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Should You Invest in a Buy to Let in London?

Ask yourself the following –

Do you want capital growth?

Do you want to invest for the rental income?

Do you want a combination of capital growth and steady income?

How long are you prepared to have your money tied up in your investment for?

There are several reasons why people get into buy to let but it’s usually either viewed as a solid investment for the future, a way of making income immediately, or both. No matter the reasons you’re choosing to invest in buy to let, here’s some helpful advice if you’re trying to make the decision of investing in London.

Why is London not the first choice for buy to let landlords?

If you’re looking to get into buy to let as a career, London isn’t the most popular choice with landlords. This is mainly because the rental yield in London isn’t as high as what you could expect in other parts of the country. Many buy to let landlords opt for areas in the north of the country, where property prices are lower and rental yields are higher. However much higher capital appreciation happens in London, it’s just whether the investor has bought the buy to let as a longer term investment and not dependent on the short term yield.

Landlords don’t have the capital needed

Property in London is comparably expensive compared to everywhere else and many landlords don’t have the capital to invest. Even if you do, you’re choosing between spending your money on possibly one property in London, or two (or even three) somewhere else.

Stamp duty rises

The recent rises in stamp duty on second homes or buy to let property (since the 1st April 2016, anyone buying a property which will not be their main home will have to pay a higher rate of stamp duty) are fairly significant. Unlike the regular Stamp Duty, there is now an extra 3pc charged as a flat rate on the overall cost of the property. This is making London’s high property prices look even more unattractive to potential landlords.

Example of regular stamp duty:

If you’re buying a house for £275,000 you would pay no tax on the first £125,000. The next £125,000 will incur a 2pc tax charge of £2,500 and the remaining £25,000 will get another rise of 5pc worth £1250. This is a total bill of £3750.

Second home stamp duty:

With the extra 3pc added onto any property purchase over £40,000 this would increase that £3750 charge to £12,000!

Lower rental yields

Rental yields are also an issue. As property prices are so high in London compared to the rest of the UK, the gap between the cost of mortgage repayments and the amount of money you can expect in rent is usually considerably smaller.

Earning a small yield means you’re likely to be in more trouble financially if anything goes wrong, like long void periods, the rent not being paid on time or repairs that need to be carried out. Investing in property in London to rent is more of a risk if you’re reliant on the rental income to pay the mortgage and don’t have anything to fall back on if plans don’t work out.

Why do some people choose London for buy to let?

Many people choose London for their buy to let because it’s where they live and work. Keeping an eye and managing property when it’s closer is easier than buying at the other side of the country. If you’re planning on using an agent to manage the property (which many people do if the property is far away) this could seriously eat into your rental profits.

If you’re purely looking at a buy to let property as a long term investment but you’re not bothered about making a huge profit in rent, then London could work very well for you. As property prices in London keep rising, it makes it much more likely that you’ll get a higher profit when you come to sell the property. For a long term investment perspective then this makes sense, although as mentioned there will most certainly be a higher rate of capital gains to pay.

If you wish to rent out property to a specific market (young banking professionals) then there are ways you can increase the capability of earning higher rental yields, however this will involve some effort. Some investors buy lower end property in up and coming areas popular with young bankers (the Isle of Dogs is a popular spot for this), make considerable conversions to the property and then rent out by the room. This can mean a higher profit, but it’s also harder work as the tenant turnover is usually more rapid.

What to consider if you’re set on buying in London

If London just seems like the more sensible choice for you, try to make the most calculated decision you can on where to buy. As well as considering up and coming areas and locations, you should also consider the type of property.

Old vs new

Period property – If you want to keep your yields as high as possible, be wary of older period properties. Although they generally hold their value far better and therefore tend to sell quickly, they are more prone to having high maintenance costs. Older properties need regular maintenance and it’s more likely there will be expensive structural issues you’ll have to deal with during the course of your ownership.

New builds

New properties tend to have lower maintenance costs, but if you’ve bought a property with a lift and concierge service then you should be wary of high service charges. You might be able to rent the property out easily, but the rise in capital may be slower than a period property (especially if there are lots of new developments close by). If it’s in a good area, it should still be easy to sell when you’re ready to move on.

There are ways that you can get better deals from developers. If you’re less bothered about the exact location and can be more flexible, here are a few pointers that could help.

Keep an eye out for companies going into administration and make offers directly to the administrator.

Developers are usually in a rush to sell off remaining units in order to secure finances for their next projects. Try offering on buildings in completed flats where most of the units have been sold, you’re more likely to get a good deal.

Developers (like those listed on the stock market) may be focused on booking sales within the current financial year and therefore be more flexible in price to secure deals in time. Offering around one month before the end of this period can mean you get a bargain (you can find this information usually online or on the company’s website).

Location

It’s wise to research as much as possible about a location before you buy. This will allow you to spot good buying opportunities when they come up. It will also help you narrow down the best streets to concentrate in within your chosen area. In each area there will be streets that are more popular with renters and therefore produce a higher rental yield, it’s wise to locate these and stay set on securing property within these areas.

Transport

Obviously looking for somewhere that has great transport links is important if you’re buying in London. Renters want to get to work quickly and easily, especially if you’re going to rent to young professionals. Keeping an eye out for where there are set to be improvements in transport infrastructure can help you find property that will experience a steep increase in value and rental yields in the coming years.

Regeneration

Areas where the council are spending a large amount of money on regeneration projects usually mean that the demand for rentals in that area is set to increase. The building of Westfield in Shepherds Bush, the gentrification of East London and the Crossrail service has caused a boom in property and rental price in those areas.

Conclusion

Buy to lets in London are still popular, although it’s not the best choice if you are only focused on short term yield and rely on a steady monthly. Despite this, property prices in the capital have proved to be more secure than anywhere else in the UK, consistently rising each year and recovering faster after blows to the economy, therefore meaning a far lower risk factor which is why (coupled with the falling Stirling) has seen a surge of investors from around the world.


Source by Chris Haywood