In previous posts I’d written about the importance of deal flow. In other words to create a consistent flow of property opportunities to consider so that we don’t get in a position of trying to force fit one deal. [if you missed that one I’ll attach a link at the bottom of this post]
So, once you have your deal flow working, the next thing of course is to analyse the deals you select for your shortlist. Much of our desk based time these days is doing exactly this and with our focus being on the acquisition of mixed use buildings (ie commercial on the ground floor with opportunity to create flats with the space above) we need to take the time to break down the deal into its potential component parts, before piecing it all together to assess the full building/site.
Here’s a brief overview (no particular order and not going into massive detail) of the kind of analysis process we are going through with each short- listed opportunity.
ANALYSING THE COMMERCIAL PARTS
(Note the properties we prioritise are the ones in locations where we have some information about a brand looking to expand there or we have some information about a commercial tenant interested in leasing the vacant property).
#1 Overview of the area ie to get a sense of area population, state of the high street (ie occupancy of shop fronts, make up of nationals, independents etc)
#2 Break down top line figures on a spreadsheet
-floor areas ie unit 1 is 57 SQM and 615 SQFT etc
-rateable value (you’ll find that here www.saa.gov.uk for Scotland and here https://www.gov.uk/correct-your-business-rates for England
-a range for market rent/SQFT in the area (we get that from commercial agents/surveyors)
-a range for vacant possession value in the area/SQFT
#3 Calculate conservative end value
-using annual market rent for your size of unit, we start by divide that annual rent figure by .10 (representing a conservative 10% yield) to arrive at a projected end value (we also speak to a couple of commercial surveyors to understand the range of investment yields they have used for valuations for bank lending in the area)
-calculate the money out at refinance ie at 70% LTV (loan to value)
-gauge the monthly net income after finance interest
-derive a figure you would be happy to pay for the commercial part of the building ie working backwards from the amount that could be drawn down using commercial finance
-take into account all acquisition costs ie legals, commercial stamp duty/LBTT plus any remedial works to create a decent shell for incoming tenant
ANALYSING THE UPPER PARTS
#1 On the same spreadsheet list out the number of flats you can create with the upstairs space ie 1 x 1 bed, 3 x 2 bed etc and the associated floor space
#2 Assign an end value to your proposed flats
-we typically start with building up a list of comparables using rightmove sold prices in the area, and also properties currently for sale
-compare the size and finish of the properties (HINT if the floor space isn’t listed on rightmove you will find it on the EPC register)
-Next step is to call at least 2 – 3 local selling agents to get their take on end values to add into your spreadsheet
-Now you have a low to high range of end GDV (gross development value) for the flats you can calculate the amount of borrowing that can be drawn down at a 75% LTV. This figure will help inform how much you could allocate to the purchase and conversion of these upper parts
#3 Calculate your conversion costs to create and finish the flats
-this is the part where you will need to call upon your trusty builder in your power team
-unless you have a description of works you’re not going to get a line by line accurate estimate but you can at least collect some ballpark figures and layer in some contingency
#4 Calculate your cash flow opportunities from the flats
-a lot of this will likely be informed by your local knowledge of operating single lets/HMOs/SA in the area but you will definitely want to build out cashflow projections of the various options onto your spreadsheet
-speak to 2-3 letting agents to seek both demand and market rent insights
-speak to SA agents/operators seek both demand and booking revenue insights
#5 Piece all the information together and consider all the inputs/outputs and exit options
-You will want to look at key figures like:
-total money required to buy and create desired end options
-total money out from refinance
-equity created
-monthly cash flow
-overall return on capital employed
-You’ll want to compare the pros and cons of all your possible exit options (and you will want multiple exit options) ie to create higher value and sell on, to refinance and cashflow or to do a hybrid of both
-This of course will be heavily informed by your knowledge/research at the demand end of whatever it is you are looking to create. That’s where you really want to be starting from, the source of demand and end user/audience you are going to be serving.
There you have it, a simplified overview of what we’ve been working on.
I’m curious, for those who read my posts, do you prefer reading most about tactics like above, or other topics related to property investing like personal development, mindset, productivity, or something else?
Link to post titled “THE IMPORTANCE OF DEAL FLOW FOR INVESTORS”
http://adaeroproperty.com/the-importance-of-deal-flow-for-property-investors/