WHICH PERIOD OF BTL PROPERTY SHOULD A LANDLORD BUY?
Well, that depends on a landlords investment selection strategy, but the key thing to always remember - 'it's not a place for you to live!'. When investing in property always think with your head and not your heart.
So new or old property?
Both property types have merits and downsides.
Buying a new build rental property
Brand new properties have an advantage in the lettings market. They hold the sparkle and draw of car driven off the production line. Newly decorated, they have nobody's elses dirt to put off a prospective tenant and therefore will always command a premium rent for that first tenancy.
New build property also often comes fully loaded with domestic appliances, fancy cooker hoods, gelaming hobs, cooker, oven and sometimes if the developer is feeling generous a fridge freezer and washing machine.
When buying a new property a landlord may be able 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 property developer. Gardens however are not provided and therefore a landlord will have to: design, landscape and plant it themselves.
Some developments offer landlords the option of guaranteed rent for a couple of years as part of the purchase price. This kind of offer of a 'hassle free let' with a 'guaranteed rent' has drawn many unsuspecting novice investors into buying a property. Unfortunately, after these initial guaranteed rents have come to an end many landlords have found it impossible to let out the property at anything like the same rental figure, but by then the deal has long been done.
My advice is always do thorough comparisons and research on local rents before believing the initial guaranteed yields are achievable on the open market. Often they are purely a piece of creative accounting by the property developer to help artificially inflate the true value of the property - buyers beware!
Another thing to remember, a new build, particularly if bought off-plan, will probably come with the time consuming headache of 'snagging'.
Snagging is the construction term referring to the activity of picking up on all those 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, cracks in the plaster etc. With the lack of trained and skilled tradesmen available to the building industry, these lists seem to be getting ever more extensive.
Don’t be surprised if it runs into double figures and doesn't require a number of re-visits to get the property up to an acceptable finish.
If you can’t face arguing with the developer there are Building Surveyors that will do it for you, with their typical charges starting at £250. Surveyors such as www.newbuildinspections.com specialise in snagging new builds or for those landlords who want to go it alone download a full snagging list from www.snagging.org for just £14.99 and do it yourself.
Assuming that the ‘snagging’ isn’t too painful, then the big advantages of a new property is that everything is done. No need for landlords to roll up their sleeves and dust off their property development hat. Be warned however, for this convenience you will pay a premium. A typical new build property will be priced at least 8%, but more likely 10-15% more expensive to a comparable 'second hand property'.
If you do go down the route of buying a brand new property, it is usually wise to get in early. Developers tend to increase prices as a development gets closer to completion.
If you were to live in the property, you might be deterred from buyng the first phase of development by the signs of building activity and the incomplete look of the development, but tenants generally are a bit more forgiving, and most will just see the fact that everything is brand new as more than compensation for the constant hammering.
On completion of a development, the uplift in price from the first sales averages between 5-10% - assuming stable property prices.
Buying Post War rental property
This period of dwellings incorporate a variety of styles. The 1950’s followed a trend in building semi-detached 3 bedroom houses. A type of house built in large numbers by councils, incorporating rear gardens and by modern standards very generously sized.
The 1960’s and 70’s saw the development of increasing numbers of private sector houses from starter units to four bedroom detached properties. Most 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
. Design standards that 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. As a result, pre-1980’s houses tend to provide greater 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 properties 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.
Buying Pre war rental property
Pre second world war property are varied in layout and size. Design had moved away from the terrace layout of the Victorian era, with builders electing increasingly 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 room and therefore where a landlord is seeking a multiple let the accommodation is limited for a tenant.
Buying Victorian/Edwardian rental property
Victorian/Edwardian property tend to be more costly than post war properties, 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% on a Victorian property. In some areas the ubiquity of the terrace property still makes them one of the cheapest buys, but this does depend on area. A Victorian terraced property still remains beloved by first time buyers and property investors alike and shows no sign of going out of fashion.
Part of the popularity of these period homes is down to 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 onto the road. Car parking tends to be on street and gardens narrow.
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.
Buying a pre-Victorian rental property
A pre-Victorian building has a strong chance of being listed. If you don't understand the impacts of a 'listing' to a property, put simply, a Listed Building
is a building that has been designated by the Department of National Heritage as having “historic or architectural importance”. My advice is avoid buying a Listed Building. Most are a nightmare to develop and maintain.
A listed building, is a building named and described upon a statutory list. In practice, the smallest alteration to the building, such as attaching an external light, will technically require approval from the local council’s planning department.
Legally you must seek advice from them about the acceptability of any building 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 of listed building; 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 listed properties.
The main consideration in buying an investment property that is so old to rent out is the additional maintenance costs 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 of a rental property
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!
There are essentially three types of property a landlord can invest in using a BTL mortgage
in the UK.