This is a question often posed by investors and there simply isn’t an easy answer. To a large extent, your decision will depend on your financial position, but it is also likely to be governed by what’s happening in your local market at the time you are looking to buy.
The question of capital and time
A big consideration is the amount of capital you have available. Although the price of a property that is in excellent condition and ready to let is likely to be considerably higher than a similar one requiring renovation, you can leverage the purchase via a mortgage. Currently, there are deals available at 85% loan to value (LTV), meaning that if you were to buy at the UK average price of £216,674 (as at October 2016*), you would require £32,501 for your deposit.
In contrast, you would need more capital available in order to buy a property requiring substantial refurbishment. According to a survey carried out by HSBC in 2014**, a fully-renovated two-bedroom property would cost, on average, 43% more than one requiring refurbishment, meaning the UK average price for such a property could be around £151,520. Assuming the property was mortgageable and an 85% LTV mortgage available, that would mean finding £22,728 for the deposit, plus money for the renovation, which could easily be £20,000 or more to make a difference to the property’s value. There is also the matter of having to make mortgage payments from completion until the property is refurbished and tenants have moved in.
Taking on a renovation project can take up a lot of your own time – even if you have a project manager – and your plans may be delayed if unanticipated problems are found, which, the older the property, the more likely to happen. That can make the process more costly, not to mention stressful, so it certainly does not suit everyone.
The HSBC survey found that two-thirds of UK landlords looking for their second Buy-to-Let property in 2014 intended to buy something that didn’t require any renovation, with the most popular choice being a two-bedroom flat that was ready for tenants to move into. Only 38% of landlords surveyed were prepared to take on a ‘fixer-upper’.
The potential financial rewards
Capital and time aside, it is possible to benefit greatly from investing in a renovation project. Taking the figures above as a rough guide, it’s possible to make back double – or more – what you spend on the works. You may then be in a position where you can re-mortgage and release some of that equity to either reinvest or spend. So if you are willing and able to make the additional outlay in the short term, you could reap the financial benefits in the medium to long term.
Conversely, if property investment is not your full-time occupation, capital is tight and/or you need to generate rental income as soon as possible – as it seems is the case for the majority of landlords - then buying a property that is ready to go may be the best option. But you will need to secure the property at a discount, not just rely on natural property price growth. However, if it has recently had substantial renovation or is a new build, there should be guarantees and warranties for the works and most, if not all of the fixtures, meaning you shouldn’t have to worry about big maintenance issues for the first 5-10 years, boosting profits. You will also be able to line up tenants to move in as soon as you complete, so that you generate income right away.
A ‘middle ground’ option
Something that has become more common in recent years is landlord-to-landlord sales, where investors buy an existing rental property with sitting tenants. This requires some additional legal paperwork, but it’s a way of acquiring a property that pays for itself and possibly generates an income right away, that you could then look at refurbishing to a higher standard as and when it suits you.
But all of these options should be considered in the context of what’s happening in the market. If there is a lot of competition for properties already in good condition and a lack of demand for those requiring work, you might be able to pick a project up at below its ‘true’ market value and make a good profit from turning it into something that’s in high demand from tenants. So, even if you are convinced you know what you want to buy, it’s wise to keep an open mind and always consider the other opportunities that might be available.
The important thing to remember is that tenants are getting ever-more discerning and safely let property costs money to create and maintain, so any property offered to the rental market needs to be in excellent condition. That means investing in high-quality fittings and spotless, modern décor in whatever you buy as well as ensure things like smoke alarms are properly fitted if you want to appeal to the best tenants and attract the highest monthly rent.
This information has been provided by our partner Mortgage Advice Bureau. For more information relating to Mortgages or for Mortgage Advice please visit Mortgage Advice Bureau.