Today Grant Erskine talks to Amy about his biggest property development success. The take-home message is this, that it is very difficult to profit from property development with bricks and mortar alone. Profit comes from increasing the commercial value of the property and adding to its capacity to generate an income.
Property Expert Series: Grant Erskine From Grant Erskine Architects
- Part 1: Introducing Grant Erskine from Grant Erskine Architects
- Part 2: What Are Grant Erskine Architects Currently Working On?
- Part 3: Grant Erskine’s Biggest Property Development Success
- Part 4: Tips For Property Developers
- Part 5: What Has Been Your Biggest Mistake In The Property Business?
- Part 6: How Will The Construction Sector Change Over The Next 5 Years?
- Part 7: What Could Councils Be Doing To Address The Housing Crisis In 2018?
- Part 8: What Are Modular Buildings and What Do They Mean for Investors?
Your Biggest Success With Property Development
Amy: Could you tell us, what has been your biggest win in the property sector, in investment? What’s been one of your standout projects? Something that’s worked really well?
This is your chance to show off.
Grant: We did a project that finished in January or February of this year that’s the first time, in all my career, where the client has been able to take out more than he put in. This is something that never really happens.
Amy: Can you explain what that means for anyone who is watching that may not understand that terminology?
All Money Out
Grant: A lot of people talk about, ‘All money out’. It’s a simple idea. Say you were buying a house and it’s 100k. You spend 50k on renovating it and turning it into something such as, for example, an HMO. So, your total spend is 150k.
Now, everybody thinks, ‘Well I’m going to get this valued at 250k. And then I’m going and get 80% percent more’.
But, at the end of the day, it doesn’t work like this. In truth, you are unlikely to get out more than you put in.
When it actually comes to a valuation the property, in most cases, will be valued on bricks and mortar alone. So, a buyer will look at the property and say to themselves, ‘You bought this for 100k and you spent 50k. So, you’ve spent 150k. Therefore I can buy a different property for 100k, spend 50k and end up owning something that is more-or-less the same as this.”.
The value of a redeveloped property is pretty much always going to be what you have spent on it. You have defined your own value.
And, of course, if you are looking a refinancing then you will only ever get that for 80% of the property, leaving 20% in the deed.
So, people will talk about, ‘100% out’, or ‘all money out’, but actually achieving it is rare. That said, it is exactly what we managed to achieve with a recent, very large project.
The Most Expensive HMO In Salford
Grant: What people tend to not understand is the difference between bricks and mortar value and commercial value. Commercial value is based on the income that a property can generate.
So we met a new client and pitched him the idea of making the most expensive bedrooms in Salford. We wanted to build the most expensive HMO in Salford.
Amy: Salford is a great place to invest. Everybody is investing in or wants to invest in Salford for obvious reasons.
Grant: So, we designed this nine-bed HMO.
I pitched the idea of having sleeping lofts in it. Every room had its own en-suite, its own little kitchenette, its own sleeping loft above.
It’s a proper-sexy, high-end property. It looks really good and has an average rentals yield of about £7/725 a month, per room and got a valuation based on its income rather than just on the bricks and mortar.
The property was about 200k to buy and had about 190k spent on it. So, we are talking a big spend here.
But after a spend of around 400k, it was valued at 535k and the client got his 80%+ out. So, in essence, he made about 40k from it. And that is the first time we’ve ever managed that.
So, the client gets all the money he spent back out of the property plus a 40k thank you. And he has a property that is cash flowing, fully let and pulling in 70k a year. The property costs around 30k per year for running costs, leaving the owner with 40k per year as a margin.
But as I say, getting results like this is rare. These kinds of outcomes are few and far between but, of course, I like to use this project as an example to talk about. And everyone says, ‘Oh. This is how I want to do it’ to which my reply is always, ‘But there were so many things that had to align for it to work’.
Amy: And I suppose this is a great example, as you say, to use as a case study but there were lots of different elements that made that project work.
I’d be really interested to learn more about that one and I think maybe we’ll cover that in one of our articles.
Thank you for that, Grant.
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