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  • Property Prices

    Which property type offers the best potential for capital appreciation?

    Hi All,

    With my next BTL I would like to ensure that I not only achieve a decent net rental yield, but also give myself the best chance for future capital appreciation.

    I understand that this can be influenced heavily by the choice of location (e.g. growing city vs quite village), but I wonder beyond that which property type might give me the best chance to increase in value.

    Is it better to buy a new build or something older? Are ex-council houses or flats a no go? Are houses better than flats? What is the best age of property and what is the best size. Are there any other factors beyond that that I should consider?

    I look forward to your comments! Smile
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    Markus Beher
    MyPropertyProjects
    Hi Markus,

    Up-market areas tend to attract more capital appreciation.

    See Should I buy up-market or down-market?

    If you look at Property Strategies Going Head to Head it compares:

    Houses vs. flats

    New build vs. old stock

    Ex LHA flats vs. private flats

    I also believe that coastal property (NOT on a flood plain or with history of flooding!) are likely to achieve higher than average capital growth.

    See - Understanding "intrinsic" value of a property

    So, if I was pushed, I would say that my answer to your question is:

    A three bed family home in a good coastal location - could be new build.

    As 2018 approaches, new build homes are going to become more and more popular as it will become illegal to let an energy in-efficient home.

    Have a look around the East Sussex area. A new High Speed train service is set to be completed by 2017 that will greatly improve transport links to London.

    Whatever you do, always find the tenant demand FIRST, otherwise you might not stay in the game long enough to enjoy capital appreciation. Smile
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    (07-02-2015 09:24 PM)MBproperty Wrote:  Hi All,

    With my next BTL I would like to ensure that I not only achieve a decent net rental yield, but also give myself the best chance for future capital appreciation.

    I understand that this can be influenced heavily by the choice of location (e.g. growing city vs quite village), but I wonder beyond that which property type might give me the best chance to increase in value.

    Is it better to buy a new build or something older? Are ex-council houses or flats a no go? Are houses better than flats? What is the best age of property and what is the best size. Are there any other factors beyond that that I should consider?

    I look forward to your comments! Smile
    This is a very intresting Question and I want to give you some facts on my business True Figs from me
    In 1989 I was looking to buy property and I looked at two options
    1 a new development on the old docks in Newcastle
    purchase price in 1989 £99,0000 it had all the bells and whistles river frontage Parking two bedrooms both on suite you get the picture
    Rental income £550 pcm
    the development was opened by mrs Thatcher
    2 Buy and ex council flat in a town outside Newcastle for £12500
    it was basic nothing special 2 beds Kitchen Bathroom ect
    Rental Income £250.00 pcm
    Just look at the figs today
    Option 1 Value £195,000 rent £900
    Option 2 Value £75,000 rent of around £475.00pcm
    Option 1 has doubled if you can sell it
    Option 2 has gone up six fold
    anyone looking at the options would have thought option one was the gold mine it turned out very different as you can see in capital values
    Rental values have just about doubled in the time
    I prefer lower valued properties and lots of them
    oh by the way I bought the £12,500 flat I just wished I had bought 9 more at the same time
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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.


    Hi Dislexix_landlord,
    That was a great post of your two strategies taken through memory lane.
    Is there someone here who has evaluated something similar in the south-east/ london area?
    I could imagine that the difference in appreciation between new build and old properties is much smaller in London/ South East.
    I have always invested in older properties till recently. With the market picking up in London I am looking into new build properties as off plan. This helps to increase my leverage ( 1 to 9/10 in most cases, as 10%/ 15% deposit to property value) and am also looking into 2-3 year time frames as it helps me build the rest of the pot through sale of other under performing assets in the interim.
    This kind of possibilities would not be possible on old buildings. Surely this strategy has the risks of predicting the market and the change of mortgage lending criteria in the future. But in a rising market it could be a calculated risk worthwhile making.
    I do make sure the off plan prices are realistic in today's market rather than a projected price factoring in price rises in the future and also that the paid deposits are protected by insurance.
    Look forward to hearing other people views on the strategy in the context of this discussion .

    Kind Regards
    Arun
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    Thanks for those great real life examples DL.

    The thing worth remembering is that the first option might be easier to sell because you can sell it "retail" to owner occupiers.

    It's probably best to have a mix of both type of properties to spread risk.

    From my own experience, our properties in the South East have had lower voids, and less hassle than our stock up North (Manchester/Leeds), and have also capital appreciated more.
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    I have come to learn that even the less desirable areas can generate vast interest from the next generation of investors. Each generation has a first time buy to let investor looking to start a property portfolio. As there will always be another generation of investors the demand for these properties will always be strong.
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    Hi MBProperty,

    It is useful to reflect on dislexic_landlord's anecdotal story which also reflects my experience of the last 20 years. What I describe as our "monster property" held for 13 years until 2006 doubled in price and returned gross rent cash flows of 170% of purchase price over the 13 years, its capital appreciation per year was 5.7%, below the UK average for the timeframe 1993 to 2006. In addition, it was at the mercy of one specific industry and career type (Aberdeen oil business), and it represented, at the time, over 50% of our property holdings.

