Advice on whether to convert 2bdrms to 3 bdrms

[beginner]

I have a professionally managed new centrally located 2 bed flat in an apartment complex in a UK university town which is let to professional couples with no vacancies or problems ever. It rents at NZ$648pw.

About half of the apartments in the complex (all identical to mine) have been converted into 3bdrm apartments by putting a wall down the middle of the living room to change it into a small bedroom and small living room - these are all let by UK university students. The rent is NZ$799 pw. There is not usually a problem finding students, although occasionally there has been the odd week or 2 of vacancies in a handful of those converted apartments.

It would cost me NZ$8640 to have my 2bdrm converted to 3bdrm

I plan to keep the property indefinitely.

Is it a good idea for me to have the flat converted to 3 bdrms or not?

[No Regrets]

Depends on a number of things:

If you look only at the numbers, then go for it - you will make an additional $150 per week, so the alterations will be paid off in just over a year, leading to additional profit reasonably quickly. Just think if you put $9000 in the bank, would that return you $150 pw??

But...

Do you want to appeal to the students, or the professionals. The professionals are (hopefully) more likely to look after the place and pay their rent on time, whereas you may have problems with students - parties, bad payers etc.

Could you still rent to professionals with 3 bedrooms?

It is a tough call, the increase in rent really does look good though!

[revdev]

Beginner,

90% ROI...
23% rent increase...
@ a 6.5% cap rate (guess) you would create $120,800 equity from a $8,640 spend
Good rental history/low vacancies...

Hard to see a downside, so fill your boots!

G

[artemis]

Personally I would be inclined to stay with the professionals - less wear and tear, probably longer term tenants, fewer hassles with tenants and their neighbours, less likely to have late rent issues, and if finished to a high standard should be able to charge premium rent.

A lot depends on the tenants though - I am sure there are great students and hopeless professionals.

A quiet life is worth a lot of dollars!

PS Seems a lot for what sounds like a basic conversion.

[beginner]

Beginner,

@ a 6.5% cap rate (guess) you would create $120,800 equity from a $8,640 spend

G

sorry for being dumb, but what does 6.5% cap rate mean and where does the $120,800 figure come from?

thanks

[beginner]

Just think if you put $9000 in the bank, would that return you $150 pw??

Could you still rent to professionals with 3 bedrooms?

But if i put it in the bank i would still have the $9000 whereas if i use $9000 for conversion, I will have lost that capital as it will not increase the market value of the property at all (according to my agent)?


- i don't think the 3bdrm would let to profs because the living room would be too small and so would 2 of the bedrooms

[beginner]

Personally I would be inclined to stay with the professionals probably longer term tenants, fewer hassles and if finished to a high standard should be able to charge premium rent.

PS Seems a lot for what sounds like a basic conversion.

the tenants are all 1 year lets for the profs and students - many of the profs are actually executive MBA students or postgrad students but i count them as profs

i've had a final quote from the agent for $8064 for the conversion - including overseeing it

[tillerman]

Ask for a breakdown of those costs. $8064 seems an astronomical amount for a simple dividing wall and extra doorway even allowing for overseeing it.

[revdev]

sorry for being dumb, but what does 6.5% cap rate mean and where does the $120,800 figure come from?

thanks

Hi beginner,

Cap rate is another term for yeild, however more commonly applied to commercial type properties. It does however allow us to determine such things as an accurate purchase price and the value of improvements to a property.

The hard part (without paying for an RV) is determining an appropriate yeild. I gave yours 6.5% as a guesstimate of what your house is yeilding, at current market value e.g. Annual rent = $33,696 / 6.5% gives an estimated market value of $518,400 (£185,000 ??)

By spending your $8,064 you will lift your rent by $151 p/week. Annualised, this increase equates to $7,852 divide this by your cap rate, and in theory you will have created $120,800 in value to the house.

All the best
G

p.s. maybe you could let us know what your place is yeilding currently

[RentMaster]

the tenants are all 1 year lets for the profs and students - many of the profs are actually executive MBA students or postgrad students but i count them as profs

i've had a final quote from the agent for $8064 for the conversion - including overseeing it

Maybe you should get some further quotes. It seems a bit steep to me also to just add a dividing wall and door.

But even at $9000, the extra rent received seems very good, so I would be inclined to go ahead.

[Oopsick]

I did it twice in NZ thou and it cost me $1,000 for the whole job.

[beginner]

Hi beginner,

p.s. maybe you could let us know what your place is yeilding currently

i think it is yielding between 5-6% last time i checked but the market value has been going up around 12-15% per year for the past 3 and went up 4% in the last 3 months so i am keeping it because i thought that it is likely to continue appreciating well

[beginner]

I did it twice in NZ thou and it cost me $1,000 for the whole job.

its too much trouble for me to get another quote
- the place is tenanted so arranging access is difficult, I don;t know any local tradesmen, I haven't been there for 2 years and don't know the tenants at all as its all managed by the property manager. He quoted me the same price to do the same work 2 years ago when i was in the uk so i doubt i would be able to get it done a lot cheaper even if i could get quotes - i think things are just genuinely a lot more expensive in the uk than NZ

[Kerry Christian]

What is this

Team

Without trying to be a salesman-what are you trying to do

I use a software program that can analyze these problems quickly and then I can make a decision.

Would it not be better to know if the project is profitable - from day one, without committing to an unconditional contract

[beginner]

Ask for a breakdown of those costs. $8064 seems an astronomical amount for a simple dividing wall and extra doorway even allowing for overseeing it.

i've just found out from the property manager that the cost is actually $5760 for the wall conversion plus $2880 for the extra furniture (extra bed, study table, chair, wardrobe)