Knowing how and when to do a property up to guarantee a profit is one of the key tools of success in a property investor’s armoury and I, for one, like to use “forced appreciation” as it is known, whenever I can.
Let’s consider what this is. “Appreciation” is the increase in the value of a property due to market movement whereas “forced appreciation” is pushing the value of a property up by improving, repairing and modernising.
If you would like to use forced appreciation as part of your overall strategy, there are a number of things you need to consider before buying a property and embarking on a potentially expensive refurb.
For “forced appreciation” to have a positive outcome, you must first have a system in place to make sure you find plenty of “product”. This may sound simple but in practise the competition is fierce. (So much so that particularly during boom periods, it’s not uncommon for purchasers to overpay for a property).
Each investor has his or her preferred method or methods of finding suitable properties… from simply doing continual rounds of their “favourite” estate agents, to conducting land registry searches of abandoned or derelict (or semi-derelict) properties, seeking out properties in disrepair in their target areas, attending auctions, running their own “wanted” ads in local papers, or even – believe it or not – keeping an eye on the obituaries column in the local paper to see if they can get a march on probate sales.
Having identified a suitable property, an investor will then need to make sure they don’t over pay for it. This requires a detailed knowledge of the value of this type of property in the locality, preferably in both its improved and unimproved state, which is not always possible with regards to the latter.
In this instance, I always find “working back” from an improved figure easier than trying to extrapolate forward from an unimproved figure. However, those that aspire to be successful in property will quickly realise that they must develop an ability to make accurate judgements using whatever information is to hand.
Having done this, an investor will then need to consider the cost of any work that is required, and must consider how these costs will impact upon the end value. For an accurate assessment, they will need to have inspected the property and made a detailed assessment of what is required. By this I mean more than a cursory viewing, although I do admit that it may not always be appropriate or possible for an investor to carry out a detailed inspection.
With experience comes the knack of spotting where to look for defects and the things that will make a genuine difference to the value. For example, in a Victorian terrace with a back addition, obvious issues to look out for could be roof problems, especially around valley gutters, as well as the wiring and plumbing and damp problems where the damp course has broken down.
Having established the likely works, the investor needs to factor in the effect on value when deciding how much to offer – or in the case of an auction property, how much to bid.
As I’ve discussed many times over, in property “cost does not equal value” and some improvements will add more value than the cost of undertaking them, but equally, some will add less. As I mentioned in a previous blog post, generally speaking, central heating and new windows can add more value than they cost, whereas going to extremes, an expensive swimming pool could be considered a liability and could have a negative effect on value.
The key to knowing how much to spend on a refurbishment is to understand your potential market and to question whether you are renovating for resale, or whether you will be keeping the property to let out and hold as an investment. This will often dictate the standard of work that you will need to undertake.
Don’t get me wrong, I’m not suggesting that tenants should be fobbed off with shoddy workmanship or a poor standard of housing. However, often an investor would be wise to perhaps install a lower standard of kitchen in a rental property than if he/she were to sell on to an owner-occupier. Because as long as the kitchen is of reasonable quality, the property will attract the same rent as if an investor were to install a plush, all singing and dancing kitchen.
In contrast, if an investor is looking to sell on to the owner-occupier market, it may be worth spending more and putting in higher quality fittings because this is what the owner–occupier would expect.
Again, the value might not be enhanced by the full cost of the works, but if nothing else it should facilitate a sale, and a quicker sale should enhance profit, taking into account the opportunity cost of money or actual interest paid on any finance.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
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