If you’ve recently bought your first buy to let property or are considering becoming a landlord for the first time, I wouldn’t mind betting that of good proportion of your time so far has been spent in working out where is the best area to buy.
Whereas buying a house to live in is guided by your own personal preferences, buying a property to let requires a somewhat more objective and measured approach. Indeed, if you allow your personal preferences to determine the location of your buy to let property you are likely to end up spending more than you need and quite possibly ending up with a lesser return than might otherwise be possible.
So, what do you need to be considering when determining what would be a suitable area for a potential buy to let investment? Here, Simon from IQ Property discusses some of the main concerns facing a new landlord.
Firstly you need to consider how much you can afford. By that I mean how much cash you have ready to put down as a deposit on a potential purchase. Buy to let mortgage deals vary, but typically you’d be looking to put down roughly 25% of the purchase price as a deposit.
Of course, you need to budget for legal fees, survey fees, mortgage fees etc. and this may add another two to three thousand pounds to that figure. Once you know how much of a pot of cash you’ve got, you now also know the maximum you can spend on a property. Even having carried out this first basic exercise it may quickly make you realise that you won’t be able to buy a property in the sort of areas you were first considering. If for example you have a pot of £30,000 you will probably be looking at a maximum purchase price of around £100,000. So needless to say if you had first thought you’d be buying a three bedroom semi-detached in Solihull, you had better think again!
Now that you know your budget, it’s time to think about what you want to achieve from your potential investment. Are you looking for a property which you are going to hold over the long term, say 20 plus years and which you are hoping to increase in value? Maybe you’re looking for a property which will generate you a decent level of income? Most likely you’re looking to buy a property which will give you a blend of the two.
Generally speaking, the higher the yield the lower the capital appreciation. Take for example property in London. Yields are very low but capital appreciation is some of the highest in the UK. So, quickly you can see that the landlord buying a property in London will most have likely have very different objectives to a landlord buying a property in the north east for example.
Let’s say you have this pot of £30,000 which you are looking to put towards your next buy to let purchase. This translates into a maximum purchase price of let’s say £100,000. Furthermore let’s say you have decided that as this is your first buy to let property the most important thing for you is going to be to generate a decent cash flow. As well as paying the mortgage this will also give you a nice income every month, which you can put towards a deposit on your next buy to let. It might sound ambitious but let’s think big for a moment!
So your next job as a property investor is to make an assessment of those areas which have properties for you can afford. This is where most people get stuck. The reason is this – whilst it is easy to calculate the potential yield of a rental property (see below) it is less obvious to the untrained eye how you can compare areas and see which area might be better bet over the long term.
How to calculate rental yield
% Rental yield = (Monthly rent x 12 / purchase price) x 100
So how do you compare areas?
Well, this is an old trick of the trade and one which I am happy to share with you.
“You can judge the affordability of an area by simply finding the ratio of the average property price to the average salary. The lower the ratio, the more affordable property is. Simple.”
We recently put this to the test when I spoke to one of my existing landlords who, was looking to expand their property portfolio.
We looked at the area of Stirchley in South Birmingham and we found that it currently has an average property value of around £175,509 with the average salary being £26,000. This is a respectable ratio of 1 to 6.8. Meanwhile in Moseley where we are based, the ratio of property values to salary is 1 to 7.6, which suggests the property in Moseley is 11% less affordable than in Stirchley.
We also had a look at Edgbaston (B15) and found the average salary is £34,399 and the average property value is £338,476. This means that property in Edgbaston is a rather significant 31% less affordable than Stirchley with a ratio of 1 to 9.8.
The upshot of this In relation to this particular landlord was that he felt that was a good time to continue to invest in Stichley’s property market while the average value of property is low compared to the average salary. This check on average salaries also verified what we have known instinctively all along, which is that the typical tenant in Stirchley tends to be a professional on the first rung of their career ladder.
Hopefully, as you can now see there is an awful lot you can tell about an area if you know the right figures to look at and the right questions to ask.
If you’d like to discuss your plans for investing in the Birmingham area, why not give me a call on 0121 647 7115.
Author note: Daniel Sperber is the owner of IQ Property specialist letting agents in Moseley, South Birmingham. He is also the author of the Moseley Property Blog and a regular contributor to property related articles and comment both across social media and the printed press.