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I am an aspiring investor in BTL and home improvement requesting your guidance. Following is the background:-
I intend to release equity from my residential property and invest it in extending my house as well as in my first BTL. I don't have experience of either major home extension or BTL Your guidance is requested on the following :-
1) My mortgage adviser suggested BTL budget of max £325k. A studio or small one bed in central London should be available in my budget as I can see on property websites. Or I can get 2 beds if I go out. Would you recommend smaller central London property or bigger flat in outer London; especially in light of Brexit and suggested rental slowdown.
2) I have applied for planning permission for house extension through an architect. The choice we have in our budget is either to extend on ground floor or in the roof. Our plan in 4-5 years is to move out and rent the house / make it an HMO. Which extension (roof or ground floor) do you recommend to increase property value for my next equity release.
Your thoughts will be highly appreciated.
Need to work on your numbers accurately, as property has become a very professional business.
Just as an example, making some assumptions from your numbers. Buying a one bedroom flat at 325k attracts 16k stamp duty, with solicitor fees, mortgage broker, light refurbishment etc... your total outlay will be at least 345k cash. When you rent it out, after deducting monthly mortgage interest, ground rent, service charges, agency fees, you will be doing well to net £300 per month (£3600 per year). That is investment of 345k for 3.6k per annum return, before tax. About 1% annual return from this investment before tax. Just to put into perspective, current best instant savings account will be better than 1% and no tax on first £500.
You might say, how about capital growth? You will be lucky if your property does not drop another 10 to 20% from today's prices in 12 months time (already dropped 20% over the last 20 month's in central London), but likely to do better in the longer term.
If the numbers works out for you, I would say go for it. But please do the numbers. Couldn't advise more than this, some are happy with 1% annual ROI, most will only touch over 10%.
Hello JLASSET - thank you for your prompt reply. I worked on the numbers and you are right that max 2.5% RoI per year is achievable. Any decline in rents or the value of the property next year will mean added risk. The only hope one would have is capital gain over say next 5 to 10 years. This means the buying price has to factor-in the risks.
May be it will be worth waiting till say spring next year to see if better deals are available?
Thanks again, sincerely appreciated.
The prices in London are incredible aren't they.
I would invest outside of London and buy multiple assets. If you want to build a portfolio. This also mitigates risk, provodes good cash flow. (Some won't agree, and would stay in the capital)
Extension - To increase propery value and give you more practical living space I would suggest. (I've had this discussion in the past with my surveyour)
Hi Richard, many thanks for your feedback.
Agree that spreading the risk over multiple assets would be wise over one asset in London. I'll keep looking for suitable opportunities. As far the extension goes, your recommendation is valuable. I think getting practical living spaces / additional rooms makes sense over increasing the size of existing rooms. Will work with the architect on it.
Hi Akay and welcome.My responses:1. I would never buy a studio flat as they have limited appeal and do not appreciate in value as much as other types of flat. To answer your question, I would buy a 2 bed house within a 45 minute commute of London. There are bargains to be had at the moment, so leverage your position of not being in a chain and being able to complete quickly to secure a deep discount!2. I would always cater to owner/occupiers, not investors. Speak to local estate agents about what property buyers in the area are looking for. Generally adding bedrooms with an ensuite adds the most value and that would work well for an HMO as well. I would also spend the money on upgrading kitchens and bathrooms if they are tired.Hope that helps and good luck!
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
HI Vanessa - thank you for both points.
Not going for studio is a very valuable advice. A novice like me was thinking of the central London location/ postcode appeal. I think looking at commutable distance from London would be a better bet for me.
Re extension, you guiding principle is valuable. Will look to add en-suites in the loft, or on ground floor. This is very helpful.
Sincerely appreciate you and the community finding time to respond.
You are most welcome. That is what we are here for. These threads may also assist your decision:10 reasons to buy a house rather than a flat .... EVERY time. Terraced homes are the Landlords favourite ...Best way of adding value to a property?
I'd second Vanessa's comments - freehold houses within commuter belt are much much much better than flats.