    Now look at the anecdotal story.

    Newcastle flat. Compound growth over 25 years 2.77% per year. Initial gross yield 6.6%, final gross yield 10.9%. Adding up the average of the initial and final gross yields and the compound growth, that is (10.9+6.6)/2 + 2.77 = 20.27% annual growth (not an exact equation but a substantial gross return on overall investment before agency, void, maintenance and buy/sell costs.

    Ex-council flat. Compound growth over 25 years 7.43% per year. Initial gross yield 24%, final gross yield 45%. Adding up the average of the initial and final gross yields and the compound growth, that is (24+45)/2 + 7.43 = 41.93% annual growth on the same comparative basis.

    There is no doubt in my mind that, though low end properties present more hard work and higher bills as a percentage of gross rents than do sexier, modern or bespoke properties, the overall returns don't lie.

    Since we are in the last decade of our investment lives before we settle down to retirement, it often occurs to me that we should be transforming our portfolio from more risky low end properties to medium risk middle of the road (3 bed semi in decent area) properties. But as dislexic_landlord points out, and as my calculations on the anecdotal evidence show, the low end properties have generated twice the total growth than the sexy newbuild has. Yorkshiremen say "where there's muck, there's brass" And Edison said "Opportunity is missed by most people because it is dressed in overalls and looks like work".

    There are more things to life than having to squeeze out the last percentage point of return, but somewhere between the 100 year old terraced property and the multimillion pound London pad, there is the right property type for everyone. I hope the comparative returns have helped you towards a decision.

    Damodaran,
    I did not see your reply whilst writing my own. Though the low end properties under discussion will require a higher effective deposit percentage than newbuilds, they are typically 25% to 50% cheaper than newbuilds, so cash equity requirements are similar. When assessing risks, it is important to know what percentage of gross rents are the mortgage interest payments likely to be. I baulk when (current) mortgage rates are more than one third of gross rents because a simple move in base rates even only to 3% will mean that interest rates double. If interest rates double on our "sexy" properties, our debt interest will be uncomfortably around 60% of gross rents, and that will result on no cash flows. However, for our old dog properties, mortgage interest is currently less than a quarter of gross rents, so would be less than 50% of gross rents if doubled. This still gives us positive cash flow. Eventually, stacking up your portfolio with new builds is likely to make you far more susceptible to interest rate increases, and will bankrupt you far faster than old properties, unless you also have another surplus income stream or two that can manage negative cash flows in the property portfolio for a few years.

    I say this as a word of warning because in 2008 when we had over bought our intended portfolio maximum commitment, and rates peaked at 5.75%, at the same time we had bills to bring properties up to good letting standards, our property-only cash flows peaked at negative £8K PER MONTH!. Fortunately, we had two other income streams that allowed us to get over that period (which by the way is still not fully completed in terms of planned property quality), but the journey took in excess of five years before our property portfolio returned to what it had been, and that is a cash cow. If you want to borrow to high LTV levels, you need really deep pockets to cope with the negatives.

    People tend to have very short memories with things like supply/ demand or cost of borrowing. What situation would you be in if you took a 90% LTV on a new flat, and suddenly London experienced a severe downturn of business (like a world war or another repeat of 2008 where central banks did the reverse, and allowed all zombie banks and companies to fail to clear out the dead wood. Just because they printed money like there was no tomorrow in 2008 doesn't mean they will definitely do it again. They may choose to reset the entire global economy, and only allow well capitalized businesses to succeed. That's the way it should have been in 2008, and I am pretty sure that is the way it will go next time around, which by the way I think will be by 2019.
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    (09-02-2015 03:04 PM)Gerry Pridham Wrote:  Hi MBProperty,

    It is useful to reflect on dislexic_landlord's anecdotal story which also reflects my experience of the last 20 years. What I describe as our "monster property" held for 13 years until 2006 doubled in price and returned gross rent cash flows of 170% of purchase price over the 13 years, its capital appreciation per year was 5.7%, below the UK average for the timeframe 1993 to 2006. In addition, it was at the mercy of one specific industry and career type (Aberdeen oil business), and it represented, at the time, over 50% of our property holdings.

    Now look at the anecdotal story.

    Newcastle flat. Compound growth over 25 years 2.77% per year. Initial gross yield 6.6%, final gross yield 10.9%. Adding up the average of the initial and final gross yields and the compound growth, that is (10.9+6.6)/2 + 2.77 = 20.27% annual growth (not an exact equation but a substantial gross return on overall investment before agency, void, maintenance and buy/sell costs.

