Here’s 3 simple ways to get back EVERY penny you spend on your property. AND MAKE PROFIT. How much to spend on improvements, refurbs, additions etc.
Today I’m going to give you landlords, property investors, and if you’re going to get into property investing same for you; three ways that you can get back every single penny that you ever spent on your property, on your rental property, and this will include whether you’re about to buy a rental property whether you’ve already got a rental property.
These are three clear and easy methods to get back all of your money and make a profit as well. So hopefully I’m going to describe to you everything you need to do or how much you need to spend on improving the property, how much need to spend on adding to the property, how much you need to spend on refurbishments without losing any money and that’s the key. We don’t need to lose any money, we’re property investors, right?
So the idea for this is to be able to help all landlords calculate correctly and change the way you think about your own property investment, because whether you like it or not, you are a property investor.
So all landlords need to start calculating correctly and turn their mind into the way of a property investor. Now, I’m not talking about general repairs and general maintenance here. I’m talking about actual property improvements and refurbishment and additions and extensions and Loft conversions and adding bedrooms and all of those things.
You need to understand how much you should spend and how you can get all of your money back and make a profit without losing any money. So first of all, we are all bound by the same rule in money to do with property and that if you’re going to refinance a property or re-mortgage a property you can only refinance or re-mortgage up to 75% of the value of the property, right? I think we all should know that by now if anyone’s new to property investing that is the rule that we’re all bound by.
Now that’s at the time of doing this recording sometimes mortgage lenders will change this up a little bit depending on the borrower, depending on the property, but generally speaking if you’re going to refinance a property you can only borrow up to 75% so we’re all bound by that rule.
So tip number one is only spend up to 75% of the increased value that you’re going to add. So for an example, you might be thinking about doing a loft conversion to add some bedrooms that’s going to increase the value. You might be thinking of building the extension at the back so you can have a big open plan kitchen-diner that’s going to add value or you might be putting a bathroom downstairs so you can add a bedroom upstairs that’s going to increase the value, conservatories increase value. If the property’s rundown is a complete wreck, then refurbishments are going to increase the value, but let me give you an example here.
So we’re going to talk some numbers now and hopefully you stick with me on it, but it really is a get your head around this calculation. So for an example if you’ve got a property right now, that’s worth £100,000 I’m just using a nice easy round number for you and you add a bedroom, right? So maybe or maybe you add an extension and you’re going to increase the value of your property by £10,000.
So now that after that extension the value of the property is worth £110,000 pounds then technically and according to tip number one don’t spend any more than £7,500 now, that’s the ideal. If you’re going to add an extension don’t spend more than £7,500 on the extension now, why is that?
Well, that’s because you can only withdraw 75% of the total property value, which means you can only withdraw 75% of the increase in value, right? So if you’re going to increase the value of by £10,000, don’t spend any more than £7,500 that’s ideal. That’s the dream, get your money back out. That’s it, but you haven’t made a profit and also that only works if it’s just going to be a one-time transaction.
We’re investors, we want to make profit first of all and we want to secure the future growth of our property right, simple as that. So yeah in an ideal scenario, if you’re going to increase the value by £10,000, don’t spend more than £7,500 on that property. That’s a quick way not to lose any money, but we got to make profit. So, how are we going to do that?
Well tip number two is to ensure that you get your money back in two years at least now why am I saying that? Yeah, well most mortgage deals are two or five years. Now, there are other mortgage deals around that’s normally what a fixed rate mortgage deal would be two years or five years. There are in between and you can have other things like variable rates, tracker mortgages, all different types of mortgages, but generally speaking if you’ve got a mortgage uhm deal over two years, you know that you can re-mortgage after 2 years, right?
So let’s use that same example where we’ve got a property that’s worth £100,000 We’ve increased the value to £110,000 but it’s cost us £10,000 pounds to do the job.
Now, technically, we’re down £2,500 because you can only refinance 75% right? So we’ve got to get that £2,500 back, but we also want to make profit on that too. So let’s do that same thing, right? So we’ve got that same property is worth £110,000 now because you’ve added an extension, but it cost you ten thousand pounds. So now we need to make sure that we’re going to be able to refinance through the appreciation in the growth in value of the property over time. We’re going to use a rough calculation here to keep it simple. But let’s say over two years the property value has increased by six percent, three percent per year. So your extension has cost you £10,000 now the value of the property is £110,000 because you’ve increase the value by £10,000 but the appreciation over two years is going to take the property value up to about a £116,000 there are thereabouts.
So hopefully it makes sense, but we can take out 75% of that if you remember so now we’re able to take out £12,000 of that increase in value, so we’ve increased the value over two years by £16,000 and we’re able to take out £12,000. So there’s a little bit of profit. So you get your money back. You got your £10,000 pounds, but you’ve also got another £2000 in profit.
