There are a number of considerations to be made prior to property purchase, whether you are purchasing an investment House or a Home for your family, this is one of the most expensive, if not the most expensive investments you will make in your lifetime. Before you go ahead, read our:
Usually the time spent overseas, changes your view on where you wish to live upon your return to the UK. Rarely is the home that you left behind still available or even suitable. Because of this a number of expatriates defer property purchase until a year or so before return.
However, our clients realise that a “foot on the property ladder” could provide capital gain and/or income, as well as important identity record through the credit or electoral records, and therefore look at property investment as a smart move into investment and repatriation planning.
We recognize that the ‘promise’ of Gain or Yield is the usual approach to property investment and we all see the projections of 20% gain or 15% yield a regular basis. We are happy to show you the “Actual Return”, net of all costs, achieved on behalf of our clients and how best to assess these returns in advance and to plan the exit strategy before you have entered the property market. We can illustrate all of the purchase and management costs, as well as the tax implications and ensure that you enter with eyes wide open to the potential returns and the risks.
It takes a great deal of time and effort to research and buy the right investment property. We find that more often than not a property investor greatly underestimates the work, time and commitment it takes to be a successful property investor and landlord. By allowing us to do the work for you, you’ll avoid all of the costly errors and troubles that first time investors often encounter. We actually exist as a company because we have, over the years, come to realise that to achieve our property portfolio and aims, on a part-time basis and at a distance was extremely challenging.
There are no companies, that we are aware of, that understand the expatriate or foreign investor as well as Homes or Houses.
Our services are structured to accommodate time differences, different working weeks, long distance communication and portfolio building and management from a pure non resident investment perspective.
As our client, you will not be limited to a geographical area. We can purchase throughout the UK through our own knowledge and network of partners and if needed we will make arrangements with one of our national partners for you.
However, we are based in the North East of England and we do specialize in this region. Therefore, we offer fuller services in project management for property refurbishment for example, if your property is within 50 mile of our office.
This is valid concern and should always be a consideration before investing in property. Many people have heard horror stories about purchasing a buy to let property, and not being able to let it out, or on the other hand finding ‘awful tenants’. The truth is this normally happens to the investor who try’s to do everything themselves and believes property investing is easy.
As well as our due diligence and research into rental market demand before purchasing any property, we aid the process by commencing the marketing discreetly prior to completion to selected tenants, and then direct and focused marketing as soon as you legally complete. This can mean we have tenants ready or viewing mid refurbishment, and this can aid the process.
Our background and reference checks go as far as is legally possible to prevent future tenant problems. When they do occur we deal with them swiftly.
The service is suitable for anyone who intends to invest in UK property for investment purposes. This includes those who want to invest but do not know the best way to begin or as is more likely the case, do not have the time.In addition, those who already own investment property and understand exactly what is involved can benefit from our portfolio management services.
We research regional purchase areas constantly to establish the rental demand and sale price fluctuation at a high level, using statistics provided by the Land Registry, as well as by search engines such as Rightmove, Zoopla, and Property Finder etc.In addition to internet research, we maintain regular face to face contact with estate agents, solicitors, development companies, private landlords and auctioneers. We use all means of keeping our eyes and ears open for opportunity.Once a suitable property is identified as having potential, a viewing is arranged and the history is researched for comparable pricing through Rightmove and the Land Registry, the area is investigated and the surrounding sales and lettings market is assessed.The macro due diligence is part of everyday work, the micro due diligence on your potential investment is specific to each property and varies in degrees dependent on the house and the location.
Our previous experience of refurbishing means we understand what it takes to refurbish a property to the highest quality, in the most cost effective and efficient manner. With over twelve year’s experience, we have strong relationships with our contractors and provide a maintenance service for all of our properties under management.
The costs are controlled on a daily basis and discounts on materials and services obtained at every opportunity. We understand the materials to be a primary cost; however, the most expensive materials are not always necessary, good materials with excellent quality workmanship is the key.
