For landlords, the lure of cheaper house prices has often been seen as the main attraction to buying in the ‘North’.
Yet they also need to consider the relationship between the purchase price, the cost of maintaining the property, the potential rental income, and the sustainability of keeping the property occupied over the period of ownership when deciding where to buy a property. The fact is that whilst house prices might be cheaper in the North this does not necessarily lead to high yields.
It’s important, from the outset, that landlords understand the financial obligations of letting a property in terms of tax and stamp duty, for example, and how this might affect their ability to repay a mortgage or maintain the property over time. Bearing this in mind it makes sense for landlords to set a budget on the purchase price and, if necessary, look further afield to find a property that ‘fits’ within this. The UK has a well reported North/South divide in house prices with average property prices in London more than three times those of its northern counterparts. It therefore makes sense that those looking to buy to let are attracted to the affordability of the North.
How much a landlord is willing to spend on maintenance must also be considered as part of the budget planning. It will be down to personal preference, but most agree that houses or flats in the best condition will attract higher rental returns. It’s therefore worth investing both time and money in maintaining an investment property to a high standard and, again, gain an understanding of the maintenance costs that might be incurred now, and in the future.
In terms of maintenance, there is now a ‘minimum level’ expected by both tenants and lettings agents in the industry, which is supported by ongoing Government legislation. Key areas include any work needed to improve EPC ratings, regular Gas Safety Reports, organising appliance testing and fitting the correct smoke and carbon monoxide detection equipment – all of which should be budgeted for.
Sustainability of income
Purchase price and maintenance costs aside, a landlord must also fully consider both the future prosperity of an area (for future capital growth) and the likely future demand for rental accommodation in the area (for sustained annual rental income) in order for a rental property to be considered a success.
Annual rental income will ultimately depend on who the target tenants are and where they are moving from. Northern cities are continuing to benefit from greater investment in their infrastructure and from new employers who are moving to the region, which means they are attracting a lot of graduates and professionals, although there continues to be high demand from students.
Manchester University, currently ranked 29th in the world by the 2018-2019 QS World University Rankings, attracts applicants from all over the world. All of these students will need somewhere to live during their studies, which can often last for several years. Similarly, Liverpool has been completely transformed since it was named the European Capital of Culture in 2008. One of the fastest growing cities in the UK in recent years, it now boasts four universities that have increased in size eightfold since 1993. Again, this has attracted new residents looking to live in a prosperous area.
Salford is yet another area that should be highlighted with the relocation of the BBC and ITV to Media City. It is not only the employees of these huge corporations who look for property, but also the ancillary services that supply and support the industry. This has brought investment in infrastructure, leisure and facilities in Salford, which has led to an increased number of young professionals and growing families from across the country looking to rent property here.
Moreover, the Government’s website shows that the Northern Powerhouse is seeing £13 billion invested into transport and £70 million into schools, providing even further assurances that the demand and sustainability of employment is only set grow in this area.
It’s all about yield
Whilst these opportunities may be exciting, landlords also need to look at potential yields very carefully. For example, if property prices are cheaper and rental income is lower, then how does that affect the return on investment? In short, not a great deal.
Yes, landlords might be able to find a one off, cheap property that gives them an impressive double-digit yield, but how long will they spend finding it?
All this shopping around can waste time and lead to consecutive months of no returns where a landlord could have been enjoying a stable income from an investment with a lower yield. In truth, most investors would be better off securing a modest, stable return in their preferred area, rather than searching endlessly for a property which may not exist.
When is a spot ‘hot’? Hot spots tend to be areas that are still under development – but once investors and owner occupiers begin to flock in and drive up demand, it’s too late for anyone else. Most investors have their own methods for identifying properties with the greatest potential, but the truth is that property values rely on a complex equation with many variables, so it is really just an educated guess.
However, that is exactly why the North is attracting so much attention – because investment and growth is being felt in most locations. As a general tip, prospective landlords should look at plans for local transport, schools, retail, employment and general infrastructure, as these could point towards a sustainable, improving market.
In a nutshell
If someone has a set amount to invest in property, they also need to ensure they have a sensible strategy in place. Most landlords will have considered the initial costs, such as the deposit or full property price, stamp duty and solicitors’ fees, but fewer have thought about the ongoing maintenance costs, sustainability of income and the potential for future capital growth.
Landlords will ultimately have to decide whether to put all of their ‘eggs in one basket’ and buy one high value, high rental property (which comes with increased stamp duty and risk of price fluctuations) or several, smaller, varying investments. With this second option, a landlord will continue to receive an income from their investment, even if one property ends up being unoccupied for a short amount of time.
All in all, making the choice to purchase an investment property or portfolio is not an easy decision, and there is much to consider. Take a look at some of the properties below to see whether investing in the North may work for you.