4 – PROPERTY TRADER (ENHANCE)

I Vital Statistics

Introduction

The market has changed since mortgage lenders introduced the 6 month rule.  This means that any property that is being sold must have been owned for at least 6 months if the purchaser wants to get a mortgage on it.  It can be safe to say that the majority of refurbished properties are sold to the end user (i.e. they will live in it!) and the majority of these will require a mortgage.

Therefore we have to take the 6 month rule very seriously.  Otherwise you will end up holding a property far longer than you expected.

There are three strategies you can adopt to make money in this business all with increasing amount of enhancement:

1. Refurbishment – this is sometimes called “a lick of paint”.  All you do is a cosmetic refurbishment, smarten up the kitchen, change bathroom, paint walls, new floors and a nice shiny paint on the front door.  You can do this very quickly and cheaply and add many times your investment in refurbishment as profit.
2. Conversion – this is where you convert part or all of the property such as a loft conversion or split in to flats to realise a profit due to the conversion you apply.
3. Extension – this is where you add floor space area to a property realising your profit due to the enhanced value you give the property by extending it.

All exciting stuff!  Those of you who like to see a finished product will love this game.  There will be plenty of ups and downs but for those who persevere and know what they are doing can make some serious money.

1. The Formula
2. determine which enhancement method you want to follow. Either Refurbishment, Conversion or Extension.
3. Work out the buy price, enhancement cost and sell price
4. Enhance
5. Sell

So the first part is working out what type of enhancement you want to do and then the rest is just following through.  So I am going to help you decide which one is right for you then tell you how you go about each method to make sure you make some cash.

2. Refurbishment, Conversion or Extension?

Each method is attractive.  However they have increasing levels of enhancement which result in greater levels of risk which are compensated by increasing levels of profit!

Refurbishment

Now the attractive thing about this enhancement is no planning permission is required.  You can buy, refurbish and then sell.  If you have an eye for interior design then you can make decent profits just like Sarah Beeny does.

Refurbishment can involve:

1.Painting & Decorating

2.Plumbing

1. Installation of new bathrooms and kitchens
2. Flooring
3. Basic Electrics
4. Installation of gas central heating
5. Installation of new windows
6. Basic exterior work

Now these can all be carried out by various subcontractors or you can instruct a building company to do the whole project.

Now if you are new to the enhancement concept then I suggest you choose this method.  I would also try and stick to finding properties that only require 1, 2, 3, 4 & 5 above needing doing to it.  It is best you break yourself in gently.

If you have done a few refurbs before and want to get top dollar for your property then 6, 7 & 8 can be worthwhile.

Being good at enhancement is all about project managing.  If you feel you have this skill then enhancing properties could be the way forward for you.  Paperwork is minimal and you can just crack on with the project as soon as you get the keys.

It is the lowest risk way of adding value to a property and is the usual way property developers start off.  So if you have a sneaky desire to be like Donald Trump and build tall skyscrapers then here is a great place to start.

Conversion

Conversion is the natural step after you have mastered refurbishment.  This involves:

1. Knocking down and erecting walls
2. Creating bathrooms and kitchens out of empty rooms and spaces
3. Seeking planning permission from the council
4. Dealing with the land registry with creating titles

Now you might be able to see why most people do not do conversions.  It is not a simple case of splashing a bit of paint.  You need to have not only project managing skills but:

1. good paperwork skills – there will be a lot of paperwork being shuffled between different departments such as architects, solicitors, land registry etc. to get planning permission. You will have to be organised.  So if your mantra has always been “I hate paperwork” then this enhancement might not be for you.
2. Good negotiating and people skills – you will have not only to deal with subcontractors such as builders and plumbers etc. you will have to deal with white collar professionals such as architects, council officers, fire officers etc. Persuasion rather than instruction works with these type of people and you need to use the power of influence if you want to get what you want.
3. Persistence – if you thought refurbishment projects were fraught with problems then doing conversions can be worse. There is a procedure that needs to be followed and each section needs sign off before the next stage can begin.  Also when you are trying to create rather than replace a whole load of other problems emerge.  So a fair degree of persistence is required to see the project through.  There are plenty of abandoned projects for sale auction I hope you know.

So if you have got a few refurbs under your belt and you are looking for that bigger return then conversions can deliver the goods.

Extensions

Extensions require all of the above plus:

1. The building of foundations
2. The building of walls
3. Construction of roofs

This is serious stuff.  So again you would need all of the above skills plus the ability to manage another contractor or contractors to do all of the above work.  The projects usually take longer and cost more but the rewards are naturally higher if you get it right.

So which one?

So which one floats your boat?  Refurbishment, Conversion or Extension?  I will leave it up to you.  I think it is a progressive thing.  That is to say you start off with refurbishment and then progress to conversion and then on to extension.  The next stage beyond extension is property development i.e. building flats and houses but that is another book!

3. Refurbishment – How To Make Money From It

The enhancement game is all margin led.  You have to know what you want to make as a profit before you start.

The best way to express what you want is as a percentage of the eventual selling price.  This eliminates the obvious mistake many novice refurbishers make by chasing absolute figures.  You see non-business people use Mummy and Daddy’s money developing a £1m property to make £10,000.  For those who do not know that is chasing a 1% return.  The slightest problem will bring the project out of budget and in to loss.  So having your margin being set as a percentage is a rule set in stone.  Please do not deviate from this.

It is also best based on the selling price as this is market led.  It is the selling price that you should be focused on as this is the only figure really out of your control.  If you invest time in determining what the selling price is then it should reduce the margin of error.

