Sunday 24 March 2019

It's a great investment, right?

All too often are those words spoken... "it's a great investment, right?"

"Well, buying a new build is hardly going to give you the best rental return, let alone capital appreciation..."

"But it will go up eventually right?"

That is true... property, most of the time, appreciates if you give it long enough. Time to revisit a nifty article I wrote a while back (High Yield HMOs vs Low Yield New Build) to dig up a graph that I made to demonstrate this exact point. The point being that you pay for the "shiny factor" in the new build, or newly refurbished home. 

Now there could of course be a multitude of reasons to buy a new build or newly developed property. Time is the primary one of course. Those with busy jobs cannot afford to invest the time into sourcing new bathrooms, flooring, paint, dealing with tradesmen and so forth, that much is true. Money is another. In the case of first time buyers using the help-to-buy scheme they can only take advantage of the scheme when the property is eligible (it must be new build and the developer must be registered with the scheme). So we've identified a few caveats where it is not perhaps not feasible to buy an older style property (leaving aside personal preference as Victoriana is not everyone's cup of tea of course).

So how do we calculate how good an investment is? Normally there would be metrics we can use such as Gross Yield (annual rent divided by purchase price) or Return on Capital Employed (more applicable when you’ve added value and refinance to represent how much return is made on the money left in the deal. In our hypothetical scenario we are adding time and effort into the mix though. How do we calculate that? Well if you are a homeowner it goes without saying that you will, at some point, have to put in some time and effort to carry out (or have carried out) repair works to the property you live in. Something, at some point, will break and you will need to call a plumber, tiler, electrician or some other trade professional. So aside from routine maintenance what about improvements works? Installing a new bathroom is considerably more time-intensive because of choices that need to be made - design, colour, you name it.

Back to our analogy. New build - 0 time/effort choosing bathrooms and kitchens, it’s already A* quality. Older style property doer-upper - considerable hours pouring over bathroom designs and the like. The temptation is also rather high to overspend with this sort of thing because you want to make it “just right.” So how much do you value your time? To see the real trade-off between the two you can’t just compare purchase price against what it would be worth in 5/10/25 years, but how much time and effort you spend updating/refurbishing/maintaining it. Same goes for the exterior. Although by and large a new build developer will appoint some kind of managing agent this is of course an expense that you, as the leaseholder, will need to bear. The time spent maintaining the outside is outsourced, so you are paying for someone else’s time. I would argue that if you are going to buy a property and hold it you are planning to hold for the longer term, 15-25 years. in that space of time you would expect to have to carry out some form of work, be it bathroom/kitchen or maybe even a roof repair. I would therefore wager that less time is spent upgrading and repairing a new builds style property; this is however reflected in the returns over time (see graph).

So which is the “best?” Well that still very much depends on how hands-on you want to be. New build is certainly less involved from a repair and upgrading perspective, but if youdon’t mind the odd repair or upgrade then you can’t beat an older style property, they have always done better over time in terms of saleability (less identical supply on the market at any given time) and have lower fixed outgoings on the whole in the form of service charges, ground rents and the like. So from a purely investment point of view I would have to lean towards an older style property from an appreciation point of view. Is an older style property suitable for everyone? No, one size doesn’t fit all - which is right for you? Bear in mind however that there are better vehicles out there than new build properties - the yield is likely to be in the region of 3-4%; better returns can be made by working together with a property investor to leverage their skill and expertise and employ the money into a bigger, more profitable scheme rather than become a landlord yourself. I for one am working with a few bigger developers in order to accelerate my returns. If you’d like to hear more then by all means drop me a line and start the conversation. 


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