The ABC Plan

Hi Arsh 
I like reading your column monthly and I like the way you put it bluntly and to the point. I would like to ask, when you look at a property, do you ever look at it from a single point of view? 

Mr U – Peterborough 

Thank you for getting in touch Mr U, and thank you also for asking a fantastic question. Let me start off by saying that it is a topic that I am very passionate about and I hope the answer I provide will show why. As we all know, property can be a risky business if we do not treat it with its due care and attention. However in the other breathe, property can also be a very secure business if you calculate everything to the ‘n’th degree. Let me elaborate on that.  

Whenever I look at a property, I will always look at it in a couple of ways:  

• What is it now – what could it generate as it is? 
• What could it become – what is its true potential and what would it generate?  

As strange as it sounds, whenever I look at a property, not only am I looking at the property, but I am also knocking the walls all around the property. This allows me to check which walls are stud portioned walls which can be taken out easily and those that are load bearing walls. What I am really doing is mentally recreating the floor plan and trying to maximise it to its full potential.   

In the earlier years 2008 etc, I would be looking to turn single let properties into HMOs, therefore I would be looking to maximise the space to create as many rooms as possible. In order to do this, I would be looking at the:  

• Floor space 
• Flow of the property 
• Communal facilities 
• Current facilities and their condition  
• Potential to extend – either to the rear or in the roof  
• The surrounding area of the property, the local amenities and transport links  

All the above, would have a major impact as to whether I should purchase the property, or the offer I would put forward.  

When looking at every property, I would consider the property as : 

•  A single let 
• A HMO 
• Potential small development of small contained flats 

I would do all the financial forecast of each of the scenarios above, to calculate, which would: 

• Make cash flow 
• Benefit better for refinance valuations, preferably on a commercial valuation  
• Potentials for capital growth  

So, not only am I looking at what property strategy I would employ but also the benefits of each and the longevity of the property along with the strategy. 

From the early 2000’s up until approximately 2015, the strategy was predominantly HMOs as this would naturally provide the maximum number of units along with a fantastic cash flow. However, I made the decision to no longer acquire HMOs and moved more into buying blocks of apartments or developing single let properties into small blocks of apartments.  

In 2015, I came to the conclusion that the HMO market was becoming a tough market and was near enough at point of saturation. Although I operate a high 98% occupancy rate, I was finding tenant enquiries were slowing down. However, this was not the real reason for switching strategies. Having spoken to a number of chartered surveyors in the area, I was informed that the majority of them were being instructed by lenders to only value on Bricks & Mortar values regardless of the structure or fabric of the building. 

Anyone that knows me will also know that my HMOs are not the normal type of HMO. All my HMOs : 

•  Do not have any gas in the property  
• Every room has their electricity supply, with the property being serviced by a 3 Phase electricity supply 
• Have their own ensuite and mini kitchenette  
• Do not have a communal lounge  

As a result of the above, it would be pretty hard if not impossible to turn my HMO back into a single let; therefore I DEMANDED commercial valuations on the commercial product I had created. I asked the surveyor : 

“Which other property on this street has 6 bathrooms, 6 kitchens and 6 electricity meters. If you can find something comparable, I would be happy for you to compare values, however if not, I believe the property should be valued on its own merits upon its income.” 

It was a conversation I have had many times over the years and have won every time.  

However, moving forward, I believe that acquiring blocks of apartments is a much easier and safer strategy, and with Section 24 starting to show its head, I have found loads of landlords nationwide who are now selling them in their drones.  

Just to clarify, a block of apartments could be: 

• A purpose built block of apartments or 
• A house converted into self-contained flats  

I tend to find that the houses converted are available everywhere and the reason why I like them is because the landlord has usually kept them on one title. This instantly allows me to add value, without actually doing ay work. 

Providing the flats are of an adequate size, I could title split the flats and then have the a number of options available to me such as: 

• Sell off the flats individually 
• Refinance against each title  

I have been actively acquiring these types of properties and to date, have not had a single issue with: 

• Finance for acquiring or  
• Finance for refinancing  

As a deal sourcer myself, I also find that this style of property is very easy to sell to other investors as they can be very simply a let and forget style strategy. In comparison, HMOs are still deemed very hands on. 

I have recently just completed a small development of 6 flats in Wolverhampton.  I acquired the property as a very tired block of 4 flats for £180,000. See below a basic breakdown of costs, which will give you an indication of what can be achieved with the right vision.  

• Purchase Price : £180,000 
• Legals To Acquire : £1,500 
• Stamp Duty : £6,500 
• Finance Arrangement = £3,000 
• Finance Costs Over 12 Months = £7,200 
• Architect Fee & Planning Fees = £8,000 
• Build Cost (Materials & Labour) = £135,000 
• Total Acquisition & Build Cost = £341,200 
• Gross Development Value = £480,000 

I now have the option of selling the flats individually or refinancing and pulling all of my initial money out.  

Here are the figures below : 

• Acquisition & Build Cost = £341,200 
• Title Split = £6,000 
• Selling Fees = £4,800 
• Selling Legals = £5,000 

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Total Costs = £357,000 

Based on the Gross Development Value of £480,000 I would net approx. £123,000 for a small project which took 9 months. As we speak, we current have Wolverhampton Wanderers who are interested in acquiring the property at full value for their club players to use.  

As a refinance and let basis, this property would generate: 

• Gross Development Value = £480,000 
• Rental Income = 6 x £500 pcm = £3,000 pcm = £36,000 per annum 
• Lending @ 75% Loan To Value = £360,000 (Please note, that I would get all of my money back out) 
• Mortgage payment @ 5% = £1,500 pcm 
• Insurance = £150 pcm  
• Letting Fees = £0 (As I own a letting agency) 
• Cash flow based on figures above = £1,350 pcm = £16,200 per annum  

As you can see from above, it is a difficult decision as they are both win-win scenarios. Do I take the lump sum cash now and do another or do I refinance, get all my money out and generate a healthy cash flow, knowing that this property does not owe me anything.  

What would you do? 

I come across these properties all the time.  You can actually find properties like these on my new PROPERTY INVESTOR app. 

To find out more about this, please visit : www.propertyinvestorapp.co.uk  

If you still have a question which you would like answered in next months article, please feel free to email me : [email protected] and I’ll aim to answer as many as I can over the following months.  

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