Any time if you buy carefully and keep it for 10 years or more – Possibly not the insightful tip you were hoping for, but its number one for a reason. If you buy an income generating property that is a good investment in its own right, regardless of property prices, when you buy isn’t hugely important, as long as you hold it long term and don’t need to sell.
At the bottom of the market – Again this is hardly an industry secret. Number one is very important but buying at the bottom of the market is still preferable of course. If you are buying in an area where prices are going up, you have missed the bottom of the market. Where the bottom is for a particular location, nobody knows, but that’s the great thing about tip number one.
When there are good opportunities to buy – There are far fewer opportunities for great deals in a rising market than a stagnant one.
When the time is right for you – If it is your first investment property you may find it a nerve racking experience. You need to make sure that you feel comfortable that you are making the right decision as you are making a substantial purchase. Take plenty of advice but only from the people you know who know about property investment. Many people do however procrastinate, forever finding reasons not to buy due to nerves. If you find yourself in this situation calculate how much income you’re losing every day leaving your money where it is and not making a decision. If that doesn’t motivate you to go ahead and buy don’t waste any more time thinking about it and invest in something else.
When you have a sufficient funds – Buy to let requires a deposit of around 20% of the purchase price. You need to ensure you also have sufficient funds to cover buying expenses too. We would suggest you have a minimum of £20,000 to be able to get started with our investments but you will need far more than that to buy in affluent areas.
When it is a better proposition than other investments – If the economic climate is such that you can get better returns with other investments, invest in them instead.
When mortgage rates are low – Low mortgage rates will increase your income.
In this section we look at:
Which parts of the country perform best in terms of house price growth?
The indisputable fact that less affluent areas offer better rental returns
How to check the returns in your home town
How to do due diligence in other locations
Where to buy to get good deals
I am originally from Bournemouth on the south coast; I lived for a few years in London and now live in Salisbury in the South West. I tell you this because I may at times appear biased towards investing in the North of England and this comes about, not from an allegiance to my local area, but from my nationwide experience in residential property.
It’s not always easy to discover that your hometown isn’t the greatest place to invest. Some argue that you should buy close to home because you understand your local market better, but if it means you are going to get poor returns, or even a loss, in comparison with buying elsewhere, then it makes little sense. Average yields in the UK are around 5.2% but it is easy to do far better than that if you know what to buy. Many people buy a property with an average yield, borrow money at 5% and after running costs are out of pocket every month. They hope that one day they will have a nice nest egg. It could work out ok for them but there are more fruitful and less risky ways of doing things.
The landlords we deal with who have multi million pound portfolios and most of the institutions have one thing in common and that is to target good returns from rental income. They are usually flexible on location if it means a better yield.
1. Find out what return you can get locally
My heart tells me that buying on my doorstep is nicer, but the closest buy to let I own is 86 miles from where I live and the furthest is 320 miles from where I live. The average distance my properties are from my hometown of Salisbury is 195.5 miles. Why? My hometown of Salisbury is dreadful for a decent return on investment with estate agents getting excited about 5% yields. Research what a decent yield is in your home town, (gross yield = annual rent/purchase price) If you’re lucky your hometown will be a good place to invest. We have landlords with large portfolios who have bought through us in the North when they live in the South, we have never spoken to a landlord living in the North building a portfolio in the South! I buy property if the deal is good regardless of location and all my properties have been on developments offered to clients. You can download our free excel spreadsheet from our website and use it to calculate your returns.
More affluent areas tend to have a more stable market, the peaks and troughs of property prices are generally less exaggerated.
According to land registry figures many of the Southern cities and towns such as Bournemouth, Southampton and Reading have been some of the worst performing places for house price growth over the last 10 years. They have, however been some of the best performing places in the last three years (not necessarily showing wonderful growth but not declining).
The best performing location over the past few years has undoubtedly been prime London. If you are more a budding property speculator than a budding landlord, have deep pockets and you aren’t interested in monthly income then you could do well investing in prime London if it continues to rise (if you buy in prime London with a buy to let mortgage you may need to put money into the investment every month to cover all costs). It wouldn’t be my choice but it suits some. London properties also take the least time to let according to Countrywide at an average of 12 days, with property in the North of England taking an average of 15 days to let. The problem with prime London is that the average return on investment is dreadful in comparison with much of the rest of the country. If you are holding long term, in general, you will get a better return in the North of England and land registry data shows that long term house prices don’t necessarily favour the South, the ratio of property prices to earnings in the South is far higher than in the North of England which, in theory, gives the North of England’s house prices more freedom to grow.
It is often reported in the press that London property prices are performing well. Again land registry figures show that this is true for some parts of London but, as with the rest of the country, different locations perform differently.
