Irrespective of which part of the property market you are seeking to invest in, there are some basic ground rules:
- The first and foremost is to obtain qualified professional advice as to whether to buy in a company name or individually, as there are lots of different taxes to navigate.
- The second is to ensure you understand your cost of capital – by this we mean, are you borrowing funds in order to buy and if so, does your rental return after costs and taxes, cover your monthly payments? What were to happen if your borrowing costs increased by 1% or 2% or 3% – would the income from the asset still cover the debt payments?
- The third is to understand the market you are buying into – what has driven the increase in demand? What are the price points where properties actually let (and this could be flats, houses, or student accommodation) and how long does it take to let? What has driven this, for example, have companies moved, has a university expanded its intake?
- The fourth is to set the rental price in the context of where the transactions are occurring, rather than where you think it might rent (if your rental price is in the 75th percentile of rents achieved, you are not appealing to all of your potential market, and one month with no tenant is a month with no income, which in turn affects your yield).
- Fifth is to choose your tenant carefully. A party house will cost you more to renovate than renting to members of the Clergy. Sixth is to establish your exit strategy. If you need to sell, how long would it take and who might be the natural buyer? A guide is perhaps the amount of time the property you are considering buying has been on the market, the discount you negotiated and what drove that discount.
On a pure income basis, a £300,000 property might attract £1,000 per calendar month in rent, or a 4% gross yield. A £600,000 property may only attract £1,600 per calendar month rent, as there are fewer people who can afford it – resulting in a 3.2% gross yield. A more expensive property which generates more income, may not actually make you as much money on your investment.
On the upside, however, we know that there are not enough houses in the UK and certainly not enough are being built, so there will always be demand – but the rate of capital growth in a property is not assured, given lending restrictions and the current political climate. There is value in this market, but only for those who do their homework and this is where a good agent with local data is invaluable.