Rather than chasing yields some professional landlords are adding capital value to their properties through refurbishments.
Sometimes this could be turning a three bedroomed house into a four bed and increasingly shrewd landlords are also using permitted development rights to do so.
This allows owners of a building to make certain changes, including improvements, extensions and changes of use without having to make a planning application.
This could enable landlords to extend the ground floor of a house for example, or extend it to accommodate more people, thereby improving not only the capital value of the property but also the yield.
However even projects that do require planning can still be lucrative for property investors.
One becomes two
For example, one professional landlord client of Connect purchased a buy-to-let, rented it out but realised shortly afterwards that they could be making more of the property.
They applied for planning permission to develop it into two self-contained flats and this was granted.
When the existing tenant moved out, the landlord rescinded their original loan and took out a short-term loan in order to carry out the development to convert the property.
The work involved creating two separate entrances and adding a new bathroom and kitchen.
This took only around three months and created a substantial increase in the potential rental income and property value.
While the client had to pay early repayment charges when they rescinded the original buy-to-let loan, by refinancing one of the newly-created flats just three months later with the same lender, the lender refunded the early repayment charges originally paid.
Lenders increasing refurbishment
It is interesting to see more lenders adding refurbishment options to their offering to help this type of investor.
For example, Shawbrook have bridge loans that are suitable for heavy refurbishment and commercial property refurbishment.
The lender also has a term loan for lighter refurbishments used as a retention which is released when work has been completed.
Precise has also launched an offering that means two valuations are completed on day one, a current value and a post works value.
A bridge offer is issued based on current value but at the same time a long-term offer is issued based on the post works value, giving the property investor the guarantee of the long-term mortgage while knowing the amount that can be released from day one.
Brokers experienced in this area can help guide the client in relation to the finance options and structure needed to make these types of investments a success and benefit from the increased income stream of adding bridge products to their recommendations.