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Money Matters – How to make over 500k to Commercial Conversion

I’m standing in front of my home in Scotland. It’s been my home for 16/17 years now and it was originally a commercial conversion. Okay, so let’s talk about the numbers. By the way, before I do that, welcome to the hallway. You can see the lovely views out to the garden, the fountain, the flag, everything else. So we bought this as a nine-bed care home. We reconfigured it to an eight-bed family home. We bought this property for £450,000. We then went on to spend £120,000 on it but £60,000, as you’ll see, as you walk through the house with me, was actually on the kitchen. And, it was well worth spending on the kitchen. So, in total, we spent 560, I think £570,000, something like that. As soon as we finished, it was immediately revalued at 1.1 million. What did we then do? We put a mortgage on it of £770,000, because we could, 70% lines of value of 1.1 million.

So we took out almost £200,000 more than it cost us to do this conversion and that essentially is what we then used to go off and start our property investing business. So this wasn’t a flip. It could’ve been. But if we’d have flipped this property, so let’s say we’d have, let’s keep the numbers easy. Let’s say we’d have bought it and done it up for half a million and then sold it for a million, made a half-million profit, we’d have had to pay either income tax or capital gains tax on that half million-pound profit. Now, if we’d done that, 40% of half a million is 200,000, you know, say you’re 40% taxpayer.

But that’s going to kick you into 45% taxpayer territory. So, even if you made a profit of half a million pounds and you sold it straightaway, there are ways that you could manage this. But if you did make that profit and sold it straightaway, you’d get the half million pounds but you’re going to lose 200,000 in tax. You’ll only end up with £300,000. So very often, before you go and sell something, make sure you do the numbers if you keep it because if you just release the extra money as an equity release in a mortgage, very often you can take out the same amount of money, tax free, and you’ve still got the asset. You’ve still got the property. The second thing, huge! Huge mistake! We’d never heard of capital allowances. So we didn’t claim any capital allowances when we converted this care home to a family home. For most people that do commercial conversions into residential and sell them, if you don’t claim capital allowances, bang! Gone! You’re never getting them! Never, ever getting them!

So the essential numbers here are purchase for 50, conversion 120, revaluation 1.1 million. Fantastic project! But it could’ve been £15,000 better just on VAT and it could’ve been hundreds of thousands of pounds better at the time, had we known about capital allowances. What is a capital allowance? Well, it’s an amount of money that you’re allowed to earn tax free. How do you qualify for capital allowances? Buying commercial property. So between exchange and completion, make sure you’ve got the property insured. Next lesson, the rebuild cost on this property. So the current value of this property, well it doesn’t matter. Let’s go with property value then when did the refurb, 2004. It was valued at 1.1 million. And, the rebuild cost on the house was 1.8 million. So we’ve got a very hefty insurance premium. But the extra thing that we didn’t know, that we hadn’t factored in, was the covenants, the deeds, with a covenant is a promise within the deed, says we got to maintain a 6-foot-stone wall around the perimeter of the garden. The rebuild cost on that stone wall around the edge of the garden is 1.2 million. The property insurance, not the contents insurance. Just the bricks and what the rebuild cost to insure this property every year is over £3,000. And, we had other issues as we went around the house and we started refurbishing it. But rather than stand here and tell you about them now, I’ll share them with you as we go around. Okay, so welcome to the lounge. Or, at least it’s a lounge now. What this used to be is one of the residence lounges. We’ve kept all the original features, the coving, all of the plaster work. We’ve put back the picture rails. We’ve got the original parquet flooring here.

But when we bought this place, we didn’t actually know this was under here. There was two/three layers of carpet on top of it. We’ve got a bay window to the front. And, what we had to do, this isn’t a list of building, but it’s a conservation area. So if you look at these windows, they are sash and case windows. But they’re special sash and case windows. They are double glazed and they are UPVC. So, why was it so important for us to get UPVC windows in? Simple. The bottom of our garden is the sea. So if you go and put wooden windows in to any property, well, you’ve got a maintenance nightmare if you got painting. But we regularly get the wind bringing salt in to us. So imagine how often we’d have to repaint those things if they’re all made of wood. But in this house, we replaced 48 window. Our total bill, installed, not buying them, the total bill, 48 windows was £24,000. So it’s always worth making sure that the money you’re spending on the property is adding as much value as possible.

