Simply put: Unseen costs can tank your returns.
It’s no secret that one of the biggest dangers when it comes to flipping property or using a buy-to-let strategy is some unseen cost that you weren’t factoring into your budget before you bought the property.
Maybe the property structure is weaker than you thought, perhaps the fuse box will need replacing. Now you have to spend extra to bring up the property’s value, eating into your final returns, if you make a profit at all that is.
In this post we’ll talk about the key elements of a property to watch out for when searching for your next property investment opportunity, and how you can even use these unseen costs to negotiate a lower price on a property if they haven’t been declared by the seller.
This is doing due-diligence right.
As a property acquisition firm - we are no stranger to visiting countless dilapidated properties, we’ve sold countless investment opportunities to our clientele, tailored to fit their long term objectives precisely. We know a thing or two about scouring properties for unseen costs.
So let’s break it down:
There are a few major risks you need to look out for when doing due diligence on a property.
And it comes down to renovation costs.
The power, plumbing, and structural condition of a property are the major costs that will require large-scale overhauls.
Let’s say you buy a run-down house for £80,000 in bradford, and you’ve factored an additional £30,000 for the renovation. You’re aiming to build the property up to a selling price of £120,000. You’re aiming for returns of 9% - £10,000.
That 30,000 should cover the problems you KNOW ABOUT - from replastering the walls to rewiring and modernizing the electrics. And then it dawns on you:
You didn’t thoroughly check the boiler - and unfortunately it’s going to need replacing as well.A new heating system costs on average between £4,000 and £8,000. You bought the property under the impression that it was fully functional. And all of a sudden you’re eating into your returns in a major way, potentially you could break even, but in all the time it’s taken to flip, inflation is eating you up as well. Suddenly there’s a chance you could even make a loss.
This is the real danger of unseen costs in property investment, so it’s vital you know what you’re looking for. So we’ve curated a list of potential renovations, their severity determined by their renovation costs:
Replaster walls & ceilings (hack off existing) £16,000 - £32,000 - Average Cost: £26,500
New kitchen £7,000 - £25,000 - Average Cost: £17,500
Replaster walls £10,000 - £15,000 - Average Cost: £12,000
New roof £6,500 - £18,000 - Average Cost: £12,250
Paint walls & ceilings £5,000 - £7,000 - Average Cost: £6,000
New heating system £3,000 - £8,500 - Average Cost: £5,500
Rewiring £4,000 - £8,500 - Average Cost: £6,250
You can get the full renovation cost list here at:
When we enter the property, we come in with a checklist, and no matter how much the real-estate agent might try and try and shoo us past the cracks - we will stay there as long as we have to, ask as many painful questions as we have to - to make sure we understand that property through and though. To make sure every potential cost is ticked off.
But now here’s the real trick, alongside unseen costs on a property, there can also be unseen value. And it’s all about the location.
From a study conducted in 2021-2022, it was discovered that properties located near top-rate schools were on average £100,000 more expensive than properties located near bottom-rated schools. Further data concluded that on average you’re looking at a 50% increase above the average market value if a property is located near a highly sought after school.
Proximity to shops, schools, local parks, gyms, and so on - all of these local factors will affect the property’s capital appreciation. So it’s important you have knowledge on your potential prospects surrounding the area - and especially what could be built there in the future.
As we always say, long-term wealth is a long-term game - so it’s important to keep an eye on the future development of the surrounding area and factor that into your investment strategy. A location might not be the best, but if you get word that new amenities are being developed in the area, then what is an unideal location for now, might become sought after by the time your renovations are completed.
But how does the local value affect the property’s prices? Well rather than a flat-rate increase - proximity value is added overtime in capital appreciation. As the area’s demand rises, market prices will naturally reflect this overtime.
Grading properties.
Once we’ve done our due diligence on the property itself and the surrounding area, the final step towards evaluating our return on investment comes from measuring our total renovation costs against our overall property value.
We rate our renovation costs on a scale of five, and our potential location value the same way, and from there we work out the average. With five being the best, and one being the worst.
Let’s say a property is a 5/5 in condition, and a 1/5 in location - this means is NOT a good investment, and here’s why:
Because the property is already in great condition there isn’t much value we can add, and pairing that with a poor location and any work on this property is going to be a waste of your time.
So what does a good property look like?
A good property on average is a 2/5 in condition, and a 4/5 in location - a lot of value to add while the costs not being extraneous, in a highly sought after location, but also a location that has room for improvement, and is actively being improved.
Investment has always ever always been about the right place at the right time - and that is ultimately what you’re searching for.
Here at The Angels Investment Group it’s what we do, we pick our battles carefully, and thoroughly to maximize financial returns for all of our clientele.
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