Investing in Residential Property

houses going up

Many people choose to supplement their reduced pension returns by investing in property for Buy-to-let, holiday homes or as secondary accommodation. Looked at long term, residential property is still the soundest of investments and is a great way to provide a secure future for yourself and your family.

Capital Growth

Despite the (questionably) best endeavours of the Bank of England and the Treasury, property prices remain cyclical and as a consequence any investment in residential property should regarded as a longer term investment to be held for 10 years or more. Over the last 4 decades, it has consistently proved to be a truly excellent investment.

Overall Return on Capital

Even without taking into account the benefit of rental income Landlords should be looking for an average return per annum on capital invested of at least 30%. For example if a £100,000 property is purchased with a cash deposit of £30,000 a 5% gain in the price to £110,000 produces a return of 33% on capital (£10,000 on £30,000 invested) Contrast that with an all cash purchase which would only have produced a mere 5%

Gearing Up

If possible we suggest you don’t put all your capital into one property. By spreading the cash element of your funding you can markedly increase your total return by putting together a mixed portfolio of several properties instead. The rental income received from the properties, of course, provides a significant contribution to the costs of repaying the loans and although there are many exceptions, the perfect scenario is that your projected rental and surplus income from other sources should exceed the cost of repayments by 25% (125% Coverage). As things stand at present, providing the rent is set at a competitive level, in our area there is unlikely to be any void periods.

Yields

Over the longer term – in addition to capital growth &/or buying at discounted prices – decent quality residential property suited to the investment market is predicted to continue to provide an excellent yield of between 3 & 7%. You will also find that, subject to the usual influence of supply and demand, the total return increases over time as inflation, even when comparatively low, results in a continuous increase in rents coupled with the gradual erosion in real terms of the value of your loan repayments.

Type of Property

What type of property qualifies as “decent quality suited to the investment market?” In a nutshell look at the structural condition, cost of upkeep and tenant appeal/letting potential! Ideally this points to properties that do not have heavy service charges; are in good structural and decorative condition; well fitted; easily maintained; near to all the amenities and travel facilities; bedrooms of an equally practical size; located in a generally safe environment and close to a thriving local economy not over dominated by one or two big employers. Although that’s the ideal textbook description, in the particular areas in which we operate, apart from the odd local exception, a momentary glut of flats for instance, there is a high level of demand for all types of property as long as they are in good condition. Properties in the country, old and new, also let very readily.

Mortgage Funds

On the assumption that your general financial position is reasonably secure and you have a generally good credit history, we can readily obtain funding for residential investment properties through a choice of specialist lenders. Although 85% loans are readily available they can be a little more expensive so as long as the borrower can find an extra 10%, 75% loans are proving better value.

Off-Plan Purchases

Over the last decade, buying off-plan has been a popular way of acquiring property. The idea is to commit to a purchase prior to building work having started in return for which you require a discount on the price &/or a period of time during which the rent will be guaranteed by the Developer.

With regard to the discount the key here is the accuracy of the valuation given at the time you legally commit yourself to the purchase and the level of discount against that valuation. The valuation figure quoted should be based purely on what the property, as a finished article, would be worth in the market at the time of committing to the purchase and not when it is eventually completed.

Providing the terms of purchase are right, buying off-plan can be exceptionally rewarding – in the good times when investors are able to sell at a profit before completion and in difficult market conditions where the investor is protected by the generous in built price advantage &/or the guaranteed rent. Whilst buying at off-plan prices can be rewarding we suggest great caution, especially during a credit crunch when there is a serious risk of even major developers finding they are not financially in a position to complete the development!

Rental Income Insurances

There are various excellent schemes available which provide comfort by guaranteeing the rental income &/or provide protection against legal costs associated with the letting. On a limited range of property there is an enhanced policy available which , as well as the rent and legals, covers most other eventualities.

Tax

Before going ahead you should first consult a qualified tax advisor – we can provide a recommended list of advisors. Investments in SIPPs however are not subject to either income or capital gains tax. UK Income Tax: Net income from lettings is subject to tax and we have general guidance pamphlets available on request. UK Capital Gains Tax: After taking into account personal allowances and sale costs any residual gain in value from selling an investment property is subject to C.G.T.

Summary

As with the vast majority of investments, we believe that investors should take a medium to long term view as far as investing in residential property is concerned. Don’t buy with the automatic expectation of making an immediate profit but buy to get a better return than you could elsewhere. Look to cover the mortgage payments from the rent received and with the necessary caution use the gearing effect of the cash value in your existing investment property as a deposit for further purchases.

Help and Guidance at Hand

Whatever information and guidance you may need we can help. We have dedicated Lettings and Management Centres which have long term experience of managing properties for investors including of course numerous private Landlords. If this service is of interest there is information available from your nearest Country Properties Office setting out the various ways we can help you through each stage of the transaction – from locating decent quality property suitable for investment all the way through to finding a reliable tenant.

IMPORTANT NOTICE

Investment in residential property can be risky and unsuitable for some people. Independent professional financial and legal advice should be taken before entering into any transaction. Please note also that the Financial Services Authority itself does not regulate property purchase, tax or legal advice.