I frequently have lots of people asking me how they can invest in London often complaining that the the yields are too low, rent doesn’t meet the mortgage payments on loans above 50% LTV, that there is a lack of income after costs, and deposits are huge.
Synonymous with higher priced properties London frequently gets all the headlines for capital growth, quick sales due to high demand and a lower perceived risk by foreign investors due to familiarity.
So how can you invest around London and still make the returns?
I’m going to explore than now for you…..
1. Lower value areas
How about finding an area where prices are not quite in Chelsea territory but where you can still find good flats and tenants to go in them in perhaps an ex council estates and still single let them to a couple or family?
‘Up and coming areas’ have potentially more opportunity for capital growth as they become regenerated and gentrification takes place. As the core of London has become more expensive more people are looking to live further out and commute into “London Town” creating a pricing ripple that is likely to continue to spread.
Here are some areas to focus your efforts on.
Many of these areas whilst on the lower rung of the outer London property market still have flats available for sale on Rightmove below the £150,000 mark and with yields of 7%+ which coupled with the likelihood of high capital growth makes for great investment.
I recommend seeking out 3 local letting agents to advise you on the best areas within areas to invest for higher tenant demand which helps you control voids and maintenance costs. Seek areas where you have demand from well referenced professional tenants and you are likely to prosper.
Another strategy for London is to purchase HMO type properties. Houses where rooms can be let to 6 tenants on individual ASTs can be great for increasing income and therefore yields. Gross Yields of 11%+ are available on this type of property creating an income and allowing investors to make property their full time career.
These higher yields also tick the income box for the lenders meaning that investors can borrow a higher % of the properties value as debt is easier to service. higher loan to value borrowing allows greater expansion of the portfolio quicker.
3. Rent to Rent
A permutation of the above is the ‘rent to rent’ model where an investor pays a property owner rent and then effectively ‘sublets’ the individual rooms using a management agreement in the property to tenants as a house of multiple occupation.
As one of the more popular strategies of recent times many investors like the benefit of being able to take properties over without needing big deposits or legal costs. I frequently see people with smaller amounts of capital behind them making this their full time pursuit as people can get started with “sweat equity” rather needing lots of capital.
A 3 bed property which the investor has managed to rent for £1000 a month could generate £550 per room over 6 rooms or £3300 a month. After taking other costs out such as utilities, maintenance and voids this could leave £1500 a month, not bad when multiplied over a few properties.
This strategy is great when starting out but over time investors often choose to buy properties rather than lease or rent them once they get more capital behind them as they would then benefit from capital growth from the increase in value of the properties, which over the long term is what is most likely to make the big money.
4. Conversions and Flips
Conversions and adding value to then flip are the most common strategy I see around London. I see a lots of small developers taking a flat, moving the kitchen into the living room and converting the old room the kitchen was in into a bedroom.
This can make a 1 bed flat a 2 bed and a 2 bed flat a 3 bed, which will usually create a strong uplift in value, especially around London where property values are relatively high. Buying a dilapidated flat and combining this strategy with full refurb renewing the kitchen and bathroom and repainting would create a “double bubble” uplift in capital value.
Finding flats with short leases and negotiating an extension is another nice strategy as the extension will usually increase the value of the flat by more than the cost of extension. It’s a good idea to approach a specialist leasehold solicitor/surveyor to help you with this strategy many of which can be found on the “Leaseholder Advice” website.
The add value and flip strategy can be extended to houses around the capital. As the value per square foot is so high in many of these boroughs, performing a loft conversion by identifying a property with high eves which could provide 1.8M head height for occupants or perhaps an extension by utilising the garden or outdoor space to create new reception rooms and with double storey bedrooms above.
There is also the possibility to dig down to create sub terrain spaces that although with less light would create nice living areas with light wells/tubes. Some extensions and conservatories can even be built by using permitted development sidestepping the need to apply for planning permission which can save a lot of time and Section 106 / Community infrastructure Levy costs and pay huge dividends.
With time you may also decide that buying commercial buildings to convert to residential can provide great profits. Especially on the outskirts of the capital the uplift from this strategy can be eye watering. The Government has recently made permanent planning reforms allowing conversion of office buildings and light industrial buildings to residential without planning permission in most areas.
So its clear London works for investment, you just need to modify and enhance your investment kaleidoscope to other strategies that fits more snugly with the landscape in which you are looking to operate.