Everybody likes a good list, and property enthusiasts are no exception. It’s almost a national sport, identifying the newest up-and-coming investment opportunities; but as ever with “the next big thing”, as soon as you read about it, it’s already too late.
Still, if you’re interested in buy-to-let (BTL) property investment, there’s a good chance you had a look at a list or two over the holiday period – just like we did.
#1 The first big problem with national Top 10s or Top 5s is they never take into account where you live. As a BTL landlord you need to be available 24/7 to sort out any issues your property or your tenants might have, so a bargain in Blackburn is no use to you if you live in Bideford.
Unless, of course, you hire a management company to run it for you, but that will probably eat up most of the extra yield you’re hoping the list will deliver in the first place.
#2 The second problem they have is they are wildly different. Certainly, this makes them more entertaining, but it does make you doubt their reliability.
We were particularly struck by one Top 10 list which featured locations in Cambridge, Kent, Oxford, Surrey, Sussex, 4 London boroughs and a single northerly nomination which was York. These, we felt, were rather genteel and probably on the pricey side for a BTL property.
So we thought we’d check another list, a Top 5 this time, and we were assured that the places to be in 2017 were Hull, Inverness, Leeds, Manchester and Stockport.
Not that we have anything against any of these 15 locations; we were just mildly surprised that not one of them featured in both lists.
#3 The third bone of contention is the yield. The general consensus would seem to be that a 7% NET yield is a worthwhile return for an investor, yet these lists ambiguously referred to “overall yields”, and unambiguously to yields between 5.1 – 7.6% gross.
While we wouldn’t suggest that 5.1% gross isn’t worth getting up for, we certainly wouldn’t be setting our alarms early for it.
Particularly when you consider the fourth water-muddying factor, which is price.
#4 The trouble with average prices is that you rarely pay the average price; nor do the list compilers know what your realistic budget is. The Top 10 list refers to 2-bedroom properties ranging from an ‘average’ £149,000 to a fairly startling ‘average’ £400,000.
Now, these numbers might not alarm seasoned BTL landlords with substantial portfolios but to the relative novice they might be rather off-putting. Add to them the Stamp Duty surcharge on second homes and that price bracket becomes real food for thought and, possibly, indigestion.
#5 A fifth consideration that the lists ignore is your set-up costs; very few houses are bought ready to rent. How much is an HMO license in the area – indeed, is the local authority likely to grant one? How often does it have to be renewed, and for how much? How much is the council tax? What’s the local going rate for property management? Is there a good local supply of builders and tradesmen who understand conversions for rental who won’t rip you off?
It’s the kind of information a list can’t really give you but it’s absolutely vital you find out before you get in too deep.
#6 Another thing they don’t tell you is that considering the amount of work a BTL landlord has to get through, it doesn’t really pay that well.
First you have to find your property – a process of prolonged research which takes up a great deal of time and frequently more money than you bargained for. Then you have to buy it; however you go about this it’s recognised as one of the most complicated things we ever do.
Then it’s on to the conversion work, some of which you might be able to do yourself, or you’ll have to find someone reliable and capable to do it for you at reasonable rates. You’ll have to make sure the alterations and furnishings comply with a whole raft of legislation; then you’ll have to advertise your property, arrange viewings, draw up tenancies and organise rental payments.
When your tenants have moved in, there’s still the day to day management and maintenance to be taken care of – and you’ll be their first port of call when anything goes wrong so you have to be on standby 24/7.
That’s a lot of effort for what might, if you’re lucky, be a gross income of 5-7%.
#7 What the lists should tell you is not to concentrate so much on specific locations, but instead look at your sector options.
Rather than restricting yourself to the uncertainties of residential property, think outside the box and consider other forms of bricks and mortar property investment.
University accommodation, for example, is springing up all over the country. But this Purpose Built Student Accommodation (PBSA) as it’s known isn’t owned by the universities – much of it is owned by ordinary individual investors.
The traditional university halls of residence have for a while now been pretty much obsolete; a consistent increase in UK student numbers over the past 20 years, with record intakes over the past 4 years means the student body is around 2.3 million today. Student blocks are bursting at the seams, but with a national housing crisis the authorities are keen to get students out of HMOs.
The problem is, only 26% of them can find a PBSA room.
So this new wave of development is very much in demand from students, from the universities and from the government, demand that will continue for decades to come.
And since it’s classed as commercial property, there is no Stamp Duty to pay below a threshold of £150,000.
Student expectations are higher than ever, especially when it comes to accommodation. Today’s high-quality studios and en-suites are unrecognisable to anybody aged 30 or more, and the most sought-after are close to both campus and city centre.
Furthermore, they are run 24/7 by professional onsite management teams. For the students, this means carefree living with everything included in their rent. For investors, this means completely hands-off ownership, as the management takes care of every aspect of running the property.
This includes letting, rent collection, repairs, maintenance and everything else – all included in the purchase price.
When you add that to 8-10% NET yields fixed for a 10-year period, it really does put most BTL hotspots in the shade.
Another sector you might care to consider is Serviced Apartments, the UK’s fastest growing hospitality sector – because with the pound so weak for the foreseeable future, British tourism is booming. Again, these investment properties are fully managed to provide you with an effortless income.