The new year has started and the property market will begin to get into gear again, after the Christmas lull. The auction houses in London will start running again in early February, lagging slightly behind to ensure everyone has returned from their holidays to attend.
As the market is still rising awake, there is a window of opportunity. Traditionally this is probably the quietest time of the year for property deals. Everyone takes their holidays during this time, however it also represents a great time to pick up some deals. We managed to close a deal which was a great one for our investors on the 20th December, in the nick of time just before the Christmas period hit. A freehold in Marylebone for £680 per sq. ft., all done up, no work required.
Similar deals can be done during this early part of the year by the astute investor.
You want to be focusing on those who have to sell, and not those who merely are dipping their toe in the water to see if they can get the price they wish to achieve, which at times exists only in their heads and nowhere else. And with London being London, surprisingly sometimes they achieve it.
The focus needs to be on the 3 Ds: Death, Divorce and Distress. These should be the ideal motivations of the seller. The first two exist in any market, the latter is driven in large by the market, and especially the lending market. Recently Brexit did not help in the short term, during this time many lenders either reduced the Loan to Values or had properties revalued, and this was in mid application, meaning during the process of refinance. This was a very anxious time; although it was mostly caused by the knee jerk response to the result, rather than reality, however due to this response it then became reality.
The lending market is set for a tightening up, which means the amounts loaned will be less for BTL properties. This, along with the recent hikes in Stamp Duty will serve to reduce the demand for property. Lending will be tightened up to accommodate the removal of the interest relief for BTL properties.
All this means is there will be deals to be done. However, no one can say how long this period will last for, or what the actual price of a property actually is. The comparables will not reflect the current market values, as the market is in a different shape to the comparables. And the comparables themselves can be deceptive. They show the price a property has been sold for and the date. However, the price is likely to have been negotiated three months prior to this date. Therefore, the completion price may not reflect the true price on the date, especially when the market is changing.
So how does one know what is a fair price in the current market?
And when will it go up again?
The truthful answer is you don’t.
So one good strategy is to purchase based on yield, meaning you ‘ignore’ the capital appreciation and focus on how much money the property will make on a monthly basis. This can be challenging in London, and more so as you get to the centre. However, there are ways and means to increase the yield for rental properties. So even in areas such as St John’s Wood, Marylebone one can attain yields of 5% plus.
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Is a benefit tenant a quick fix?
One question I am asked too often is: will the council pay a good rent for my investment as the rent is guaranteed? It may seem like a quick and easy fix to fill your investment with a council tenant, however, I think the following issues would overrule the “quick fix” we were looking for:
1. Payment in arrears
When letting to tenants who are in receipt of housing benefit, the payments are always made in arrears. This compares unfavourably with a private letting where the rent is paid a calendar month in advance, which means a better cash flow for investors.
2. Deposits
Tenants who are dependent on housing benefit often do not have a deposit to hand over to the landlord to protect. And even where the local council can help with a deposit, the council schemes are cumbersome, slow to administer and claim against in the event of damages caused by tenants.
3. Red tape
The administration of housing benefit can be slow and involve lots of form filling. Payments can start and stop without notice, and councils retain the right to try to claw back past payments from landlords if it later emerges that their tenant was claiming fraudulently – even if the landlord was unaware of a change in the tenant's circumstances.
4. Insurance traps
Buildings and contents insurance premiums are often higher where a landlord lets to people dependent on the Local Housing Allowance. Sometimes insurance is refused to landlords altogether.
5. Buy-to-let mortgages
Some buy-to-let mortgage loan terms and conditions do not allow landlords to let to tenants on any kind of benefits or income support.
6. Constant change
Finally, the array of changes to the housing benefit system, rates of payment and rules over the last years has left landlords feeling confused. Rather than trying to understand something that keeps changing, many private landlords simply opt out instead.
If you have any questions relating to a situation you are currently in, regarding a rental property, then please call the office for a chat.
