Posted by If you’re looking to buy a property, you might assume that the most important things to think about are where you’re buying, or maybe how big of a mortgage you should be taking out.
A lot of the time, I find that most people assess whether or not they should buy this property or that, is simply whether or not they can afford it. That whole approach, in my opinion, is wrong.
Actually, the question you should be asking yourself, whenever you look at a property is “how much value can I add?”
Can you add or create value? If you can’t see how to do this, you shouldn’t go ahead with the purchase. So with that in mind, this week I’m running through three strategies that can help you add value to your property assets.
Find a fixer upper
Let’s start with the most basic version. Most of you will be familiar with the term BRRR, which, in the residential property context, means Buy, Refurbish, Rent and Refinance. It’s a tried and tested formula that a lot of people do. You find an older property and you modernise it, then you rent it out and put the profit into a new deal.
So how could you add value to an older property? Things like upgrading the kitchen, or putting in a new bathroom. Repainting, recarpeting, putting up new curtains, whatever it might be. You might even go so far as to improve the insulation in the attic to improve the energy performance of the building.
Basically, you would go in, maybe spend 30-40k to do the work, and get out. What you would hope is that by spending that money, that you’ve added value to the property in the region of maybe 60-70k, maybe 80k. A potentially 30k investment in and a return of 30- 50k. That’s what I mean by adding value.
It’s tried and tested, it’s not very sophisticated and you don’t need to have any kind of deep understanding of the planning system. You could even do a lot of the work yourself and save on labour cost (with that caveat that you do know how to do the work in the first place!).
Putting plans in place
To get into a slightly more (although not massively) sophisticated strategy, you could add value through working the planning system. With BRRR you could add maybe 25% value, but what if you decided to be a little more ambitious and double or even triple the value of an asset?
It’s not that easy to do with residential, because the value of residential property is usually based on the surrounding areas, so unless you can lift a house up and move it to a more expensive location, you’re just not going to double the value. But what about if you thought about buying a piece of land on its own?
When I was in my early 20s, I bought a plot of land in the West Coast of Ireland: about one acre that cost 25k. At the time it had cattle grazing on it. It was zoned for residential, but it didn’t have any planning permission – it was just sitting there being used by the local farmer.
I had studied architecture, so I was able to draw up building plans and apply for planning permission myself. Now, this isn’t something that an architect would charge a lot for, so you don’t necessarily need to be an architect to do this kind of thing. But regardless, I applied for four detached houses on my plot, went through the whole process and eventually, got planning permission, which said that I could go ahead and build my four houses on this one acre of land.
At that point I put the plot up for sale, although I didn’t actually intend to sell it. Instead, I approached a local auctioneer to ask how much I could expect to sell each of these new houses for.
He came back to me a week later – I thought he was going to give me the price of what each house would be worth. Instead, he said he’d spoken to a builder who wanted to buy the site with the planning permission, and he was willing to give me 125k just to sell it to him!
I added 100k of profit simply by going through the process of getting planning permission. This is a strategy you would call planning gain: the (relatively) simple act of going through all the red tape and getting permission to build or develop adds value.
Divide and conquer
Another potentially lucrative example, which I’ve used in the past, is what I call the subdivision strategy. It’s quite simple, but you do need to be a little bit more experienced.
Back in the mid-2000s, I found an oversized retail unit in West Dublin, way too big for the ‘usual’ kind of clients that you would want to put in there. Take a look around a typical convenience store, an off-licence, a pizza place or anywhere like that: you’ll notice that they’re not massive units with tons of spare space.
That is your typical size retail unit. This place was much bigger, about three times larger than what you’d consider average, and I couldn’t work out who would ever rent out a unit that size. So, I split the unit into three different smaller units.
We bought the unit, and got planning permission to divide it into three smaller units. As soon as we had the units split into three, there would be an increase in the value of that property, but of course, the next stage had to be actually doing the work to subdivide the unit.
In the end, it didn’t take much work at all: a local builder built two walls to split it all up, and an electrician to sort out the power supply, so we had a separate power supply for each of the three units. We also changed the water supply to support three units rather than one, and within about 2-3 weeks the work was done.
The next step was to appoint an estate agent that dealt in commercial property to help us rent it all out – and we got our three tenants. There was no frontage to the building aside from some timber so we said to the tenants that they could put up their own proper shop fronts, in return for six months rent-free.
So, what would be the next stage after doing all of that? You would hold on to the units until the rent-free period expires, so it becomes a performing investment, and then sell all three units.
I had bought an oversized unit, for about €680k. After planning permission and refurb costs, the total investment was about €705k. The total end price that we sold was 3.75 million, basically a €3m profit over 2.5 years. A phenomenally lucrative deal, but in reality, not that sophisticated!
Of course, it’s not something you could necessarily go out and replicate every other day, and I certainly have examples of trying to replicate it that didn’t work, or where mistakes were made. Never forget to do your due diligence and a full risk analysis! All three of these strategies carry an element of risk, so never assume they’re going to be as simple as they may seem at face value and always be aware that you don’t know what you don’t know.
So, when you’re looking at a potential property purchase, always look for ways you can add value. Think bigger than buying a property just to have (for example) the rental income and keep looking for ways you can add value to create equity in the deal. Could you fix up something old? Could you do the boring bits of bureaucracy to save someone else the hassle? Can you look at the asset in a different way to see new opportunities that others may have missed?
I take a deeper dive on this topic in Episode 196 of the podcast, so do take a listen, or if you’d like to know more about the strategies I’ve mentioned here and how to go about implementing them for yourself, do consider investing in one of my programmes – more details here.