London and major regional cities in the UK: a buy-to-let guide
Investing in
Now many potential landlords are concerned about the future of
However, there are still good reasons to invest
buy-to-let mortgages are still available, and mortgage rates are not expected to increase in the short or medium term;- rental demand is getting higher, especially for
micro-apartments , as more and more international students come to study in the UK; - the number of single households is on the rise;
- property prices in some
sub-markets (i.e. new developments in London) are starting to decrease, and now may be a good moment to enter the market while it is on the downswing.
Price movements
On average, there is an increasing price trend. Nationwide data indicate that property prices in Q3 2016 across the UK rose 5.4%, and Zoopla shows a 3.4% YoY increase in November.
The majority of the ten largest UK cities, including London, show an increase by
Cities | Average asking prices, £ |
Value change, % | |
---|---|---|---|
12 months | 10 years | ||
London | 909,567 | 4.27 | 50.67 |
Bristol | 300,604 | 5.83 | 28.72 |
Edinburgh | 284,899 | 3.22 | 21.63 |
Manchester | 206,261 | 4.56 | 17.48 |
Leeds | 199,028 | 3.23 | 16.24 |
Birmingham | 196,297 | 3.61 | 15.83 |
Sheffield | 189,172 | 4.35 | 15.19 |
Glasgow | 181,302 | 5.42 | 11.65 |
Liverpool | 158,570 | 2.69 | 8.80 |
Bradford | 129,682 | 0.04 | 4.38 |
Despite the general increasing trend, property specialists at international broker Tranio indicate a growing amount of discounts being offered in London’s most
A Tranio client tells her story of buying a flat in Central London with a discount:
Prices can be negotiated down as much as 20%. Asking prices are also lower than before the Brexit referendum. I will give you an example in the flat on which we put an offer. The flat was listed at the beginning of this year at £1,375,000, and after Brexit the price went down to £1,100,000.
We started our negotiation at £800,000 and then raised it to £850,000; the real estate agent is probably going to meet us halfway at £875,000 (21% off the asking price). Sometimes, when they see that they cannot get good offers and all the buyers are starting low, they take the properties off the market for a while. I experienced this with two houses already. We put in an offer and they came back after a week, saying they don't want to sell. But in July, when it first happened, you could have pushed it even more. Now the pound is recovering, and there is a bit of confidence.
For
Purchase cost
Despite falling prices and, therefore, more affordable investment opportunities, many potential landlords are concerned about the increased stamp duty: as of April 2016, buyers have to pay an extra 3% stamp duty
Other additional expenses include legal fees (0.5% of the purchase cost), survey fees, if needed (from 0.03 to 0.5%), and other costs (removal costs, service charges, etc.). Total costs of purchasing
% of price | £ | |
---|---|---|
Price of property | 909,567 | |
Stamp duty | 6.90 | 62,765 |
Legal fees | 0.50 | 4,548 |
Survey fees (from lender’s valuation to full structural) |
||
Estate agent's fees | 0.00 | 0 |
Removals | 0.1 | 1,400 |
Total above price |
High costs of purchasing
The interest rate is normally higher. The cheapest
The deposit is generally bigger as well. A future landlord has to put down a minimum of 25%, although sometimes (e.g. when rental income is not sufficient) lenders require 40% or more.
There are also eligibility criteria:
- expected rental income: the annual rental income must be at least 125% of the annual mortgage payment (e.g. if an investor is paying £20,000 in mortgage interest a year, his rental income should be at least £25,000);
- borrower’s age limits: most banks and building societies insist that the borrower must be at least 25 years old and not over
70–75 years at the end of the mortgage term; - minimum income: usually a minimum annual salary of £25,000 is required.
There can be other criteria as well. For example,
Returns
Cities | Average asking rents, £, per month | Yields, % |
---|---|---|
Glasgow | 1,105 | 8.36 |
Leeds | 1,125 | 7.14 |
Manchester | 1,065 | 6.42 |
Sheffield | 946 | 6.26 |
Birmingham | 1,001 | 5.82 |
Edinburgh | 1,111 | 4.68 |
Liverpool | 759 | 4.64 |
Bradford | 488 | 4.52 |
Bristol | 1,121 | 4.47 |
London | 2,773 | 3.66 |
For example, in Leeds the average home costs £189,172 and the average annual rental income is £13,500, so rental yield is 7.14% (13,500/189,172*100%).
If a property is bought with a mortgage, an annual return on investment (ROI) may be calculated instead of
To find a yearly return on investment, the investor should subtract an annual mortgage cost from the yearly rent and work this amount out as a proportion of the investment. For a £189,172 property (an average price in Leeds), for example, that could be let for £13,500 per annum (an average rent in Leeds), an investor pays a £75,668 deposit (40%) and about a £7,000 stamp duty. The overall cost of investment is £82,668 (deposit plus buying costs), so the annual return on investment comes to 16.33% (13,500/82,668*100%).
It is worth noting, however, that taxes and maintenance costs will eat into rental return. These costs include:
- taxes (income tax on rental income and Council Tax);
- mortgage payments;
- maintenance and repairs (including replacing fixtures and fittings, cleaning and gardening);
- buildings and contents insurance (
1–4% of the rent); - costs of letting the property (letting agents’ fees and advertising);
- ground rent and service charges (if the property is leasehold).
Current offers
Tranio offers student flats in UK for
- apartments in Liverpool for £174,000 with absolute annual return of £19,793 and 10% rental yield;
- apartments for
£69,995-99,550 in a new development in Liverpool with an absolute annual return of around £4,900 and a 7% yield; - apartments in Manchester:
one-bedroom apartments starting from £98,000 andtwo-bedroom apartments starting from £140,000, with a guaranteed yield of 7% in two years.
Things to consider before buying a buy-to-let property:
- Location. Location is the most important consideration, and it will likely determine the type of tenant. It is recommended to choose a promising area, a place where people would like to live for a variety of reasons (i.e. a commuter belt with good transport links, areas with good schools, or locations where new transport links or schools are expected to appear in the near future).
- Tenants. Investors are advised to think about the type of tenant they want to attract: families, young professionals or students. This may help in the choice of property type and the property’s location. For example, if it is a family, the investor would consider one
or two-family houses near schools. If they are students, a more appropriate choice would be small, inexpensive flats in the proximity of a university. - Condition of the property. In case of properties needing improvement, banks can restrict the amount of money the investor can borrow, and letting can be delayed. It is advisable to consider carefully whether mortgage payments would be afforded during the renovation period.
- Rental income. It is worth remembering that higher yields mean higher risks. In addition, it is important to keep monthly payments below rental income to have a profitable business.
Yulia Kozhevnikova, Tranio.com
Originally published on Bridgingandcommercial.co.uk
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