The margin I reckon you should aim for is 25% of the selling price.  So if a property has an estimated selling price of £100,000 then you should expect to make £25,000 profit before tax but after all direct expenses.

It is set at 25% to allow for:

1. You estimating the selling price to be wrong
2. A fall in the market during refurbishment
3. You over spending on the project

So if you were 5% out on the estimated selling price, there was a 5% fall in the property market during refurbishment and you over spent on the refurbishment by 5% based on the estimated selling price you would still make:

24% - 5% - 5% - 5% = 10%

So if you estimated the selling price to be £100,000 you would still make:

10% x £100,000 = £10,000.

So considering the only figure out of your control is the selling price lets look at all the other costs.

Now I am going to create something you are going to love which will take all the hard work out for you.  It is called a cheat sheet.  You just fill in the blanks.  Once you have filled in the blanks you will derive the price that starts the whole thing off:

The buy price.

If you buy right then even if you make a pigs ear of the refurbishment you can still make money.  I think the reason why I have been so successful in property is that I am so damn disciplined when I buy.

I do not like to buy at fair value or even cheap I like to buy dirt cheap.  This does not make it likely that I will make money but it ensures it.  That is why I hardly buy anything and I believe more than 99% of properties are simply not worth buying.

So here is my cheat sheet to fill in.  I have filled it in as an example:

Looking at the figures the following should be noted:

1. A buy price of anything less than £54,500 is a good buy price
2. You would need to achieve at least £71,100 to not lose any money

Now you can get this cheat sheet for free by visiting my website www.ahuja.co.uk and joining my newsletter which will perform the calculations automatically.

Now be prudent with all your estimates.  This will mean you will see opportunities go by but it is better to let 10 opportunities go by than buy a dud.  It is a patience game.  That deal will come along and remember there are millions of properties for sale quite literally so take your time and hold out for the property that can give you an estimated 25% return.

You only ever become involved in a property deal once you buy.  Like I said before if you buy right EVERYTHING is taken care of.

4. Conversion – How To Make Money From it 

Conversions can be:

Loft Conversions

Garage to room conversions

House to a number of flats conversions

They simply use the current space of the property in a more commercially better way.

This game is all about seeing the value of space in a given location.  You need to calculate the value per sqft and see if by enhancing the current space you can achieve the value per sqft and make a profit.

So think of a flat in Oxford Circus with a loft above it.  How valueable do you think that space is?  I hope you can appreciate if you were able to convert that loft space in to another room or even another flat you would certainly add some value.  The cost to do it will be your only cost as you already own the space.  So it is a simple calculation of:

Value created by conversion – cost of conversion = profit

Now the profit has to be worthwhile.  So the question is:

To convert or not convert?

This depends on where the property is located.  I have come up with a neat way of determining whether a property is worth coverting or not.  You have to determine whether the property sits on desired land or not.

The way you work out if the property is on desired land or not is to work out the market value relative to the rebuild cost.  So you would perform the cslculation:

Current Market Value divided by Rebuild Cost

So you would use establish what current market value is by visiting land registry sites such as houseprices.co.uk and then the rebuild cost is approximately £100 per sqft.  Then if the ratio is greater than 1 then the property sits on desired land and is worth potentially converting.

So for example:

There is a four bed property worth £300,000 for sale.  It has a large loft area totalling 1,000 sqft and the property living space is 1,500 sqft.  You would then do the following calculation:

£300,000 divided by (1,500 sqft x £100) = £300,000/£150,000 = 2

So on the face of it it appears that it is worth developing the loft.  For every £1 spent you will get back £2.

The higher the number the more reason to convert.  So take my Oxford Circus flat example.  Lets say the flat is worth £1m and the flat is 1,000 sqft and has a loft space of 1,000sqft then the ratio is:

£1m divided by (£100 x 1,000) = 10

So every £1 spent you can expect to get £10 back.  That is a very nice profit!

Now I have assumed a £100 per sqft rebuild cost.  It will be cheaper if you are doing a loft conversion or garage conversion but more expensive if you are doing  a split of house in to flats conversion.  £100 is just a ball park figure to firstly determine whether it is worth converting or not.

I would set a threshold of 2.  This will cover you quite safely.  So if Market value divided by rebuild cost is greater than 2 then it is worth buying in this area to seek developments.

As a rule of thumb the nicer desired areas to live are worth developing and the not so nice areas are not.  It is kind of obvious that that would be the case however I do see some strange conversions going on where I invest.  I invest primarily in cheap undesired areas so the choice whether to develop is an easy one as the ratios are always well under 1.  I see some terraced properties being converted in to 2 x 1 bed flats where the only real gain is a bit of extra rent which will takes ages to pay back the cost of conversion.

So once you have isolated the areas which meet this greater than 2 threshold it is time to get in to the specifics.

Return Required

You will need to set a target return to aim for.  The target return to go for is a 30% profit margin on the selling price.  I have set it higher than the refurbishment threshold as there are more things that can go wrong with a conversion.  You may not get the planning you require or the conversion may be restricted.  This will affect your selling price.  So in the worst case scenario that planning is refused you can just refurbish and aim to at least get your money back.

I have created a cheat sheet for you and you can just fill in the blanks.  This will give you the maximum price you should pay to get the target return.

Again do not forget to be prudent!  It is better to under estimate the selling price and over estimate the costs.  This way you will ensure your chances of success.

This cheat sheet is available for free by joining my newsletter at www.ahuja.co.uk

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