A London buyer wants a buy-to-let: what could go wrong?
04-24-2014
Ginetta Vedrickas
A London buyer wants a buy-to-let: what could go wrong?
(Picture: Lava)
Edward from East Molesey writes: ‘I’ve come into some money and am considering buying my first buy-to-let property but am unsure how to go about it. I’d like advice on where the best areas in the capital are for guaranteed returns and also want to know what type of property is best.
‘A friend suggested an ex-council flat but I’m worried about potential service charges. Are there any other pitfalls I should look out for?’
Metro’s panel of experts
Nigel Bosworth, MD of Dwell Residential
Michael Wilson, Head of Sales for independent estate agents Mountgrange Heritage
Bruce Evans, MD for London and New Starts, Countrywide Residential Lettings
Our experts’ advice
The panel is unanimous in telling Edward that with buy-to-let there are no guarantees and, if he needs one, Edward should hang onto his cash.
‘After that, investing in government bonds carries a slightly higher risk, but not much more,’ says Nigel Bosworth.
Property may seem like a safe bet but all experts warn it’s only for risk-takers. Downsides include falling values, rising interest rates, a fall in rent levels, long void periods, unexpected maintenance charges, high or escalating service charges, a tenant mistreating the property, rent falling into arrears, regulatory risk from local authorities, a change in the tax regime after the next election and sometimes a lot of hassle and aggravation.
If Edward decides he is a risk-taker, then Nigel advises asking himself some hard questions.
‘Does he want capital growth, income, or a combination of the two? What length of time is he prepared to have his money tied up for? What precise degree of risk is he comfortable with?
‘Once he knows the answers to these questions, he will have a better idea of what areas in the Capital suit him,’ he says.
Property types have pros and cons: ex-council flats could give Edward good rental income but they may not appreciate as much in value: service charges can be high and they are more difficult to sell.
New-build flats might show an average income yield, have little or no capital growth over the first year or two, still have high service charges, yet be easy to maintain and easy to sell.
A period property in a prime location might have a very low income yield, fairly high maintenance costs, with low service charges, excellent capital growth and it might sell quickly.
‘Every potential investor in property should carefully consider what they want to achieve, how long they are prepared to commit for and what level of risk they’re happy taking on.
‘These are the fundamental decisions. Only then should they start thinking about the bricks and mortar, otherwise the tail is wagging the dog,’ Bosworth warns.
As for areas that Edward could target, Michael Wilson suggestions include Queens Park, Kensal Rise, Kensal Green, Harlesden and Willesden. Some areas have already boomed but finding locations that might be part of the next price ripple is a wise move.
‘Consider areas which might not yet have been gentrified, but where there is planned investment or the prospect of improved transport links.
‘The London Borough of Brent, for example, is currently investing £4 million in improving Harlesden Town Centre, part of a 15-year regeneration programme for the area.
‘With the prospect of new high speed rail links in Harlesden, Willesden and Kensal Green in the future, we certainly view these as good areas to invest in,’ Wilson adds.
Edward is worried about potential service charges which can be high in new build homes but Wilson warns of other pitfalls. ‘Avoid buildings with a lift or concierge service, as these push service charges up, which will eat into yields,’ he says.
The panel tells Edward that each part of London has its own dynamic and the supply and demand for all types of property varies significantly from borough to borough across the capital.
‘You may have one area that is particularly popular with families whilst another is particularly popular with young professionals,’ advises Bruce Evans.
Evans says that there has been a lot of investment in east London over the past few years, including the opening of Westfield Shopping Centre in Stratford and the 2012 Olympic Games.
‘Some companies are moving out of central London and into east London: this will encourage more people to move into the area, including those looking to rent,’ he says.
Countrywide have produced a strategy guide for new investors, which provides advice and guidance on how to make the most from your investment.