It’s interesting that many of the new and seasoned investors we have spoken to recently seem not to think so. They say things to me like ‘if you want good cash flow you need to buy an HMO’ or ‘the best way to make money in Coventry and other areas at the moment is in serviced accommodation’. Okay so these are certainly two valid strategies, although I wouldn’t say that they were necessarily easy or even suitable for the first time investor, as you need to look at things such as time and finance available amongst other things. Yes, when done well they can be very high cash flowing but they also aren’t without their pitfalls and believe me and I have seen some horrible examples of when things haven’t gone right.
My aim with this blog is to give my experience and a balanced view of the different options, and neither champion or destroy the idea of you buying any property for a purpose. This is because different properties work well in different situations. Now I also hear other people say that as there are no discounts available buy to let just does not work. Now it is certainly true that it is important to buy property at the best possible price but even in a market where prices are higher they can still work if researched and managed correctly.
As an example, let me take you back on a Journey to 2008 when I first started buying properties and for this example I will you use a simple Vanilla 2 bed terraced house in a good rentable area of Coventry. Now back in 2008 I would have purchased these properties for around the 70k mark and sometimes cheaper, but if we work on £70000 it meant I would have been receiving a positive cashflow in the region of £270 per month giving a return of investment in the region of 13%.
Now if we fast forward to today a similar property may cost you in the region of £100000 in my area. After taking all the other costs into account that I did for the previous calculation, and taking into account rent increases as well you would receive a positive cash flow of around £250 per month giving a return on investment in the region of 10%.
These are rough figures to to give you an idea of what it is like to own such properties and the great returns they can still give.
In addition to this we have not considered the capital growth of the properties over time, and historically properties have doubled every 7-10 years. This has not occurred over the recession however we seem to be making positive strides forward now to continuing this trend over time, as the country continues to recover. Some people are fearful that the may be another correction in the future but if there is, it will likely mean more people renting as they are not able to buy due to their financial situation. This can keep rents strong so if you fix your rate now you will know what you are paying monthly for the next five or ten years, and so you will likely be able to ride this downturn out.
Overall this would still suggest that buy to let will give a good return if managed correctly, and with rates so low it is a great time to lock in some very good rates and make your investments work.
There is also the element of buy to let properties being a bit steadier with less voids which is attractive to some investors. The nature of HMO properties is that you are often renting to working professionals or students who may only stay a year or two. This means you then have the costs of re-letting the rooms and any works that come with that. With a single let property my experience is that the tenants are likely to stay longer especially when they have young children, as they are looking to make it their home and the schools and other amenities may be close by that they need.
But what about the tax implications for the higher rate taxpayers I hear you say?
Well yes this is a very valid point and two main things spring to mind about this.
- The stamp duty tax
- The mortgage interest relief reduction.
Now unless you are following a commercial property route then the stamp duty must be paid on whether you buy a single let or HMO and the prices in my area are very high for HMO’s as opposed to single lets and so there are pros and cons here, with single lets often costing less stamp duty.
The mortgage interest relief is to be considered carefully and if you are a 40% tax payer there will be ways you can legally minimise tax such as buying through a company but it is important to get qualified tax advice here as we are not qualified to do this. You will need to look at what works for you but we are still buying single lets and making them profitable.
Overall, I do not feel like Buy to Let is dead and there is still a huge demand for Single family lets in our area. As with any property you do have to do your research and buy correctly however even if we are only getting an 8-10% return is this that bad compared to the 2% in a bank if you are lucky.
Now don’t get me wrong if your strategy is HMO, Serviced accommodation, or something else that provides a better return for you and you have the funds and time available then fantastic, but if you are new to buy to let or only in a position where you have a smaller deposit then single let properties may just be the answer for you, as you may want to start with a smaller deposit which I certainly did when I began, one because of funds but also because I wanted to build my confidence first before taking on bigger projects. We have talked about the reduction in mortgage interest relief but in reality this will only serious effect higher rate taxpayers and you may not be in this position anyway.
To conclude I feel that standard Vanilla properties should not be overlooked when looking at an investment strategy. I feel that bought correctly they can still be a profitable and work well for you moving forward. Although many people want to look at the strategies that give higher headline figures, it is important to understand all aspects before making an informed decision on which way you want to go as it is important to choose what is right for you and your own situation.