How can you add value to your property assets?

A lot of the time, when people contact me, they’re reaching out for my opinion on a particular property, whether they should buy in a certain area or how big of a mortgage they should opt to take out.

Often, the criteria that they’re using to assess whether or not they should buy this property is simply whether or not they can afford it. That whole approach, in my opinion, is wrong. What you should be thinking about whenever you look at a property is “how much value can you add?”

Can you add or create value? If you can’t see a clear path to do this, you shouldn’t go ahead with the purchase. So, this week I’m running through some of the strategies that can help you add value to your property assets.

Finding a fixer upper

Now, what do I mean by adding value? 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.?

So how are you adding the value there? It’s 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 and improve the energy performance of the building.?

Basically, you would go in, maybe spend 30-40k to do the work, and you get out. What you would hope is that by spending that 30-40k, that you’ve added value to the property in the region of maybe 60-70k, maybe 80k, so a potentially 30k investment in and a return of 30, 40, maybe 50k. That is 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. If you know how to put in a kitchen, you could do a lot of this kind of work yourself.?

Putting plans in place?

Now I want to get into a slightly more (although not massively) sophisticated strategy. What I'm talking about here is simply adding value through, say, the planning system, and ways to do this. With BRRR you could add maybe 25% value, but let's have a think 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 easy to do in residential because the value of residential property is usually based on the surrounding areas, so unless you can lift the house up and move it to a different location, you're not going to double the value. But what about if you just took a piece of land on its own? I'm going to give you an example of that, a deal back when I was in my early 20s.?

I bought a plot of land in the West Coast of Ireland, in a little seaside town in Sligo. It was about one acre of land 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 in this village being used by the local farmer to graze cattle.?

I came along and, because I had studied architecture, I was able to draw up plans and apply for planning permission myself. Now, this isn’t something that an architect would charge a lot for so you don't need to be an architect to do this kind of thing. But regardless I applied for four detached houses on this land. I went for the planning, submitted all the drawings, went through the whole process and eventually, got planning permission which said that I could go ahead and build these four houses on this one acre of land.?

At that point I put it up for sale, although 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 these houses when I’d built them.?

He came back to me a week later - I thought he was going to give me the prices of what each house would be worth, but instead he said he’d spoken to a builder client who didn't want to build the houses for me, he just wanted to buy the site with the planning permission, and he was willing to give me 125k to just sell it to him!?

I had owned this property for no more than 6 months, I had paid 25 grand for it, and I’d added 100k of profit to this property simply by getting the permission to build the houses. This is a strategy you would call planning gain: the act of getting a 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 a oversized retail unit in West Dublin, way too big for the kind of clients that you would want to put in there. If you go and look around a convenience store, or an off-licence, a pizza place or anywhere like that, you’ll notice that they're not massive units. If you go into an off license, you’ll see the wine stacked up to the roof. In a pizza place, you’ve got the counter and kitchen, but there’s not a huge amount of space.?

That is your typical size retail unit. This place was much bigger, about three times larger than what I've described above, 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 and I went out to those exact people I've described.?

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 the next stage was to go ahead and actually do the work to subdivide the unit.?

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 that instead of there being one distribution board and one power supply, there was now three power supplies in the three different one in each of the different units. We also changed the water supply to support three units, and within about 2-3 weeks we had three separate units with their own power, water, and sewage connection.?

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 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 this 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, this isn’t 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 were mistakes were made. Don’t forget to do your due diligence and a full risk analysis!?

But, when you’re looking at a potential property purchase, always look for ways you can add value. It's not about buying a property just to have the rental income, it's actually about how you can go about adding value to create equity in the deal.?

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, do consider investing in one of my programmes – more details here.