Many new definitions and schemas are used to describe the following process, which is actually quite simple. I was doing this for many years before it was packaged and marketed in a way that appealed to consumers rather than developers.
If you are buying a property that can be divided into separate homes, then those homes can be sold individually for more than the original purchase price, at a profit to you. This is what many developers do.
Even if you don’t sell them, you create a more valuable property as separate units. You may be able to borrow on them, since lenders consider the individual divisible demise more valuable than the whole. In some cases, the amount collected on the individual remortgaged premises may be enough to discharge the initial investment and perhaps leave a small profit. Even if remortgaging in this way doesn’t make a profit, it may allow a developer to pay for development costs.
Historically, it has been more beneficial to purchase a larger property and create a separate decease rather than purchase those deceases individually. However, buying properties individually can save on stamp duty as long as the transactions are considered separate (many are not).
Again talk to your lawyer about this. Both have advantages and disadvantages, but if you want to make a profit on your property, the effort and risk may be worth it.
Example
Let’s say there is a three-story Victorian house that can be converted to three stories. Suppose you pay £500,000.00 for that freehold property and the flats sell for £225,000.00, £250,000.00 and £275,000.00 each. The resale value then becomes £750,000.00.
There is a clear profit margin that, even after deducting taxes, represents a considerable sum.
Consider the following benefits:
1. Buying in bulk has benefits: one transaction and you’re done!
2. The cost of each property is relatively low compared to its actual value as an individual death.
3. The profit could be very high on the right property.
4. You have the opportunity to create the property you want at the price that suits you.
5. Remortgaging will create additional funds that can be reinvested.
6. You create a flexible investment opportunity to remortgage, hold or sell.
7. The property can end up being ‘free’ if the financing is managed correctly.
The low:
1. The transaction will attract stamp duty at the higher rate.
2. Additional stamp duty may be due when creating the new lease.
3. Cost of business loans.
4. There is a large element of risk in speculative real estate investments.
5. Planning issues, restrictive agreements, environmental or conservation areas should be considered.
6. The cost of remodeling can be high.
7. There will be a delay in the release of the money.
8. Electricity and gas meters (if applicable) must be installed for all layoffs.
9. The surveyor’s plans and the architect’s drawings are needed.
9. Attorney’s fees for drafting leases and creating separate death with rights of way on other properties.
10. Lots of time, effort, and planning involved.
