Looks Can Be Misleading
Recently we had one client look at a property in Queen’s Park for £285,000. The property looks like a house, as you enter it from street level and it has two floors; rare to get anything resembling a house in this location, at this price. The property is an ex council flat situated on the borders of Maida Vale and Queen’s Park.
The property already has an offer on it, but we were given the opportunity to close the deal, if we wanted to, due to the relationship we have with the agent. The angle here is to turn the kitchen into another bedroom and relocate it in a store room, which is next to the living room. This would turn the property from a two bedroom to a three bedroom property, and therefore attract a rental of £475pw, giving a yield of 8.23%; an excellent yield given the location, allowing for a £15,000 refurbishment, quoted by a builder.
This area is being pushed by the ripple effect, meaning as Maida Vale increases in value so do the neighbouring areas. Only a few minutes from this property on Bravington Rd we purchased three flats for £710k. We spent £180k refurbishing the block and we have just had an offer of £443k for the top floor flat. This demonstrates the area is on the rise.
We had a viewing on this Queen’s Park property on Friday and stressed the need for a quick decision due to the other offer being on the table; however to my surprise the response given was they did not want to proceed because they did not like the area.
This is actually a very silly reason; the criteria for choosing an investment is not whether someone likes the area, But whether the price will increase in the future.
There are only two things to consider: the value of the property and the rental. If they both are set to increase there is no question of liking the area.
There is only one reason why someone should not go for this property and this is if their money is working harder doing something else.
This is not the first time I have had this feedback. Notably a good few years ago, a client who lived in East Sussex wanted to invest in property so I showed him a deal in Westbourne Grove which was a three bedroom for £275,000, this was a duplex ex council property in a block of flats.
He travelled over from Sussex over the weekend to look at the area and the property from outside; and then told me he didn’t want it because he didn’t like the look of the block. Admittedly the block was ugly and a monstrosity.
I mentioned to him that looks were not what he should be considering, as he was not going to live in the property. At this time the rental on this property was a massive £720pw and this increased to £820pw, thanks to the Department of Social Security. This means after a deposit of £68,750 which is 25% of the property value you will have an income of £23,127pa net of mortgage, service charges, and management expenses. This was back in the day when the government had money of course, looking back this was a honeymoon period; however they cannot turn the tap off straight away in reducing benefits and rehousing tenants, there needs to be a winding down period, so after a few years of this you would have your whole deposit back! The current market rent on this property is about £550pw which gives you roughly £14k per annum after all costs, which is still a very good return as opposed to what was an excellent return.
This property was then offered to a seasoned property investor whom we explained the deal too and he purchased it blind purely on the basis of the cash flow. Money is more important than looks.
If you allow your opinion and sentiment to interfere with investing in property it will cost you in money terms. There’s a reason why you have a different day job to someone who deals full time in property and has knowledge of the area.
There is of course room for sentiment and feeling within some aspects of property, when purchasing properties at the higher end of the scale the feel of the property is essential. There are two types of buyers, one is the investor and the other the end user. When it comes to selling you want an end user to purchase the property. They do not purchase because it’s a deal, they purchase more from emotion. It is important to have all the elements which arouse someone to become an emotional purchaser – even down to the paintings and smells you have in the final finish of the property.
One of the reasons why recent auction results have been achieving higher than expected prices is because new buyers have flooded into the rooms; the latest Barnard Marcus auction raised £19.3m with a 75% success rate. Investors are now coming out disappointed from the auction rooms and many of them are commenting it is becoming difficult to purchase in auctions currently due to new buyers; an example of this is a one bedroom flat needing modernisation which sold for £424,000 in Bayswater on Tolbot Rd on the 14th February 2013. These are the people who have a bit of cash in the bank and are looking for investments for their pension and more money than they are getting in the bank.
So anything with a yield above 3.5% is a bonus for these buyers, their standards are low and this is being translated into inflated prices. As far as investments go there are not many decent places in the UK to put your money into than London property, as rentals are still very strong. However there are holes to be exploited in this new turn of the tide. From a sales point of view difficult Lots with issues can be got rid of via the auction route, for example if you have a DSS tenant in your property and wish to sell it, it will be difficult through an agent as most lenders do not like to lend on a property with this type of tenant. However in auction this will probably be missed, and once the hammer is down you have to put your 10% down come rain or shine. If you have just exchanged on a property for a lot cheaper than what it’s worth, reselling straight away may again be problematic due to lending, as lenders don’t like properties which are being sold very quickly for a quick profit; hence most have a six months waiting rule. However if the property is put in auction chances are this will be missed as well and the purchaser is forced to come up with the funds, they may need to resort to more expensive lending than originally anticipated.
There are still good reasons to purchase through auctions though; many of the novice buyers will have smallish budgets and therefore stock which is on the higher end will still be reserved for the investors, this can be seen by examining historical records.
Also sitting tenants and unknown tenancies will scare most novice buyers away as they do not have the confidence to sink their teeth into these types of deals; this is where you can still exploit the auction for your benefit.
Cambridge Square, W2
Purchase price £490k
- A large one bedroom flat in Cambridge Square
- Can be converted into a two bed flat
- We believe it is worth £650k
- Massive capital growth potential in the future
- Close to the shopping amenities of Oxford Street
Call us now to reserve!!
Sow & Reap
A Property Investment Company
!Tips of the Week
Generally if an investment is high risk it is high return and low risk is low return. Property is considered low risk, hence banks will lend 75%, BUT you can make high returns, if done well.
When renovating a BTL property always be mindful of not just the quotation but the time period, as any delay will cost you in lost rent.