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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**
(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!
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.
(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.
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.