Case Study: Combining Two Strategies to Maximise Profitability
Malkit Purewal & Sanjay Kumar are multi-award-winning developers from Savoys Properties who have been in the property industry for 23 years, specialising in the house in multiple occupation (HMO) strategy for 13 years. The duo has been featured in The Times newspaper, appeared on BBC Radio 4, and won three awards at the Property Investor Awards.
Often, when people look at a potential deal, they’ll consider it with only one strategy in mind. For example, when looking at a commercial unit, they might think of transforming it straight into residential housing, without considering the potential for an HMO or mixed-use.
However, combining two strategies when doing a development can be highly profitable, which is something we demonstrated when working with one of our clients. Here is a case study of the project, and how we maximised the development site's potential.
Background:
In early 2024, we helped our client purchase a defunct commercial building in Reading, Berkshire. They became our client as we worked together to purchase the property in their name, and they paid us to build out the project.
The commercial property was arranged as a retail unit on the ground floor, with an outbuilding with ancillary use, and a large two-bedroom flat on the first floor.
Our client wanted to get the maximum value for the property and the maximum rent per annum. The solution was combining the commercial-to-residential strategy with the HMO strategy. However, this would involve permitted development, prior approval, and a full planning application.
Permitted Development:
HMOs benefit from permitted development rights, which is the right to develop residential houses without planning permission.
Case law (Gravesham Borough Council v SoS and Michael W O'Brien 1982) has established that the distinctive characteristic of a "dwelling house" is its ability to afford those who use it the facilities required for day-to-day private domestic existence. Whether a building is or is not a dwelling house is a question of fact.
Therefore, as the uppers of the residential property were already a Use Class C3, it would be permitted development to change the uppers under permitted development to HMO Use Class C4. However, as the property is a flat, we would need to apply for full planning to add roof dormers to incorporate the loft into the HMO.
Prior Approval:
It is permitted development to convert commercial buildings from Use Class E to Residential Use Class C3, but you need to submit a prior approval application to the local council. Prior approval is a formal submission to your local planning authority, and the purpose of it is to seek confirmation that specified parts of a development are acceptable before work can commence.
There are different types of prior approval, which require various levels of detail before a council will assess a proposal. Depending on what you are seeking prior approval for, you could be required to submit information on a wide variety of aspects of the proposal, including:
Design and external appearance
The transport impacts of the development
Flooding information
Full Planning Permission:
Full planning permission is for a variety of proposals—primarily works to flats and non-residential sites (such as a shop), as well as the creation of new residential units and changes of use. So, basically, if the property doesn’t benefit from permitted development or prior approval rights, you will need to submit a full planning application.
Our Solution:
We ended up using permitted development, prior approval, and gaining full planning permission to create:
1 x Retail unit
1 x Studio flat at the rear of the retail unit
1 x Studio flat in the detached outbuilding
1 x 5-bed en-suite HMO
This is how we used the various planning consents:
Prior approval was used to create 2 x residential studio flats.
Permitted development was used to create a 5-bed en-suite HMO on the first and second floors.
Full planning was used to create two dormers to the rear roof elevations.
The Numbers:
Now, here is what everyone wants to know:
Purchase price: £320,000
Refurbishment and fees: £275,000
Total investment: £595,000
Gross development value (GDV): £930,000
Monthly rental income: £7,158
Monthly mortgage payment: £4,965
Monthly costs: £700
Monthly net cashflow: £1,793
Lessons Learnt:
Think outside the box. The best and most profitable strategy might not always be the most obvious one. The more strategies you know, the more creative you can be in combining them.
Combining investment strategies can be far more profitable than just focusing on one.
Always look out for opportunities that others might miss. The more knowledge you have, the more opportunities you'll be able to spot.
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