WHAT TO BUY
The type of property that a landlord chooses to invest in will depend largely on their investment selection strategy
There are essentially 3 types of property that a landlord can buy:
A flat or apartment
House / bungalow
What a landlord chooses to invest in will ultimately be partly down to where you invest (more than 50% in London live in apartments) and what type of tenants a landlord is looking to attract.
Old or New?
The other factor confronting many investors is whether to buy a new investment property or an existing or second hand one.
New properties have the advantage in the lettings market of being newly fitted out and decorated. They normally come with all the basic appliances such as hob, cooker, oven and sometimes if the developer is feeling generous a fridge freezer and washing machine. In some cases it is possible to personalise the kitchen and bathroom by selecting from a limited range of units, tiles, etc. The amount of choice given normally relates to the price; with greater choice given to the purchasers of the more expensive properties. Flooring generally doesn’t come as standard, but again this can be thrown in as an incentive by the developer. Gardens however are not provided and therefore a landlord will have to: design, landscape and plant it themselves. Unless off course they purchase the show home which either becomes available at the end of the development or are sold to investors at the beginning of the development with the house builder leasing the property back during the marketing period. This gives a property investor a guaranteed tenant for perhaps a couple of years, therefore it can be quite an attractive proposition.
One observation from somebody who has bought several new homes. If you think that there will be nothing to do once you take possession. Think again! Unfortunately there is such a thing called ‘snagging’. This is a construction term referring to the activity of picking up on all the little things that aren’t quite right following the ‘hand over’ of the property from the developer. The odd leak, a door mechanism that doesn’t work, poor finishing, etc. Unfortunately, with the lack of trained and skilled tradesmen available to the building industry, this list can be extensive. Don’t be surprised if it runs into double figures. If you can’t face arguing with the developer there are Building Surveyors that will do it for you. Prices start at £250 and surveyors are available from www.newbuildinspections.com. Alternatively it is possible to download a full snagging list from www.snagging.org for just £14.99 and do it yourself.
Assuming that ‘snagging’ isn’t too painful, then the big advantage off course with a new property is that everything is done. For this convenience and having a modern kitchen and bathroom, you pay a premium. At least 8% and often more likely to be 10-15% compared to a similar second hand property. One tip is if you do go down this route. Developers tend to increase prices as a development gets closer to completion. Therefore to buy at the beginning of a development will probably mean, (assuming stable prices), the value of your investment should rise. If you were buying to live in, you might be deterred by the signs of building activity and the incomplete look of the development. Tenants generally are a bit more forgiving and most will just see the fact that everything is brand new. On completion of the development, the uplift in price from first sale averages between 5-10% assuming stable prices.
This period of dwellings incorporate a variety of styles. The 1950’s began with the continuing trend towards the building of semi-detached 3 bedroom houses. This type of house was built in large numbers by councils in particular and incorporated rear gardens that by modern standards were very generous. The 1960’s and 70’s saw the development of increasing numbers of private sector houses from starter units to four bed detached. Most of these made provision for off street parking in the form of drives or garages; as well as providing front and rear gardens. The 1980’s were marked by the demise of the ‘Parker Morris’ standards. These standards had remained in force since the Second World War and ensured that rooms were of a minimum size. The result was that the private sector started to reduce the size of rooms, particularly in areas where land values were high such as London and the South East.
The result is that with, pre-1980’s houses you tend to get more space for your money. Public sector housing provision has slumped from providing the majority of new housing to now producing a very small proportion. Therefore, most houses and flats from the late 1960’s onwards are products of private sector speculative development and by the 1980’s practically all were. Apartments as they are now known; were largely a public sector invention and most were built during this time by local authorities. There were also small numbers of low-rise private apartment developments built. These tended to be built in high value areas in and around major cities where land prices were higher and a concentration of professional singles and couples provided a ready demand for these niche developments.
Pre 2nd world war
These properties are varied in layout and size. Design had moved away from the terrace layout of the Victorian era with builders electing instead for a semi-detached or detached layout. A move towards more suburban layouts and the arrival of the car meant that these houses were often built along what were; quiet radial roads. These radial routes are no longer so quiet and many are now heavily trafficked arteries. The advantage of these properties is that whilst their rooms are smaller than their Victorian predecessors, window openings in side elevations mean that they are comparatively light. Gardens are also larger, although typically they are long and thin. Whilst they lack some of the architectural features of older properties their windows frequently incorporate leaded lights with attractive coloured designs. The downside with these properties is that whilst many have 3 bedrooms, one is often only a box and therefore where a landlord is seeking a multiple let accommodation is limited.
These types of property are very much in vogue at the moment, so expect to pay a premium, particularly for a good one with “period features”. Research carried out by the Nationwide in 2003 indicates that the premium can range from 2-8% for an investor to acquire a Victorian property. In some areas the ubiquity of the terrace property still makes them one of the cheapest buys beloved by first time buyers and investors alike.
