I find it surprising that although the British public are so naturally good at property, their interest stops at their own front door. I admit that the reality of Brexit and its possible repercussions are hard to ignore, however, if we look at the cold hard facts it’s still possible to be confident that property is a viable and safe investment model for the future.
Last week we took a look at how (generally speaking) capital values grow at a higher rate than money rates and how returns can be supercharged through gearing. I also briefly touched on how values can be disproportionately increased by spending on repairs and improvements, how nowadays pretty much anyone can borrow to buy property, and I considered that property is never going to go out of fashion given that the public will always need somewhere to live.
So let’s continue where I left off.
Property values can be disproportionately increased by spending on repairs and improvements
In property, cost does not equal value and there are things you can do to a property that will increase the value by more than the amount you spend. Two examples are kitchens and bathrooms, and to a lesser extent, central heating.
For example, you can spend £2,000 putting in a new kitchen (that would be expensive where I invest – typically, I budget £1,500), safe in the knowledge that it will increase the value by £5,000 – £10,000. The same can apply to bathrooms; spend £1,000 and expect the value to go up by multiples of £1,000; and installing or upgrading the central heating system will certainly work to your advantage too.
To give you an example, if you buy a property worth, say, £65,000 but which has an out-dated kitchen and no central heating, by spending £10,000 to improve it, you may end up with a property worth nearer £100,000. And, if you let this property out, you will have:
- an instant capital gain of more than £20,000 because of the refurbishment,
- compounding capital as house prices increase – but now the baseline will be calculated from £100,000 instead of £63,000,
- and an income from the rent, which will be higher to reflect the improvements you have made overall.
There’s no question that even only spending a relatively small sum on a refurbishment can increase a property’s market value substantially.
Virtually anyone can borrow to buy property
The availability of buy-to-let loans has made getting our hands on money for property investment much easier and today, virtually anyone with a job (and sometimes without) can borrow to buy property. In this day and age buy-to-let lenders are prepared to consider lending on residential investment property as a mainstream activity. This is because the risks involved in a loan “going bad” have been reduced under the provisions of the Housing Act. (Vacant possession can be guaranteed, and as such, the property could be sold at its full value if it had to be repossessed).
Let’s also not forget that lenders today take rental income into account, so even people in average or low paid jobs can potentially qualify as borrowers. What’s more, “loan to value” ratios are typically around 75%, although loans at 80% & 85% are also available, meaning that potential investors now have to find smaller deposits from their own funds to get a foot on the property investment ladder, and interest rates are nearer to normal residential mortgage rates, rather than commercial rates as seen in the past.
Property is never going to go out of fashion
In the case of residential property, it is 100% true that everyone needs somewhere to live and always will. However, we shouldn’t overlook that certain types or ages of property can become functionally obsolescent, and certain areas can go out of fashion. But as a general principle, we will always need property, especially residential property, and at the moment we need a lot more than we have.
All in all, most people don’t seem to realise that there are all sorts of opportunities in the property world for everyone to explore and exploit which, with a little bit of creative thinking, everyone can afford.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
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