An Investor Calls - High Risk v Low Risk Investments

Posted by Matt on 11th April 2016

We took a call from an investor last year on a referral from one of our current management landlords. He had money to invest but was unsure where to put it. At this point he was simply seeking advice on the current housing market so he could weigh up his options against other potential investments. So, we set up a meeting...

The Meeting

We set up a meeting at our office so we could find out a little more about his goals, and he could find out a little more about Redbrick Properties.

It soon became apparent that he was set on investing in property but very uncertain as to the type of property investment he was after, whether it be a safe low risk investment offering lower returns or a higher risk investment offering much more attractive returns.  With our knowledge of the rental market along with targeted research we compiled proposals of the pros and cons of each option outlining potential properties, locations, rents and yields.  

Our Proposal

Our low risk proposal was a small portfolio of low maintenance new build flats a few miles out of the city centre in an area popular with young professionals and families. These flats would be a safe investment with good rent potential and with few if any voids, but in comparison to our high risk proposal would offer a lower return. 

Our higher risk proposal was a large six bed student HMO in need of some TLC currently let until June 2016 located in the heart of Headingley, an area popular with students but largely a second choice area to Hyde Park closer to Leeds University. We knew that with all double bedrooms and a very large unused cellar there was potential, pending permissions, to increase the number of bedrooms, en-suits and bathrooms the property currently offered.

The Offer

Whilst he liked the idea of a low risk safe investment he also felt drawn to the challenge a higher return student HMO could bring and so asked us to put the offer in on his behalf as we had an excellent working relationship with the estate agent. We soon managed to negotiate a good purchase price whilst ensuring there were no issues along the way. All went very smoothly and it wasn't long before we were able to pick up keys, issue relevant notices and set up rent payments.

Phase 1

Once we had the property under management we presented him with a plan to increase the rent potential further. Phase 1 was to carry out a medium sized refurbishment project to warrant a rent increase for the next tenancy from £73.00 per person per week to £85.00 per person per week bringing in an additional £3,754.29 over the course of a 12 month tenancy. This was a substantial rent increase, but we knew that the property was being under-let at it's current rent taking into account rents we had already achieved on similar properties in that same location. 

We set about marketing the property for the 2016 - 2017 tenancy and it wasn't long before we secured a let to six Leeds Beckett University students at the new rent of £85.00 per person per week on the provision that all the proposed works were to be completed prior to the commencement of the tenancy.

Phase 2

The next phase in the plan, and a slightly more ambitious one is (following the 12 month tenancy and pending permissions) a more substantial renovation project of converting the large unused cellar into two more bedrooms with a 'Jack and Jill' bathroom whilst adding additional en-suite shower-rooms to some of the existing bedrooms.

Not only could he then benefit from the extra rent on an increase in the number of rooms, but the high standard of the finish of this refurbishment would warrant another increase in the rent to approximately £90.00 per person per week, based on similar refurbished eight bed properties we have let on that same street. This could then bring in an additional £14,704.29 per annum on top of the rent he is currently receiving as a six bed property at £73.00 per person per week.

In Conclusion

From that call we received last year from a very unsure investor, we now have a landlord with what is to become a really fantastic property in an excellent area with the potential to bring him some very impressive returns on his original investment whilst still taking into account the costs of the proposed refurbishments.

In this case, for this particular landlord it is safe to say the high risk investment was the right choice. So much so that we are now looking to secure further properties to add to his growing portfolio. 

If you are a landlord looking to invest in residential property then please give us a call on 0113 323 4016, drop into our office or send us a message. We'd love to talk with you!

By Matt

Redbrick Properties was established back in 2002 and since then has gone from strength to strength building up a fine portfolio of residential properties along the way.

We could never be accused of being a faceless agency as both Mark and I still work front-line in the office along side our experienced and capable staff.