These properties are most commonly found as a semi-detached or in terraces. Part of their popularity is down to their generous sized rooms and ceiling heights. Their big disadvantage is that they only have small garden areas or sometimes just a yard and often front directly on to the road. Car parking therefore tends to be on street. Their design means that gardens tend to be narrow and therefore privacy is sometimes compromised.
One point that I would make is that there is no point in paying a premium for a property with architectural features such as: tall skirting boards, fireplaces and ornate cornices, etc. These types of detail can be installed relatively easily and cheaply & add considerable value. For instance a standard cast iron fireplace can be obtained from an architectural salvage operator for £150 -£250 and fitted by a builder for £125. Therefore, paying an extra £5-10,000 for a property because it has a couple of original fireplaces does not make good investment sense.
A pre-Victorian building has a strong chance of being listed by why of age or its’ historic nature. What does ‘listed’ mean? A Listed Building is simply a building that has been designated by the Department of National Heritage as having “historic or architectural importance”. The result is the building is placed upon a statutory list. In practice what this means is that even if you own the property carrying out the smallest alteration like attaching an external light will technically require approval from the local council’s ‘Planners’. Ideally, it’s always best to seek advice from them about the acceptability of the work you propose. Remember unauthorised work to a Listed Building is a criminal act. Something Planners / Conservation Officers are all too keen to point out.
There are three grades; I, II* and II. The vast majority of buildings are II or II* (96%), whilst Grade 1 is the most important. The Nationwide Survey indicates that you should expect to pay a premium of between 18-34% for these older properties.
The main consideration in buying an investment property that is so old to rent out is the additional maintenance cost and management time. Most people accept that an older property has more character & charm. What you as an investor need to ask yourself is. Will this generate more rent or capital appreciation in the long run? If it does, will this be sufficient compensation for the extra purchase and ‘upkeep’ costs. Maintenance and any improvements you want to do will be severely hampered if the property is ‘listed’. If you buy a Listed Building on the basis that you need to undertake development works as part a your investment plan. Make sure that you check things out with the Planners first.
One thing to consider in buying an old property, particularly a ‘listed’ one. In these times of mass produced heterogeneous buildings many people are constantly looking for character and uniqueness. Character properties are limited in supply. Therefore, those properties correctly ‘fitted out’ and in the right location, should continue to command premium prices and rents.
The layout or potential layout of a building is an important consideration when purchasing an investment property. Size or the number of rooms isn’t always the most important factor in determining which property will generate the best returns or their effectiveness in providing quality space for your tenants. Room proportions are also important. For instance; you identify a 6 bed house at a good price. However, on closer inspection; two of the bedrooms are too small for a double bed and another provides access to a bedroom. All this is fine for a family, but if you are looking to let the rooms separately, it means the letable room count comes down to three. The price therefore should reflect the investment value of a 3 bed property, unless off course you can reconfigure the space.
The trend now is to maximise useable space and to have open flexible rooms. The prime example of this is the popularity of the single living space with a combined kitchen/ diner / lounge or the so called ‘family room’ (kitchen / diner). These changes in taste have partly been bought on by modern design principles emphasising light and space, but also by developers wanting to cram more units onto expensive building land. This trend can offer real opportunities to more entrepreneurial investors willing to carry out the reconfiguring of internal space.
Layouts can often be altered relatively easily and inexpensively; unless the work involves the removal of major load bearing parts of the building. The layout of a property rarely needs to be fixed. With the advise of a good builder, they can be enhanced to maximise the potential of the internal space. Personally, I have probably taken out or moved more internal walls than I have had ‘hot dinners’. It’s quite a liberating experience to realise that an investment properties potential is not limited by the original configuration of walls and rooms. Two examples of properties that I have altered are given below. In both cases re-interpretation of the layout of the building has enabled the full potential value of the properties to be unlocked. Once a landlord sets off down the path of altering layouts you very quickly arrive at the more comprehensive full refurbishment of property. Refurbishment can involve a whole range of works from a little decoration to a full rebuild.
The first example involved a very small 1 bed flat in a Listed Building. The living room was not huge, about 3.5m * 4m and was separated from a small kitchen by an arched (very eighties) doorway. I therefore took out this dividing stud wall to create a single open plan living area. This made the space feel much larger, lighter and more spacious. In a practical sense the space worked more effectively increasing both the properties value and its’ ‘let ability’.
The other property was a 4 bed detached property. I purchased it with 4 beds and a downstairs bathroom. Never a strong selling point! The property not surprisingly had failed to sell and was available cheaply. The first thing I did was to put the bathroom upstairs. I then opened up the living space and created a large family room and separate utility. Yes, there was a lot of work. But when I sold several years later having doubled my money it was worth it!