Further to this, our processes mean that before clients commit to purchase a property we provide them with estimate costs at outset. This also allows us to assess with you the cost in relation to the property value, we aim for 10% of property value for cosmetic refurbishment and as high as 50% for a full structural refurbishment where a significant capital gain or increase in yield is predicted.
We recommend that you have a maintenance and emergency fund for use in the eventuality of an unexpected repair, at least equivalent to 1 months rent. It gives you peace of mind and means that even in the absolute worst-case scenario you are not financially exposed. Remember, these funds, should be separate from your own living ‘emergency funds’.
WHAT ARE THE COSTS OF MAINTAINING A BUY TO LET
All property investment comes with Landlord responsibility for maintenance.
Some of those responsibilities are obligations by law, some are on an adhoc basis and some are generally just ‘good practise’.
It is crucial to note that several maintenance costs do not increase nor decrease with any correlation to your property value.
For example, a Boiler replacement is expensive. For a £50,000 property a replacement Boiler installed is around £2,500 (inclusive of labour & VAT).
The price is the same for a £100,000 property (subject to property size).
Therefore, the impact is directly on your investment return. A cost of £ 2,500 can be a 49% of annual rent on a £40,000 property versus 36% on a £100,000 property
The same calculation is crucial when assessing any fixed costs, such as Gas Certificates, Boiler Servicing, Buildings Insurance etc.
Homes or Houses cannot control maintenance requirements that are legal obligations, or those that are unpredictable such as a leaking sink or a boiler fault. We can however assist you in the management of preventative maintenance or indeed the negotiation at purchase, in reductions in asking price where we are able to assess the likelihood of maintenance requirements in advance.
Factoring in a new boiler at outset is a cost worth saving. For example; as a general ‘rule of thumb’ if the central heating system (boilers/radiators) was installed over 7 years ago, the likelihood of replacement or faults increases significantly. But if a boiler has been regularly serviced and maintained well, this risk reduces. Building in the potential for these types of expenditures at the point of purchase will always help to manage your budget going forward.
Property investment provides an opportunity for investors to achieve Capital Growth or Income. Some investors will look for both, but as with any investment a combination of both usually results in a mediocre return from either perspective.
Our strategy in the North is fundamentally yield driven, with cash flow positive investments, supported by a relatively low entry cost and densely populated rental environment.
HOW DO WE ACHIEVE THIS?
In the Land Registry House Price Index report of October2018, the data shows extremes of average pricing, with London having an average price of £528,368 versus a UK national average of £247,941 whilst the north east continues to have the lowest average price of £128,484. The North East of course, covers several areas from North Yorkshire to Northumberland, so this average is simply that, an average.
The rental market is strong and the shortage of housing well publicised, however, this does not provide a positive cash flow investment for properties where the purchase price is above the efficiency point for rental prices. For example, in the North East where the average price is ££128,484, rent of £600 per month produces a cash flow return of 5.6%, whereas a property at the UK national average of £247,941 achieving £600 per month rent has a cash flow return of 2.90%.
For discussion could be the subjective nature of how much is rent reasonable and how much are tenants really prepared to pay. In London where the average property price is 5X higher than the North East, we explored a London average price 4 Bed at £545,000 and researched the achievable rent. We found that £2000 per month, producing a cash flow return of between 3.9%, seemed to be the cut-off point in terms of affordability and what tenants are prepared to pay.
This is, of course, subjective from a tenant’s perspective and their cut off points could be based on necessity, shortage of supply or even on who is responsible for the rent. We do know however, that there is an efficiency point, where property prices continue to increase, and rental prices flatten, as the gap widens the cash flow return is reduced.
For further information from us on the benefits of cash flow positive investment contact us.
SO HOW DOES THE COST OF PROPERTY AFFECT THE YIELD?
The below table shows the correlation between purchase price in the North East and the achieved rent and the impact this can have on the R.O.I. (Return on Investment).