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Whilst arranging the sale of an inherited property I have been trying to understand the potential of mixed use properties. There is a significant learning curve from my experience of general handyman, lodger landlord and armchair landlord. For the past 12 months I have been watching 2 streets that I believe have potential. The first street has shown potential for forced appreciation, with all 3 properties being originally almost identical:
The second street is a little more complex:
I'm particularly surprised at the variations in these 3 properties, especially as they are very closely located and of comparable size. Any potential will clearly be subject to the necessary permissions and costs.
This is a fascinating niche within property investment. There is potential to get it very wrong but there is also potential for a very good investment.
All properties have been advertised as freehold but I don't know the VAT status of each.
I agree with you on the fascinating nature of mixed use property hence my username!
The variation in the tenanted properties apart from the obvious difference in rental income, will be likely due to the strength of covenant of the tenant i.e. how long have they been trading are they a high street name and the details/terms of the lease e.g. term, rent review period, opted in/out, breakout clauses, forfeiture clause and repairs liability.
All these will impact the long term view of the income flow that the commercial element will provide. An empty unit will have a lower capital value than a tenanted one.
And don't forget the holding costs of an empty mixed use premises, council tax from day 1 and business rates due after 3 months even if within small business rates relief as the premises is actually empty and you are not running a business from them. However, both can be 'waived' if in need of complete refurb but onus is on you fighting to get charges removed! Then you have water and sewage plus gas and electric, all mount up if you are undertaking substantial works before getting them let.
But irrespective of the above costs, the profit and ROI can be huge almost infinite if you get the planning permission right.
In some cases, the capital value of the residential part can mean you get the commercial for 'free'. And lower SDLT and no section 24 and you are normally getting the freehold so no service charges or restrictions.
What type of area are the properties in? Is it prime I.e city centre or secondary I.e high street or more tertiary further out in a more residential type area? Rents will be highest in prime areas as will capital values so you can expect a lower yield there but a stronger covenant which can mean lower risk investment. The real value can be found on the other two areas but it can be a struggle to let the commercial element and leases will be much shorter than prime.
As for valuing planning gain potential, this is tricky and is an area where investors can get into trouble as you mention. Planning permission is far from being a given and LAs are pushing back on PD and prior approval apps now. Space standards and parking are also major considerations when assessing whether you can get more residential units in. A studio needs to be at least 35sqm and depending on LA needs a parking space.
Thanks for all the feedback, its very useful.
The first 3 properties are in a tertiary location, but the forced appreciation aspect certainly appeals. The next 3 are in a secondary location which, from my visits over the past 12 months, appears healthy.
I've still got a lot to learn regarding the planning, I hadn't considered parking which is usually limited or non existent in these locations.