There are several different residential property sectors that one can invest in when considering buy-to-let property in the UK, primarily being off-plan developments (not yet built), new builds (built in the last 2 years), student accommodation, auctions, traditional purchase of pre-owned residential properties via the likes of estate agents, holiday accommodation, etc. It’s best to always conduct your own research and avoid merely accepting the information provided by anyone connected to the seller/vendor, in any way.
The following are points to keep in mind when exploring the different property sectors:
1. Off-plan (not yet built)
Don’t let the glitz and glamour of the sales brochure lull you into a false sense of security. Due diligence is always needed. Off-plan properties as investments are generally not the best performing choice, when compared to other forms of UK property investment. Yes, the properties will likely increase in value over time, but often the capital cost is high, because the building is new and the marketing makes it look fantastic, when in reality you’re subsidising that capital cost differential with the first few years of rental income, which rather defeats the object.
Always check the developer’s track record and don’t just take their word for it. Check previous developments and see if people have complained about the quality/value by searching online. Track price movements and see how they performed.
Be wary of smaller developers where the sale agreement makes provision for the developer to make use of the funds you have deposited, to fund their building process. The obvious risks of that model are if that developer runs into financial difficulties or worse and is shut down, then your money can be tied up for long periods and possibly even lost altogether.
There may also be delays for any reason and if the delays exceed a certain period, the conditions for the mortgage might have changed, or possibly your own financial circumstances, resulting in complications or the withdrawal of the mortgage, after you’ve already paid out deposits. This could result in financial losses, should you not be able to recover part or all your deposit money back, not to mention the opportunity cost of having had that money tied up for the period. The credit interest rate on any funds that you pay in advance is also zero, or very low, so factor that in.
Another potential pitfall might be that when the development is complete and you have taken possession of the property, you’ll be competing with every other BTL landlord in the development, to procure a tenant and that can result in some downward pressure on rental rates and possibly even months of voids (empty property with no rent-paying tenant, while you still have holding costs). Some developers solve this problem by offering guaranteed rental returns for 12-24 months, but just make sure that you ascertain normal market related rental values so that you know what to expect when this subsidy ends. It’s not ideal if you receive a good yield for a year or two during the subsidy and once the subsidy ends, your rental yield drops a few percentage points.
2. New builds (homes built within 2 years of your purchase)
New builds have certain advantages, such as building defects being covered by the builder’s guarantee, which is typically for 10 years after the date of completion. They should also be far more environmentally friendly and economically energy efficient, than their older counterparts, due to the updates in technology.
With apartments, pay attention to the service charges which can start out low, and might start ramping up, as the building starts to age, as well as the lease lengths. Check the rules with respect to ground rents, so that you understand what increases you might be facing and when.
It’s can be harder to use the sales comparison approach for the DD for pricing on new builds when there are no, or too few resales to compare, outside of the developer’s original sales, as it’s harder to get an idea of price movement.
The advantage of a new build over an off-plan purchase is that the building is now in existence, so you can see what you’re purchasing, and you’ll likely be able to find out what sort of competition there might be, for tenants at the time of purchasing.
3. Student accommodation
Student accommodation on the surface seem to offer very high rental yields, but the banks generally won’t provide mortgages for them, so those tend to require cash to be purchased. There’s always cause for concern if the banks won’t finance a property because that generally means that the value is less predictable and stable/secure than other property categories and therefore riskier. Student accommodation units tend to have very high cost per SQ FT rates, as their prices are largely determined based on their rental yields, rather than the market value of the bricks and mortar.
If all things always remained equal (which they don’t), then this might not be a problem, but if Covid-19 has taught us anything, it’s taught us that you should always prepare for the unexpected.
When students couldn’t travel, many of these units stood idle and when vendors needed to sell, many took a sizeable hit on the capital cost to attract a new buyer, more so than depreciation on standard BTL property in the same period. The price points of SA are low, so that seems like an advantage, but if you buy at £50k and sell at £40k after a couple of years, the rental of £300 pcm won’t have done you much good. You’re also limited to a small buyer pool of other cash buyers, making it niche.
