The Power of the Bedroom in Guildford

A developer came to see me the other day to discuss the "price of the bedroom" - no, not how much to rent a room but what capital gain could he achieve by providing an additional bedroom.

Gain £250,000 by adding a bedroom

In simple terms we discussed a process where an investor can acquire a property, then remodel or extend it to add a bedroom, then resell the property at a higher value. The aim is to therefore make a profit once all legal and building costs required to complete this task have been deducted.

Realising that there is substantial demand for family houses in Guildford, especially in catchment areas for the higher performing state schools, I suggested why not review the average price for both 3 and 4 bedroom houses to determine how much this additional bedroom could add to the price of a typical 3 bedroom house.

A typical 3 bedroom house before adding a bedroom

The average asking price for a typical 3 bedroom detached property is currently £425,000. There are some fine examples of these properties in Beechcroft Drive, located close to the University and Surrey Research Park. The average asking price for a typical 4 bedroom is £675,000, therefore providing a difference of up to £250,000. This is the potential price of a bedroom. There are some typical examples of this type of 4 bedroom property located in and around Burpham close to George Abbot School, which is highly rated.

A similar property with an extension to provide a fourth bedroom

The trick is obviously to purchase a property "in need of modernisation" or better still with planning permission granted already. A property requiring modernisation is ideal for those new to development because less experience is required. All that is required is possibly a new kitchen, bathroom, boiler plus decoration and some gardening to realise a profit. 

If a large room with two windows is not available to split into two separate rooms to provide a further bedroom then a loft extension is an economical way to add an ensuite bedroom to provide the price uplift required. More experienced developers might add an extension to provide additional living accommodation plus another bedroom.

The developer was correct in stating that one should always have a number of exit routes when investing for capital gain. If he takes the option to keep a property having added a bedroom would it be worthwhile holding onto the property and therefore letting it instead? 

The average rental for a 3 bedroom property is currently £1,650 pcm and a 4 bedroom property is £2,150 pcm so once again there is a positive differential in favour of a 4 bedroom house. The four bedroom house will deliver an additional rental income (assuming no voids) of £500 pcm which equates to £150,000 (before inflation) over 25 years, the typical lifetime of a mortgage. This should be sufficient to cover the building costs.

However the investor will want to know how quickly they will see a return on their investment. They will therefore calculate the gross yield to determine the answer to this question. The gross yield based on the figures quoted for a 3 bedroom property is 4.7% whereas the figure for a 4 bedroom property is a lower 3.8%. 

This means that it will take longer to see a return on the investment for a 4 bedroom than a 3 bedroom house and this is likely to be the case always, as one can only experience either capital gain or excellent cashflow - rarely both at the same time.

To chat about this opportunity, or any other property opportunities in Guildford, please call 01483 320 207 or email richard@guildfordpropertyblog.co.uk