And, I’m going to give you a rule here, really important rule. If we spend one pound, we want to generate three pounds of value. Fine point on this room, the doors into our main reception areas are enormous. They’re again, they’re nine-foot doors because this was a care home, the main doors were all screwed shut. They were backed with asbestos and they were literally screwed shut. Because in a care home, or many properties where you got to have public access, all of the main reception areas, the residence lounges, have to be accessed through fire proof anti-chambers. So all of the rooms into our main reception rooms, sorry, all of the access into our main reception rooms, were coming through secondary doors that were created with fire-proof lobbies on. They looked disgusting! And, the main doors were screwed shut. Now fortunately for us, they were still here because sometimes they get bricked up or, you know, whatever, removed. So all we had to do was remove the asbestos, very important point! You shouldn’t be doing any work on any property without an asbestos survey. So we had the asbestos survey done.

We knew where the asbestos was and what kind of asbestos it was. So we took the appropriate measures, we got the asbestos removed, closed over the secondary doors that had been created into our main rooms, and reopened the main doors. Throughout the property, we’ve installed Mains interlinked smoke detectors. We’ve got fire detection services so we’ve got, as you go through each of our rooms, you’ll see they’re there. We’ve also interlinked an intruder system. When you’re not here, you’ve got that security and piece of mind. If you got the house in bits to wire-in, Mains interlinked smoke detection, or in the kitchen we’ve actually got heat detection because you don’t want it getting set off because somebody’s burnt toast or something, and a burglar alarm, an intruder system. Now all of that is remotely monitored. So this room was the original dining room in the house. It’s quite a way from the kitchen so we’ve chosen to relocate the dining room to the back of the house. So this is a big public reception room. As with all the other rooms, we’ve maintained all the plaster work, put back picture rails, rebuilt the original skirting boards where we needed to.

And, this is one of the very few fireplaces in the house that’s actually original. Coming off this room, as well as going back that way, to the hall, going through here, we’ve got what the previous owners called a garden room. So it’s kind of a conservatory. What we’ve done with that is we’ve tiled it. We’ve put in on-the-floor heating and then we’ve put a nice, big jacuzzi in there for six people, which the kids, well, we love as well, nevermind the kids! So it’s a very nice addition to a family home. Okay, so very briefly here’s the jacuzzi room I talked about. It’s very light which this is surrounded by glass. Here’s the jacuzzi. It’s been there for, wow, 17 years I think now, so it’s, this jacuzzi’s actually older than two of my children. I’ve told you how old it is but it still gets pretty, very regular use. And, yeah, that’s pretty much it for this room. On to the next room!

Welcome to my room! This is my study. Love this little study! It’s got my favourite chair in it. Do a lot of reading and writing in here. Got my desk. Got a cute little fireplace in the corner. Think we’ve got, yeah, we’ve got 18 fireplaces in the house. So, in some of them, we’ve kept them open, like this one is open. This is actually a Rennie Mackintosh fireplace. Charles Rennie Mackintosh is a big thing in Scotland. He’s a big thing particularly in this area of Scotland. We’ve got a World Heritage Site in the local village, it’s called Hill house. So little features consistent with the local area, giving some histories and heritage to the house, to the property. But actually, when we moved in here, this shows the importance of having an open mind, this room was completely out of place for the rest of the house.

This was actually a utility room. All right, let’s keep going! This room gets really well used! This room was originally the kitchen. The ceiling in here was comparatively low compared to the rest of the main house because here is where the servants would have worked. Anyhow, myself, really love the light in this room. Again, it’s a jewel aspect. We’ve got windows to the side. We’ve got main windows to the front of the dining room, looking out onto our side gate. So we’re very fortunate that this big detached house is plunked in the middle of the plot and we’ve got garden on four sides. The kitchen is one of the most important rooms in any property. And, we actually made a lot of modifications to this kitchen. Physically, when we moved in, there was a, I haven’t just got shorter, we’ve changed the floor levels in here.

