An Empty Shop With a Flat Over It, Turned Into Four Flats
He paid £415,000 for something nobody wanted. Converted and split, it was worth about £700,000.
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The property
I had a client come to me a couple of years ago with a commercial unit and one flat above it. Semi-commercial, so roughly half commercial and half residential.
When he first showed me it, the shop downstairs was completely empty. The flat upstairs was empty too. So we were dealing with vacant possession on both, and the commercial part got valued on that basis. That's what lenders do most of the time anyway.
I'll be straight with you, an empty shop with an empty flat over it's a hard thing to own. It's also a hard thing for a lender to sell if it all goes wrong, and that's exactly why commercial lends less than residential does.
What he could see that most people wouldn't
The flat upstairs was big enough to split into two.
Downstairs was near enough the same shape, a square rectangle, so that title could be split and turned into two more.
Four flats. And not four flats under one freehold either. Four individual flats on four separate titles.
The property was on a residential street. One of those roads that's residential, has a bit of commercial in the middle, then goes back to being residential. Try that on a proper high street, where it's all commercial with flats above, and converting the ground floor into flats is much harder. Not impossible. It depends on your local authority and what they're trying to do with the area.
The funding
| The deal | |
|---|---|
| Purchase price | £415,000 |
| Facility | 65% gross |
| Net advance, approximately | about £235,000 |
| Term | 12 months |
| Bought in | a limited company |
Commercial lends less than a buy to let or a regulated bridge. You're looking at 70% gross, maybe 65%, and that's before it nets down for fees and retained interest.
We placed this one at 65% gross, and off the top of my head that netted down to about £235,000.
Twelve months was right, and on a commercial conversion I wouldn't want less. It takes longer to get a commercial tenant in than a residential one, and there were works to do on top of that.
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The exit
Anyone who knows me knows the exit is all I really care about.
His was four separate remortgages. Once the works were done and the titles were split, each flat could be refinanced on its own at 75% loan to value. The flats came out around £175,000 each, so about £700,000 all in, against the £415,000 he paid for it.
| Item | Amount |
|---|---|
| Bought for | £415,000 |
| Value once converted and split | about £700,000 |
| Uplift | about £285,000 |
Why it worked
He bought something nobody else wanted. An empty commercial unit with an empty flat over it's a difficult asset. That's why it was available, and that's why it was priced the way it was.
He split the titles instead of keeping one freehold. Four titles means four remortgages, four tenancies, and four things he can sell separately. That's a completely different asset to a block of four.
He worked the exit out before he bought. Not after the works, not when the term was running down. The remortgage route was the reason to do the deal at all.
And the location did half the job for him. Residential street, not high street. That one detail is what made the planning realistic.
One thing worth looking for
If you're driving down a residential street and you see a shop that looks like it used to be a house, you'll know the sort I mean. It looks like a house, downstairs is a corner shop, upstairs is a flat.
I'm not saying you'll get planning to turn it back. But if it was once a house, and it's sat next to houses, my experience is the local authority will be a lot happier about it.
Important information
The figures above relate to the circumstances and the lending terms available at the time of that transaction, and the terms available to somebody else may be different. Some figures are approximate.
Planning outcomes are decided by the local authority and can't be guaranteed by any lender or broker. Valuations on completion of works can't be assumed.
Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan isn't repaid in line with its terms, the lender may take enforcement action against the property or any other security provided.
Got a deal like this on your desk?
Tell me the numbers and I'll tell you honestly what's achievable.
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