Posted by What’s the first thing you think about when you’re considering buying a property? Is it the location? What size mortgage you should take out? Maybe it’s simply a case of whether you can afford it. That whole approach, in my opinion, is wrong.
Whenever you’re looking at a property, your first question should be ‘How much value can I add here?’
If you can’t see how to add (or create) value, you shouldn’t go ahead with the purchase. So, if this is an area where you could use a bit of guidance, this week I’m running through some strategies that can help.
Find a fixer upper
So, what do I actually mean by adding value? Let’s start with the most basic version: finding a cheap property that needs work doing to it, making some upgrades, and selling it on at a higher price.
In these situations, the list of how you can make improvements is long. In practice this might mean upgrading a kitchen, a new bathroom, or simply a fresh coat of paint, whatever the property needs to feel modern and well-maintained.
Basically though, you should plan to go in, maybe spend 30-40k to do the work, and then get out. What you should hope is that by spending that, you’ve added value to the property in the region of maybe 60-80k, so a potentially 30k investment in and a return of maybe 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 and its associated red tape. You could even save money on tradesmen if you’re good (really good!) at DIY: if you know how to put in a kitchen, you could do a lot of the work yourself.
Putting plans in place
The next strategy is a step up, but not by much.
With the previous strategy you could add maybe 25% extra value, but what about being a little more ambitious and buying a property and doubling or even tripling its value. How do you go about doing that?
It’s not that easy to do in residential because the value of residential property is usually based on the surrounding areas, so you’re not going to double the value unless you can find a way to lift the house up and move it to a different location! But what if you just took a piece of land on its own? I can give you an example from back when I was in my early 20s.
I’d bought a plot of land in the West Coast of Ireland: about one acre of land that cost 25k. At the time it was zoned for residential, but it didn’t have any planning permission, it was just sitting there in this village being used by the local farmer to graze cattle.
I came along and, because I’d studied architecture, was able to draw up plans and apply for planning permission myself. This isn’t something that an architect would charge a lot for, so you don’t actually need an architecture degree! But regardless I applied for the permission to build four detached houses on this land. I submitted all the drawings, went through the whole process and eventually, got planning permission which said that I could go ahead.
At that point I put the land up for sale… although the reality was that I didn’t actually intend to sell it. Instead, I approached a local auctioneer and asked how much I could expect to sell each of the houses for when I’d built them to give me an idea of value.
He came back a week later. I thought he was going to give me the prices I’d asked for, but instead he said he’d spoken to a builder. This builder didn’t want to build the houses for me but wanted to buy the site with the planning permission. He was willing to give me 125k!
So I’d owned this land for no more than 6 months, it cost me 25k, and I’d added 100k of profit to the asset simply by getting the permission to build the houses. This is what you’d call planning gain: the act of getting a permission to build or develop adds value.
Divide and conquer
The third strategy is what I call the subdivision play, and while it requires a bit more experience than the previous two, the principle is just as straightforward.
Back in the mid-2000s, I found an oversized retail unit in West Dublin. Way too big for the kind of tenants you’d typically want in there: your average convenience store, off-licence or pizza place doesn’t need a huge amount of space, and this unit was about three times the size of what you’d consider normal. I couldn’t work out who would ever rent it. So I decided to split it into three.
We bought the property, got planning permission to subdivide, and the value increased the moment that permission came through. The physical work was minimal: a local builder put up two walls, an electrician sorted three separate power supplies, and we updated the water supply to serve each unit independently. It took about three weeks to get that done.
We then appointed a commercial estate agent and filled all three units.
I had bought this oversized unit, for about 680k. After planning permission and refurb costs, the total investment was about 705k. Eventually we sold for 3.75 million, basically a 3m profit over 2.5 years. It was a phenomenally lucrative deal, honestly, not that complicated to execute.
Could you replicate it tomorrow? Probably not. I’ve tried to repeat deals like this and not always succeeded, and there’s always more risk than the numbers make it look. Do your due diligence. Run a full risk analysis. But the core idea of spotting an asset others have misread and restructuring it is something you can apply far more widely than you might think.
Most people look at a property and ask whether they can afford it. But when you’re looking at any property purchase, always ask yourself: could you fix up something tired and modernise it? Could you do the unglamorous paperwork to unlock value someone else couldn’t be bothered to pursue? Can you look at an asset differently and see an opportunity others have missed? That’s how value gets created.
I took a deep 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, do consider investing in one of my programmes – more details here.