8 Flat project – develop – sell – invest?

8 Flat project – develop – sell – invest?

10:41 AM, 18th June 2015, About 7 years ago 5

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We have a commercial building which we retail from and after 2.5 years we have finally received full planning to build 6 new flats and convert 2 above our commercial building. It’s basically an extension on the current commercial building with parking at the rear.

Retail is a business we no longer want to be in. We have a complete build cost of 250k which includes all finishing and fittings. These are all 1 beds and our 2 small will achieve 500pcm and the rest 550pcm, commercial building 20k pa.We have an existing mortgage of 93k.

Do we continue to develop (financing is not a problem) or do we sell everything and then re-invest obviously as a cash buyer. My friend is snapping up 80k properties 25% deposit and achieving £550/645 pcm rent. The gross rental is 71,600 pa we would need to achieve somewhere north of 600k to sell, which would give a yield of over 8% to a investor.

What would you do?




Neil Patterson View Profile

10:54 AM, 18th June 2015, About 7 years ago

Hi Roger,

It would be interesting to have a little more help with the figures.

Current property project:
1. Current value with planning permission
2. Full cost of conversion including finance costs
3. GDV Gross Development Value = Final value of the project
4. Final Rental incomes achievable on whole project
5. If you were to keep the project how much finance would be left outstanding.

Then if you do sell and reinvest how much cash would you use and how many properties could you purchase?

Also why would you use all your own money and not take some risk out by using finance and possibly purchase more increasing your returns especially on capital appreciation in the future.

Our Landlords Calculator may help you as well >> http://www.property118.com/calculating-rental-yields-and-returns/

Roger Pires

11:37 AM, 18th June 2015, About 7 years ago

Reply to the comment left by "Neil Patterson" at "18/06/2015 - 10:54":

Hi Neil,

Full conversion including costs would be around 280k
GDV - 910k - 1m
Final Rental - 71,600 pa
If we kept the project, finance outstanding would be somewhere around 380k

if we sold without developing and achieved 600k we would have over 500k cash. We would use the cash for a deposit of no more than 25%... i.e we could purchase 20 x 80k houses.

This obviously all depends on whether we could achieve 600k, the reason i put this on here was because we're not sure. This development is in a prime town centre location and the flats should do extremely well, my only concern is although the commercial can achieve 20k pa there is more uncertainty.

It's more likely that we will proceed with the development as the wheels are already in motion, but it' s always good to get other opinions.




Neil Patterson View Profile

15:13 PM, 18th June 2015, About 7 years ago

Hi Roger,

Having a good guestimate at costs I have done a summary using the landlords calculator on what would happen if you sold and purchased 20 properties:

Property value £1600000

Monthly rent £12000

Gross rental yield is calculated as 9%

The amount of mortgage/loan currently outstanding is £1200000

Therefore your LTV has been calculated at 75%. LTV stands for "Loan to Value". It is your loan expressed as a percentage of the value of your property. This is also known as gearing. It's important to know this when you are looking at which mortgage products are best suited to your requirements.

Your Gross equity is £400000.

The interest rate you are currently paying is 3.5%

Mortgage cost £3500 (based on interest only paid monthly)

Based upon your own estimates you should budget an average of £1610.27 per month to cover the costs of insurance, advertising/letting, management, Gas checks, maintenance, ground rents, service charges and void periods (lost rent due to arrears or when the property isn't let).

Your monthly cashflow (after deducting budgets mentioned above) , based on the interest rates you are paying now, is £6409.73

Based on these figures your return on equity is 19.23%. This is your net annual cashflow expressed as a percentage of the equity you have in your property. This calculation is also referred to as; return on cash, cash on cash return, return on capital employed/invested, ROC and ROCI. NOTE - if you have zero or negative equity the this figure is not relevant.

This property breaks even when interest rates hit 9.91%

Neil Patterson View Profile

15:18 PM, 18th June 2015, About 7 years ago

If you did the conversion you would have

Property value £950K
Loan £300K
Equity £650K
rental income £5,967 pcm
Mortgage at 3.5% = £875
Cost ?

Then would both properties appreciate in capital at the same rate?

Roger Pires

16:01 PM, 18th June 2015, About 7 years ago

Reply to the comment left by "Neil Patterson" at "18/06/2015 - 15:18":

Hi Neil,

Thank you for you guestimate..... i think we are going to develop them, as previously said the wheels are already in motion. I think we might get more capital appreciaton as we are in a prime centre location with a lack of housing and hopefully if the economic climate improves then commercial will not be so much of an uncertainty.

Thank you for your advice


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