One in ten millennials want to invest in property…..
Are you thinking about spending your lockdown savings on an investment property? You’re not alone. Figures from the insurer Aviva even suggest that one in ten UK adults between the ages of 35 to 45 have made plans to buy an investment property within the next 12 months……. and it isn’t as easy as it looks to make money.
The rise in house prices means it is more expensive than it has ever been to become a landlord. A typical investor mortgage is 70 to 75 per cent loan to value and, in places like London where the average house price is £501,320, that means the landlord is required to fund a cash deposit of £150,396 per property. It has become a challenge to make a decent, or indeed any, monthly profit in high-price regions after all these costs and expenses are taken into account.
In 2017 the government introduced Section 24, removing a landlord’s right to deduct mortgage interest as an expense. This means you pay tax on gross rental income and not the actual monthly profit you make after deducting your mortgage payment. This has led to many landlords setting up limited companies, but in reality you need a few properties and strong profits to make it worthwhile.
Buyers face paying an extra 3 per cent in stamp duty land tax on properties that aren’t a main residence from July 1, and overseas investors started paying an extra 2 per cent this month on property bought in England and Northern Ireland.
This doesn’t mean it isn’t worth your while and there isn’t money to be made. When it comes to residential property, there are two main strategies: you either focus on rental income or capital appreciation.
To make the figures work to achieve a good rental income, buying a terraced house and renting it to a family, given how expensive semi and detached properties are to buy in the first instance is sensible. An alternative strategy for higher cash-flows are HMOs (house in multiple occupation). These are also known as shared houses where unrelated people rent individual rooms and share the kitchen or bathroom facilities.
HMOs can be more lucrative, despite the extra management and general hassle, but the trick is to have larger en suite quality rooms in regions where the market isn’t already saturated with these types of properties.
Margins are tighter now, especially in the south. The trend is for investors to buy up north or in secondary cities outside the south, where the costs to enter buy-to-let are much lower.
A single let in many parts of the UK is not very profitable based on a 70 per cent mortgage. This is why most single-let investors play the “capital appreciation” game. If you do not need a regular monthly income, then you can pray the property rises in value and cash in when you come to sell.
Given most areas outside the south of England will be cheaper, how do you decide where to invest and what are the key metrics to look for? It’s all about house price-to-income ratios.
The prospects for capital appreciation are greater where house price-to-income ratios are lower, effectively meaning a person in the north, for example, pays a much lower percentage of their disposable income to buy property compared to the same person in the south.
Look for the most affordable places for locals to buy their own home, based on average annual earnings and average property prices. If locals can afford to spend more of their disposable income on a mortgage, then local capital appreciation prospects do not solely rely on regeneration, investment or outsiders to drive up house prices.
The difference in affordability between London and other parts of the UK is stark. According to Schroders, the average London house would cost more than 11 times the average London salary. In the Midlands the average is about 6.5 times, while the amount needed in Yorkshire or Wales is estimated to be about 5.5 to 6 times the regional gross salary.
House price-to-income ratio is an indicator of local affordability, which means you can compare local areas on a like-for-like basis, rather than just saying the north is cheaper than the south.
Finding the right property at the right price is a challenge. Once you’ve found an area with lower house price-to-income ratios, it’s about finding less transient tenants, reducing or controlling management and maintenance costs, and finding ways to increase the equity.
With oversupply in offices and the high street failing, looking at a commercial property, a building with residential letting rooms on the upper floors would mitigate some risk by hedging bets and not relying on the ground-floor commercial unit to pay all the rent. The warehouse market is booming right now, but deep pockets are needed to get involved. There is also good demand for “trade counter-style” commercial property in many locations, but this is specialist and you need experience to succeed here.
If you want to buy a single let, then look for a city outside the south with low house price-to-income ratios in a secondary location where yields are higher, but where there is good demand with less transient tenants. Try and create equity in every deal, which means you should look for a property needing reconfiguration or refurbishment.
Doing a full refurbishment means you attract the highest rents and the best tenants. This is also more likely to create instant equity, as you end up with a well-configured, modern, insulated, highly desirable future-proofed property.
A top tip when investing in a fixer-upper is to employ the services of a quantity surveyor to estimate building costs accurately before you exchange contracts, and to seek professional advice from an architect for optimum room planning. A terraced property in an affordable area is ideal as an extra six rooms can be added without full planning permission under permitted development rights should you decide to make it into a HMO. Speak to an agent who specialises in this market.
If you go for an HMO, you need rooms at least 10 sq m in size with en suites to attract longer-stay tenants. It is important to focus on quality of life. Think of your tenants as customers and offer them quality, comfortable, homely accommodation. This is why it’s worth investing in a good-quality mattress and installing high-end soundproofing and insulation.
A common misconception is that leasehold flats are a safe bet. I stay away from any leasehold property as they tend to be apartments, which are oversupplied in many UK cities and legally bind you into recurring (often escalating) charges such as annual ground rent and monthly management costs.
After inflation is considered, leasehold apartments have risen little in value and have even fallen in value in some cities. The “Covid carnage” in the serviced apartment sector is now pushing some landlords to sell, and the market continues to suffer from the fallout of the Grenfell Tower cladding and building safety crisis.
The best way to win at property investment is to be in control of the freehold. The lack of control over often-escalating costs means leasehold apartments are far less desirable on the resale market. Lenders are beginning to take action in this area and Santander has refused to lend on new-build homes if the developer has included uncapped or escalating management charges.
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