash flow side of things...very handy!
So in conclusion, if we want to take advantage of creating our own leverage, rather than just relying on property prices to increase due to market demand, we as investors need to be thinking more like developers.
All the best,
Hazel de Kloe | Why Property Works
© Why Property Works 2014 | www.whypropertyworks.co.uk