From July 2012 to July 2013 the best performing places outside of London were
Wrexham up 6.2%
Stoke on Trent up 6.1%
Bridgend up 5.8%
Other land registry figures for the same period to challenge preconceptions:
Newham, home of the Olympic stadium up 0.7%
Westminster up 3.7%
Bournemouth down 1.2%
Brighton up 1.5%
Buckinghamshire up 1.8%
Cambridgeshire up 1.1%
Cornwall down 1.4%
East Sussex down 0.1%
Hampshire up 0.9%
Oxfordshire up 1.4%
Southampton up 0.3%
Bath and North East Somerset down 0.7%
Blaenau Gwent up 2.8%
St Helens up 2.3%
Some interesting facts on house price increases from land registry figures over 10 years, November 2002 to November 2012:
Many regions of Wales up by around 65%
Richmond Upon Thames 60.04%
What’s more from June to July 2013 Stockton on Tees up 2.8% and Middlesbrough up 2.7% outperformed every single London borough!
Much is reported about London outstripping the rest of the country but things aren’t that simple.
2. Look into other areas
Even if your hometown looks pretty good for rental yield (we’d say pretty good is in excess of 6.5% but you could do better) have a look at opportunities elsewhere. It’s a lot of money to invest without taking the time to look at what options are available to you. In general average returns in the South of England are not as good as returns in the North and average returns in affluent areas are not as high as in less affluent ones. home.co.uk recently carried out a survey of average sale and rental prices for two bedroom properties. Bootle in Merseyside came out top with 8.2% and Belgravia in London bottom with 2.4%. This goes a long way to explain why landlords who build larger portfolios are most prevalent in the North and least prevalent in London and the South East (Source – Association of Residential Letting Agents). The national letting agent Countrywide recently reported a 6% increase in tenant demand across London in 2012, a 27% increase across the South and a 49% increase in the North. These are baffling figures but I have no reason to doubt their reliability.
3. Do due diligence further afield
It only takes a little bit of time and effort to do due diligence by speaking to a few local letting agents to find out the sort of person a property you are looking at will attract, how much rent to expect, the length of time it will take to find a tenant and how many weeks a year you can expect it to be vacant. I have been involved in the sale of around 1000 investment properties throughout the UK and we have not had one client say that they can’t find a tenant for a property they bought. As long as you set the rent at the correct figure and the property is not in a state of disrepair it will let. There are many other factors which make properties unappealing to tenants but every property has its price to rent. We have experienced landlords on our books who only want ex local authority high rise flats because they offer a good return, again not for the majority but it suits some.
Using managing agents – If you would prefer someone to manage your property for you then it makes very little difference where you buy. You must choose managing agents wisely as they will determine the type of tenant you will get and will therefore have an impact on your income. Generally a good managing agent will have good trades people at good prices as a key to a successful lettings business is retaining landlords long term. They will run quotes past you and if you think it seems excessive find a recommended tradesman from Check a Trade or a similar website to get a second opinion. London agents tend to charge 12-15% of monthly rent, in other major cities the norm is around 10-12%, in other areas of the UK 10% is standard.
4. Buy wherever good deals are available – Buoyant markets mean less available deals
Buying with a good discount means you are:
protected from negative equity against further falls in house prices
likely to be able to refinance to release equity sooner
less under pressure to buy at the right time, worrying about whether you missed the bottom
probably getting a better return on investment than buying at market value
Fantastic property deals are easier to find in flatter markets.
Buying overseas – Finding advice on where to buy overseas is very difficult and I’m afraid to say I am not going to offer much either. It is simply too big a subject to cover. However if you are looking at investing overseas, research the following carefully:
Are you able to get an interest only mortgage or will it be capital and repayment (if repayment how does it affect your return on investment)?
Is your market holiday lets or long term lets?
For long term lets speak to local agents to ask the same questions as with the UK.
What type of tenant will my property attract?
How long will it take to rent?
How many weeks a year would you expect it to be vacant?
What will the agent charge for management?
Does it need to be furnished? What rent will you get for furnished vs unfurnished?
For holiday lets
What percentage will the agent charge?
Will they also charge for changeovers and are there any other additional charges?
How many weeks a year can you expect it to be occupied and how much rent will you get at different times of the year?
Trying to work out the best place to buy is very difficult. The poor house price performance of Newham and its Olympic regeneration makes this very clear. Buy property for the deal and for the actual return you know you can get from the rental income. There is nowhere in the UK where property is worth less than it was 10 years ago. Buy for income, hold it long term and capital growth can be considered a bonus to your investment not a requirement to make it worthwhile.