Auctions can be a good source of BMV (below market value) properties for your UK property investment, but once again, the buyer must always make sure that due diligence has been conducted. Make sure that you do the research before the day of the auction and make sure that you’re aware of the terms and conditions of the respective auction and have familiarised yourself with the legal pack, which is all the relevant legal documents relating to the property and the sale thereof.
There are 2 different types of auctions in England, being a) traditional auction and b) modern auction. The differences are primarily the time frame in which the transaction must be completed.
(a.) Traditional auction
These will always have a reserve price set by the vendor. When bidding on these properties, the purchaser must have the deposit (10%) which is non-refundable and finance in place, before the auction, as contracts are exchanged the same day as the auction. Completion generally must have occurred within 28 days of the date of auction. Some of the legal work is required to have been carried out before the auction. There are advantages of this system for the vendor and the purchaser, as the parties will have certainty of the transaction far quicker than the modern version of auction.
(b.) Modern auction
The modern auction process is carried out online. Reserve prices are once again set by the vendor, but buyers have more time to prepare. The auction process can take place for a period of up to 30 days. The successful bidder can have up to 28 days after the date of the auction to get their mortgage in place and conduct all their checks and a further 28 days to complete, so a maximum of 56 days in total. They generally need to pay a non-refundable deposit on the day of the auction, which can be up to 5% of the purchase consideration, which the vendor would be able to retain, should the purchaser not complete for any reason, from their side.
Some of the obvious risks with auctions are circumstances where you may have already incurred costs before the auction, by way of legal fees and a survey and then not be successful in your bid, resulting in the loss of those expenses.
With auctions, you must always read the documents in the legal pack, from start to finish, as some auctioneers allow the vendor to write in special clauses, committing the buyer to certain expenses that would otherwise have been paid by the vendor. It’s best to avoid a scenario where you’re successful at the auction, only to learn that you’re responsible for another £5k to £20k that you weren’t expecting.
With auctions, you always set your maximum limit and never bid over it. And don’t be fooled by the advertising of a ‘guide price’, because that’s not a guide for where they think it will sell, but rather more like an indication of within 10% of where the reserve price has been set, so you’ll likely pay much more than that figure, for a successful bid. Often at auctions, the final price paid will be in excess of the realistic market value of the property, because people don’t do their homework and get caught up in the process.
5. Pre-owned residential property purchase via traditional methods
This is the more common way in which properties are generally purchased, but even with this process, there are pitfalls to look out for. Firstly, to effectively understand the market value of these properties can be complicated. There are software programs that can assist, but they mostly work on algorithms and each one may be different, so 2 programs can yield different figures.
These figures can also be thrown out by a single overpriced sale, where another buyer hasn’t done their homework or had different motivating factors to purchase and thus overpaid. That one sale can skew the pricing of other similar properties for a while, until a few more sales have been completed, with the results having shown up on Land Registry and then the algorithm adjusts, accordingly.
There’s also the ever-present risk of being gazumped (when someone else comes along and makes a higher offer to the vendor), because a property purchase in England is not binding on either party, until exchange.
This can also have obvious economic ramifications, if you’ve already incurred costs in the conveyancing process and have already paid for a property survey, which you should always do, before exchanging.
Good opportunities are possible to find, but you must do a little more work and hunt high and low. For investment, it’s better to look for a property that’s under-priced and requires value-add, i.e. modernisation, adding space, converting to HMO, etc.
6. Holiday Accommodation
Holiday homes can also qualify as part of an investment strategy, but they tend to cost more than a normal residential property due to their location and they can be harder to finance. They’ll also likely suffer higher levels of wear and tear than a traditional buy-to-let, cost more to run and potentially suffer more voids.