Monday 8 September 2014

Landlords: buy renovated for better returns

The buy-to-let industry is booming. Landlords are increasing their portfolios, rents are rising and the pension freedoms set to grace the market means there could soon be a whole new wave of landlords getting in on the action, but to really make a success of it, it all comes down to choosing the right property. So, what type of property will work for you?

Well, if research from HSBC is anything to go by, your best bet will be to go for a property that's already renovated. According to a survey, 43% of UK landlords who have only one buy-to-let (BTL) property plan to expand their portfolio in the near-future, with the majority – two-thirds, in fact – seeking a property that requires no renovation.

The figures show that the most popular choice for a second buy-to-let property is a two-bedroom flat that's ready for tenants to move into, with only 38% of landlords prepared to take on the challenge of a fixer-upper. This is despite the fact that a fully-renovated two-bedroom property will cost, on average, 43% (£58,500) more than one requiring refurbishment – or £194,599 rather than £136,042.

It sounds like a significant extra outlay, and it could make a lot of people think that a fixer-upper is the better-value option. But, when you consider the increased yields that can be achieved with a fully renovated property, it makes a lot of sense to give the run-down homes a miss.

According to HSBC's calculations, landlords who purchase a BTL property requiring no renovation receive an average yield of 5.4%, or 1% higher than those who purchase a property that requires extensive refurbishment (4.4%). 

The difference is equally as noticeable in terms of rental prospects: the average rental income for a two-bedroom property in immaculate condition is £872 per month, or 75% higher than the typical rental income achieved for lesser-standard properties (£498).

As you can see, the yields could largely counteract the initial outlay. If you were to buy a property that needed work doing, you'd need to consider the extra void periods – you couldn't move tenants in until the renovations were complete, and that could potentially mean several months of no rental income – not to mention the cost of doing the work itself, and the chance of finding further problems that will take longer, and cost more, to put right. Then there's the extra rent that can be charged, which helps explain why average yields are so much higher for properties in good condition.

Peter Dockar, head of mortgages at HSBC, commented: "Ready-to-move-into properties are often the savvier choice for landlords looking to purchase additional BTL properties. Not only does this avoid the need for lengthy and expensive renovations, it can also result in higher yields in most areas of the country. While the initial purchase price will be significantly higher, rental returns are also improved, making monthly mortgage and maintenance costs more palatable."

However, there's still the chance that you may not be able to foot the bill for a refurbished property – a barrier for 27% of landlords. Those that don't mind taking on extra work could therefore find it cheaper to buy a property in need of renovation – the yields will be lower in the short-term, but if you can foot the bill for renovation costs, you'll eventually achieve a higher rental income and overall yield.

Make sure you factor in all the costs, however. A new kitchen, new bathroom and redecoration of four rooms will cost around £10,428, according to HSBC's figures, but could add some £58,557 to the value of the property, so if you've got the time and the money it may be worth considering. It could work out well when it's time to remortgage, too, as the higher property price could mean you're able to benefit from a lower loan-to-value mortgage and, therefore, a better rate.

This will often only be an option for landlords that have spare savings to devote to refurbishments, and who can afford to have their property un-let for a few months. 

Ultimately, it all comes down to personal circumstances and overall financial situations, but the general preference would probably be for landlords to purchase a property that's in as good a state as possible. 

Peter Dockar concludes: "The choice is clear for landlords hoping to make the most out of their buy-to-let investment: either purchase or renovate a property to good condition or risk lower rental income and reduced overall yields. 

Maximising return on investment is crucial for landlords hoping to add more properties to their portfolio, and will help build a solid stream of income to supplement existing earnings or act as an alternative savings plan."

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