But there’s more, we can make more profit here because where are we right now? So we’ve got now a property over two years. We’ve got a property that’s now worth £116,000 rather than what it would have been if we hadn’t have improved it, but we’re going to make a bit more profit over that time as well. Now, if you add value to a property that you rent out then technically you should be also increasing the value of the rent. right? Seems fair enough and I’d expect if you’re going to add £10,000 worth of value by adding an extension or adding a bedroom or something like that then you should be able to increase the value of the rent by I don’t know, what say £50? That will do it, wouldn’t it? If you’ve added a bedroom in my area? That’s about £50.
What’s the calculation? It’s probably going to be something like I don’t know 4%. If you can increase the rent by about four or five percent perhaps something like that. Let’s say let’s say 4%. I think that’s a fair figure if you can increase the rent by 4% in my area that will be about £50. So what we’re also going to get everyone we’ve made £2000 profit, but we’re also going to get £1200 in additional rent profit over the next two years.
So now where are we? @hat we’ve done is we’ve made profit of £2,000 plus we’ve made another £1,200 in rent profit as well and we’ve got our money back and everybody’s happy.
So really what we’ve done is calculated our budget as well accidentally. So if we’re going to increase that value then our budget for that property, let’s work this out together, right? So you now know that you can take out of the property £12,000 in two years time because you’ve increased the value by £10,000 and you’ve got appreciation of the property as well.
So, you know, you can withdraw about £12,000 from the property, awesome, but we want to make our target yields don’t we? We want to know that’s not the budget, the budget is £13,200 whatever we’ve decided there. We want to make our target yield as well.
So we set the budget by deducting the profit that we want to make so if the total budget is £13,00, but we want to make a certain yield on that money. Now for me, my minimum target yield is 15% per year. So over the course of two years that’s 30%, right? So I calculate that as £13,200 is the total, take away my profit requirement, which is for about £4000 something like that.
So the budget for the entire job is £9,200 pounds and I hope that makes sense because I know that sometimes you go through these numbers and gets a bit, gets a bit confusing to absorb it especially on a Friday morning.
So what we what we now understand is that if we’re going to let’s just say we’re going to add a bedroom to our property, we know that we can generate total returns of £13,200 and if we’re going to make profit of in my case 15% per year, then we know that the budget for that job is £9,200 pounds and just to recap that I’m going to try and recap it to try a bit simpler.
If we know that in over the course of two years through the additional rent profit the increase in value that we can refinance 75% of in two years time if we do all of that and the appreciation as well and we’re going to get £13,200 back in total. Now, we need to make our yield on that. We need to make our profit margin there and minus 15% per yeae so it’s 30% over two years, which is about £4000. So therefore the budget for that job is £9,200.
Now if you can do that same calculation for anything and any opportunities you have to increase the value of your property and stick to that budget you will always be investing, you’ll always make your 15% You’ll always be thinking like an investor and that’s the way to do it, every single penny that you ever spend on your property has to be an investment. Now, if you follow my other if you follow my podcast by the way, the Anonymous Landlord or you listen to my other stuff then you can now add to this information I’ve just given you there because on my podcast I talked about how to calculate your maintenance, your management costs, your compliance costs, all of those things.
So this here what I’m talking to you about now is pure profit absolute pure profit. And remember you could do this over a longer term. I’m talking about two year mortgages here. You could do this whole same thing over five years, ten years, whatever it may be whatever you’re comfortable with just make sure a you’re sticking to the rule you can only you can only withdraw up to 75% of the value of the property. Rule number 2 tip number two, make sure you get your money back during that time between when you’ve spent the money and when you’re able to refinance and tip number three is get that money back from the increased rent profit.
So also tip number four I suppose it’s for tips are not three, but tip number four is to always make sure you’re including your own yield target. Like I say mine 15% per year minimum, I can do more than that then obviously, I’m happy. So everything is an investment and I wanted to end by saying that you can apply this same rule for life, for everything you do with finance and money in life. You can apply this same rule to the rule is quite simple here.
Actually, you don’t lose money, you make sure you make your money work for you and every single penny that you invest is an investment. So therefore you will always be making money. It doesn’t matter if you’re only making a little bit of money as long as your money is working for you. That’s the key, every single pound that you spend on everything has to be working for you and that’s how the best investors think and so I’m trying to put that into a property scenario here. I think I’ve done that I hope so.
Anyway, let me know but so remember set a target, calculate that target and calculate your target yield and don’t deviate from that and don’t accept losing money. So I hope that helps.
Hey, you can do some fun stuff with this with your kids as well. I do it with my boys or actually my eldest boy because my youngest boy is too young at moment. But my boy, my oldest boy is nearly five and we’re starting to do things about making his money work for him and it did this little exercise where let’s say, it’s an exercise. It was a little fun thing where I gave him a quid and he went and got three lollipops out of a machine and then he asked me for another quid. So the lesson I taught him was well. Yeah, I’ll give you I’ll give you one quid, one more pound, but you give me two of your lollipops and he thought about it for a while and he went okay because then I’ve got a pound and a lollipop and I my heart nearly melted I could have just died right there but that’s a little less than I do with my kids and that’s all about this, right. It’s about making your money work for you and all of us being investors. So I’m going to wrap that up and I am going to say my little sign off tagline thing that to be the best version of yourself at one thing. You should be the best version of yourselves at everything.