According to new research, the slump in house price growth in London may be slowing. In October 2018, the level of house price falls plateaued and the number of areas in London registering a drop in prices has since fallen from 80% in October to 68% today. (Source: Zoopla, July 2019).
Separate research by Rightmove also points to tentative signs that the collapse in London’s housing market is slowing. Many property experts believe that London prices will bounce.
Historically, London has consistently out-performed the rest of the UK on capital growth, especially prime central London. Many boroughs have seen exponential growth over the last 10-15 years and all the signs show that London prices are bouncing back.
According to many analysts there hasn’t been a better time to invest in London in recent years. You could be forgiven for believing that the yields are much lower in London, compared to many other parts of the country and that the cost of property is simply out of reach.
Many commentators take the yield averages of all properties in London, instead of looking at the top investment properties. The danger in this, is that it skews average yields and creates the wrong perception of an area, signalling that it may not be suitable as an investment.
However, if we take Newham and Haringey, the top investment properties in these areas cost less than the average cost of a home in the UK, at between £170,000 and £218,000. The yields on these properties are between 8% and 12%, comparable with some of the best BTL locations in the UK.
So if you are considering investing in London, here are a few tips:
Location, location, location
It’s a big mistake to buy a property in area you know little about. Investors need to research the local area and fully understand the market conditions. Rent yields vary from borough to borough and it’s important to buy in area with strong rental demand.
Think about the potential of the borough for buy-to-let eg Is the tube and/or train station close by? Is the property in the catchment for good primary and secondary schools? Is it an area where students want to live?
It’s important to run the numbers before investing, or you could be seriously out of pocket. You need to buy an asset, not a liability and it needs to put money in your pocket every month. Research potential investment properties that will give you good yields and capital growth potential.
It’s also worth shopping around for the best mortgage deals. There have been some good BTL mortgages launched recently, including Accord’s 80% loan-to-value (LTV) range, with a 2-year fixed rate at 3.38%. These come with a £950 completion fee, free standard valuation and £500 cashback. If you take out a tracker mortgage, it’s important to know how much the mortgage repayments will be and to allow for the rates to fluctuate in your calculations.
Once you have the mortgage rate and potential rent sorted, then you must do the numbers carefully and work out how your investment will perform. Ensure you factor in maintenance costs and work out how you will cope if there are void periods between occupancy? These are all things to consider.
Many investors do not factor in the costs of owning a buy-to-let property with contingency funds. If you do not one in place to cover unforeseen circumstances, then you could fall into financial difficulty and potentially lose your property.
As a general guideline, 30-35% of one year’s gross annual rental income should be put aside to cover rent arrears, void periods, maintenance, repairs and refurbishment, white and brown goods replacement and the ongoing rental costs, such as gas safety certificates and letting agent fees. This contingency may not be used and should not be seen as an additional annual cost, just part of the investment business plan from the outset for investment protection.
Don’t’ be emotional
It can be easy to follow your emotions when purchasing a property. The golden rule is don’t buy a property because you love it and would like to live there yourself. Any property you invest in must deliver on the financials.