Here are a few photos of the reordered and refurbished flat almost complete. We are interviewing tenants as I write.
I’m onto the final few days of the refurb, odd jobs like finishing the paneling on the bath which needed doing after the décor, and getting rid of the old carpet which had been protecting the floor from splats during re-plastering. The skirting boards can now be painted much more easily than with the carpet in situ. The new carpets are booked to go in on Thursday, that’s always the last job so I have to be out by then. I’m also gradually moving everything out of the flat, materials and tools I no longer need, and packaging and rubbish to the recycling centre. It’s quite a satisfying feelingseeing it come together and getting the space back, it’s such a small flat there really is nowhere to store things that doesn’t get in the way of work. Another satisfying thing is that now everything I do makes it look better. In the early stages of the rip-out, everything I do makes it look worse and the early works effectively devalue the property, always. Then there is a long intermediate stage where the services are going in and any structural issues or changes are being attended to, which makes it look different but not better and doesn’t necessarily increase value. Unfinished projects usually sell very cheaply as it’s hard for someone else to pick up the pieces and know what has been done or to trust
someone else’s work. It’s taken longer than I’d have liked to get to the finishing off stage as I’ve had some problems with another flat that I’ve been dealing with at the same time. Having to re-do the kitchen as detailed in the earlier blog Refurbishing a Flat with Too Much Kitchen! is another reason, as is our decision to sound-proof the ceilings.
I’m also replacing all the old poorly-fitting internal flush doors with new panel doors. I always leave doors off for as long as possible as they get in the way.
There have also been some snagging jobs as is always the case, things not quite fitting right or going wrong in some way. The worst was caused by an incompetent plumber who didn’t test the immersion heater tank prior to commissioning so didn’t realise the drain valve was left open. I filled the system, went to work in another room and came back to find a small
see the photo caption. Sometimes there is a case for doing everything yourself even if it takes longer.
There was another waterfall in the bathroom as I’ve situated the hot water tank in the middle of the room between the two to save space. Fortunately there is very little in there to get damaged.
The refurb is nearly finished but we can’t yet sell to a mortgage buyer as there still is no management co. in place. I love buying leasehold flats as I can get great deals because they are far more prone to title issues than freehold houses. But then I have to resolve the issues and sometimes that’s not as easy as expected. You need at least 50% of the flats in a block to set up a Right to Manage co. (RtM co.) and there are four in the block, so we need two minimum.
In this case the landlord of the two flats upstairs doesn’t want a RtM co as he’s hoping to buy out Madelaine, owner-occupier of the other downstairs flat. Having no RtM co. means she could only sell to cash buyers and he wants to pick it up cheap. I don’t think he’s allowed for human nature though… being difficult over this and other issues means she’s unlikely to sell to him at any price!
Madelaine wants a RtM co, but not yet due to ongoing divorce settlement negotiations, if her flat to shows an increase in value that might the outcome.
We need to sell for at least £55K to break even and that’s about the most we could hope for from a cash buyer so why sell now? The figures (approximated as I haven’t finished the refurb yet) look like this:
Purchase price £36.5K
Spend on materials and other trades approx. £6K
My hours approx. £5K.
Notional value of business partner’s finance £5K.
Estate agent fees £1K
Legal fees and other misc. costs £1.5K
The full market value when the RTM co. is in place is probably £60 – £65K. It’s amazing how what looked like a 30% BMV deal suddenly looks less appealing when you add everything in. Amateur investors and some property ‘gurus’ are inclined to overlook many of the costs above and claim much higher profits than they really make. Finance can be the killer when using bridging or a light refurb mortgage with high setup fees. Also it’s unrealistic not to cost your own time.
I wouldn’t have done this deal except my new business partner suggested it would be more profitable to do many deals for small profit, than just one or two deals a year with massive profit. It makes sense – but only if you actually make a profit! The refurb has gone over-budget from £8K to £11k, partly because we did extra work soundproofing the ceilings and partly because my original guesstimate was a touch optimistic.
The other disadvantage of more marginal deals is they are more risky. The smaller the profit margin, the easier it is to make a loss. The old truism that high profit = high risk is wrong. The reality is high profit = low risk and low profit = high risk, unless you work in sufficient volume to play the averages and can afford to make a loss on the odd deal.
Another part of my strategy is always to buy properties that stack for both selling and letting. I’ve learnt this from observing the mistakes of others. I know several landlords with portfolios of over 100 units who were buying with no-money-down (NMD) finance before the credit crunch and a primarily buy-to-sell (BTS) strategy. After 2007 suddenly the value of their stock fell off a cliff so they couldn’t sell to get their money out. Since much of their stock was low-yielding it was no good for letting either and they were stuck with a massive monthly spend servicing their loans and insufficient funds coming in from sales and rents. Some went to the wall, some of the cleverer ones adopted strategies like selling lease-options to tenant-buyers to increase cashflow and are now doing well. All have been helped by low interest rates. The lesson for me was never to buy low-yielding units even if I intended to sell them, as you never know what the future holds and you might get stuck with unsellable units on your hands.
So on Friday I put an ad in Gumtree for a tenant at full market rent of £425 and got a reply the same day! A working tenant which we want as everyone else in the building is working, and she’s viewing tomorrow. A newly refurbed flat is a bit of a USP and she sounds perfect on the phone, but it’s unusual to get the right tenant first try. We’ll see.