What return is available without buying a property?

With the new stamp duty rules and the proposals to prohibit landlords from offsetting mortgage interest against their profit, many landlords I talk to are considering how to maximize their portfolio in what could be described as a potentially new economic and political landscape.

Some are looking to further develop sites they already own and others are looking to revive lapsed planning consents for extensions and additions. This month I want to look at what is a very simple option for private landlords and one which I have recently implemented myself.

So, how can landlords improve their income without becoming subject to the additional fees and taxes which would be incurred in the event that they purchased an additional property?

I think it is understood that landlords who have average accommodation will achieve an average rent and those who provide higher quality accommodation will generally receive a premium on their rent. This is demonstrable with new build properties where the first rental is generally at a premium price to subsequent rentals, reflecting how new and modern the property is.

What is interesting is that the return on the expenditure to take your property from average to high quality could be a greater return than you would get from buying a new property. Imagine therefore if you upgraded all of your properties? You could enjoy a double digit return on that expenditure without having to pay any stamp duty at all!

Additionally, you may find that the revised value of your properties following improvements could improve your loan to value position and afford you more attractive rates when you come to remortgage.

Happy to practice what I preach, I tried this plan almost two years ago on my own properties. Whilst at that time not worried about stamp duty changes and blissfully unaware of Mr Osborne’s proposal to partially remove tax relief on my mortgage payments, I was instead keen to improve income without increasing my exposure to the banks.

The first property I refurbished was a two bedroom flat in Canterbury in Kent. It was let at £575 per month to a working couple who gave notice as they had secured new jobs in Yorkshire. The dining room and lounge were separated to create a third bedroom, and the kitchen and bathroom were comprehensively refurbished. The result was rent of £850 a month against a spend of £9,000. This gave a 36% return on the money spent.

Quite aside from that, there must have been some significant capital appreciation in the property meaning that I could also get all the money back if I were to sell it.
That said, the other thing that I noticed was that the property attracted a better covenant of tenant with stronger employment and financial credentials. Perhaps a coincidence but I was sufficiently buoyed to repeat the process.

The next property of mine that became empty was a three bedroom ex-local authority property which had been let at £600 a month. A quality kitchen and bathroom refurbishment together with some garden landscaping at a total cost of £10,000 led to a revised rental of £800 a month. So here, a 24% yield on the £10,000 spent and quite possibly an increase in capital value greater than the money invested.

With just two refurbishments I have created income of £475 a month by spending less than £20,000. No additional mortgage debt, higher quality of tenant and possibly tenants who will stay longer. Furthermore the refurbishments may mean lower ongoing maintenance and repair expenditure.

So on those two properties a 30% return on the money I invested. Far higher than the gross yield I could obtain with a new property purchase and without increasing mortgage debt or creating a liability of increased property maintenance, building insurance costs, stamp duty, gas safety certificates and the like.

Whilst for those looking for growth I can see the advantage in additional properties and leverage to take advantage of capital growth, particularly in the current climate where pricing continues to be fuelled by supply shortages, but for those looking for income and struggling to find additional properties that work on a gross yield basis, the answer may be in the properties you already own!

Perhaps when the next property you own becomes available you should give some thought in terms of what rental value it could achieve if it were upgraded. The timing is perfect as the current shortage of rental property is already fuelling price increases and the tenant looking for high quality accommodation is likely to have only a few potential properties to view.

By focusing on those improvements, which will have a direct impact on the rental value of your property, you will likely find that the return on refurbishment expenditure is greater than the yield you are currently searching for on the property portals.