So we’ve got a couple of steps in here. There was a big, massive formica. It was gorgeous, not! It was bright orange, if you can imagine that! So there was a work top that came all the way out to about here, from the door over there. And, the kitchen was, I’m going to say 1960s. The wall was decorated with, wait for it, Hessian wallpaper. How about that? Absolutely horrible! The kitchen itself is a Clive Christian kitchen. And, for anybody that knows anything about kitchens, believe it or not, forget the actual cooker, and the dishwasher, and the refrigerator for now, just the kitchen, the carcasses and the work tops, were £60,000. Now you might be thinking, “Jesus Christ, spending £60,000 on a kitchen!” But if you’ve got a million-pound-plus house and you don’t have this kind of quality of fixtures and fittings, you’re going to be jeopardizing the value of your house. Underneath the floor here was one of the major pieces of, I guess this was about the nasty surprise that we got. This house is actually built on rock, on granite. And, the back of the house to the front of the house is about 5’4. So, the ground actually falls away from the back to the front of the house. So the front of the house, we don’t have a cellar but under the floors, as we’ve got suspended timber floors throughout the house, I can’t stand up but there’s about 4’6 of head-height. At the back of the house, there’s only about 18 inches. Under the floor here, over the years, there’ve been water running in from an underground stream and it completely rotted and perished all of the wood in the kitchen. So that was about the only nasty surprise we had. When we were taking the kitchen out, the old kitchen out, we noticed all the floor levels were sagging, so we had to put more than 10 tons of warp-proof cement under this floor before we could start building again. And, we had to divert the underground stream off outside. You know, if we’d have just put 10 tons of cement under the floor here, what would the water have done? It would’ve found it’s way around it, and the overwhelming likelihood is, that it would just have started rotting some other part of the house. Hope you like the kitchen! We do and we spend a lot of time here!

Let’s go have a look upstairs! So, here we are up on the first-floor landing. You can see we’ve carried on the black-and-white tiling throughout and you’ll see it again on the second-floor landing. And, many people comment on that and it’s not actually original. We put it in. We’ve matched it to the ballistering. Let’s go have a look at one of bedrooms. So welcome to one of the bedrooms! And, again, you can see how tall the ceilings are. And, as with all the other rooms, we’ve maintained the original features. You might notice that in many of our rooms, we don’t have any curtains. You might be, “That’s a bit weird! Why haven’t they got any curtains?” Well, the reason haven’t got curtains is because West Coast Scottish properties of this age, have got shutters, but they’re internal shutters. So we’ve put, or we’ve brought back into use, all of the internal shutters. So they all work like this. And, if I was to close them both over, they’d go, well, I will close them both over so you can see how dark it gets. So there, you probably don’t have the doors. Now, you probably can’t see me anymore. This shutter, we had to refurbish. You see this piece of black tape here? This is actually black-out fabric from the Second World War that we’ve left there.

So during the Second World War, we are, or just out here, see the views that we’ve got. We’ve got the Clyde. And, close to 50% of the shipping for the world, was actually manufactured on the Clyde and by export, which meant that during Second World War, the Clyde was a major target for the Luftwaffe. And, this house, and because Glasgow was bombed a lot during the Second World War, this house was actually used during the Second World War and as an evacuation point for children. So during the Second World War, this house was home to 138 children. Apparently, just this room, used to have bunk beds in it. If you can imagine, four high bunk beds in here.

So just this room had more than 20 children sleeping in it during World War II. Okay, let’s go on up to the second floor, really just to show you how low the ceilings are compared to down here because that’s where the servants would have been. Aye, welcome to the second floor! And, you can probably see what I was talking about with the doors. So, while I’m standing still, it’s okay, but while I’m walking, I’m going up and down, I would crack my head. I’m not super tall, I’m 6 foot-tall, which is kind of, pretty normal for adult males these days. [Click here to watch full episode]

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