Although the maths is simple on the surface - the more bedrooms you have, the more rent you can charge – adding an extra bedroom to an existing buy-to-let for increased income needs consideration. In this bog, LandlordBuyer helps investors weigh up whether creating an extra bedroom is a wise step.
Short term gains
An essential place to start is achievable rents broken down by number of bedrooms, and the Office for National Statistics provides an accurate snapshot of the rents landlords can expect. Between April 2020 and March 2021, the median rental value for a one-bedroom property was £650 pcm (per calendar month), with two bedrooms at £700 pcm, three bedrooms at £800 and four bedrooms or more at £1,350.
In light of these figures – which represent the whole of England and don’t reflect localised hot spots - it pays to know your target market and what the ‘ceiling’ rent is in your local area. It’s no good offering a more expensive three-bedroom house when all tenants want – and can afford – is a two-bedroom property.
On the flipside, there could be monthly gains if there is a shortage of rental properties with more bedrooms and a good supply of tenants who are willing to pay extra for the space, but only a good local letting agent can make an accurate call on this.
Landlords should always understand how adding an extra bedroom will impact their net yield - their true profit figure – especially if they have re-mortgaged or taken out a loan to fund the work.
Adding long-term value
The property industry is in agreement that adding an extra bedroom to a property can lift its value by around 15% but any gain needs to be offset against your spend. Loft and garage conversions, extensions and dividing existing large rooms could present options but they can be expensive exercises. Work may also mean your let being out of action for weeks – even months – so also factor in the loss of rent.
When you know what your build/conversion costs are (don’t forget to add in labour and materials), contact Move Places, our online agency. The team will tell you what your property might be worth with an extra bedroom. It’s quite possible that you won’t recoup the money spent, depending on when you sell your buy-to-let.
Know if you’ll flip to an HMO
If you rent to more than one individual or family and you add an extra bedroom, you may start straying into Houses of Multiple Occupation (HMO) territory. Defined, a regular HMO is when at least 3 tenants live there, forming more than one household, and a property is classed as a large HMO when at least 5 tenants live there.
Watch the stamp duty thresholds
While it’s great to be adding thousands of pounds to your buy-to-let’s value, be aware that an extra bedroom may tip your property into a higher stamp duty bracket. Although not an issue while the property is being let out, future buyers may put off. If a sale price is just over a threshold, they may pass on the prospect or they may haggle with a lower offer to bring the sale into a lower stamp duty bracket.
Benjamin Franklin said there were only two things certain in life – death and taxes – and it is the latter that landlords need to be careful of when adding value to their buy-to-let. Capital gains tax is paid on the gain (profit) a property investor makes when disposing of their asset and the premise is simple – the more the property is worth, the more tax needs paying. It’s wise to consult with a financial professional for some estate planning advice, as you may lose all of your added value through taxes when you sell.
LandlordBuyer has bought and sold more than 2,000 buy-to-let properties across the UK, so we’re well placed to give advice to any investor weighing up their next move. Contact us if your plans include a property sale, or if you’d just like a second opinion on adding an extra bedroom.