    Ex-council flat. Compound growth over 25 years 7.43% per year. Initial gross yield 24%, final gross yield 45%. Adding up the average of the initial and final gross yields and the compound growth, that is (24+45)/2 + 7.43 = 41.93% annual growth on the same comparative basis.

    There is no doubt in my mind that, though low end properties present more hard work and higher bills as a percentage of gross rents than do sexier, modern or bespoke properties, the overall returns don't lie.

    Since we are in the last decade of our investment lives before we settle down to retirement, it often occurs to me that we should be transforming our portfolio from more risky low end properties to medium risk middle of the road (3 bed semi in decent area) properties. But as dislexic_landlord points out, and as my calculations on the anecdotal evidence show, the low end properties have generated twice the total growth than the sexy newbuild has. Yorkshiremen say "where there's muck, there's brass" And Edison said "Opportunity is missed by most people because it is dressed in overalls and looks like work".

    There are more things to life than having to squeeze out the last percentage point of return, but somewhere between the 100 year old terraced property and the multimillion pound London pad, there is the right property type for everyone. I hope the comparative returns have helped you towards a decision.

    Damodaran,
    I did not see your reply whilst writing my own. Though the low end properties under discussion will require a higher effective deposit percentage than newbuilds, they are typically 25% to 50% cheaper than newbuilds, so cash equity requirements are similar. When assessing risks, it is important to know what percentage of gross rents are the mortgage interest payments likely to be. I baulk when (current) mortgage rates are more than one third of gross rents because a simple move in base rates even only to 3% will mean that interest rates double. If interest rates double on our "sexy" properties, our debt interest will be uncomfortably around 60% of gross rents, and that will result on no cash flows. However, for our old dog properties, mortgage interest is currently less than a quarter of gross rents, so would be less than 50% of gross rents if doubled. This still gives us positive cash flow. Eventually, stacking up your portfolio with new builds is likely to make you far more susceptible to interest rate increases, and will bankrupt you far faster than old properties, unless you also have another surplus income stream or two that can manage negative cash flows in the property portfolio for a few years.

    I say this as a word of warning because in 2008 when we had over bought our intended portfolio maximum commitment, and rates peaked at 5.75%, at the same time we had bills to bring properties up to good letting standards, our property-only cash flows peaked at negative £8K PER MONTH!. Fortunately, we had two other income streams that allowed us to get over that period (which by the way is still not fully completed in terms of planned property quality), but the journey took in excess of five years before our property portfolio returned to what it had been, and that is a cash cow. If you want to borrow to high LTV levels, you need really deep pockets to cope with the negatives.

    People tend to have very short memories with things like supply/ demand or cost of borrowing. What situation would you be in if you took a 90% LTV on a new flat, and suddenly London experienced a severe downturn of business (like a world war or another repeat of 2008 where central banks did the reverse, and allowed all zombie banks and companies to fail to clear out the dead wood. Just because they printed money like there was no tomorrow in 2008 doesn't mean they will definitely do it again. They may choose to reset the entire global economy, and only allow well capitalized businesses to succeed. That's the way it should have been in 2008, and I am pretty sure that is the way it will go next time around, which by the way I think will be by 2019.
    If I had my time over I would do the same again
    Today I buy ex Council Houses in areas that I know well its not a stratergy I would recommend if you DONT know your areas
    good 3 bed houses rent till the cows come home and you have very few Voids most folk who rent a flat use it as short term in general familys certainly do ?? there biggest wish is a house
    I buy about 10 properties per year and in the last 3 years it has been 100% houses I haven't had one void since I bought houses so the work load is very light also I don't have manageing agents to concider in the managements of blocks
    I think I read that Furgus Wilson recommends houses and I can now understand why my main problem now is houses are increasing in value so the opportunity to buy at a good yield is drying up
    where do I go next I am not totally sure but its good while it lasts
    we can not have it all ways as landlords can we

    this is the sort of property I buy at present but you need to know your areas well
    https://www.rightmove.co.uk/property-for-...91070.html
    Rental income for this is around £580pcm I buy with 25% deposit and a long term fixed rate Mortgage 10 years If I can get one this sort of property sold at over 100k before 2007 so they have not yet recovered
    I also dispel the mith that property doubles every 10 years it dosent in my area
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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.


    Hi All,

    Thanks for all the great input. This has turned into a really valuable thread. Smile

    It's very interesting to hear landlords reflecting back over their property journey and reporting actual performance.

    I did this recently - My first BTL purchase in hindsight

    I would like to invite you all to pop along to that thread and add your thoughts as there are great lessons to be learned when we stop and look back at how things have turned out over time.
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    Hi

    I would advise that you only invest in the geographical areas you know or have done lots of research about. I do not think that for investments of this nature there can be any short cuts. Speak to the agents and walk the streets, or you take a huge risk. Whilst generalisations can help, in every area there are micropockets where the general rule does not apply.

    (*Moderator note: Sentence removed*).

    Best of luck

    Judith at Simma Properties
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