“How much is my property worth?” Is one of the most common questions that we hear at Choices Investments and you think that it would be easy to answer but with various changes that have happened in property over the last few years it is becoming more and more difficult to value a property.
With the removal of tax relief for landlords and the 3% surcharge on second properties, the cost of being a landlord has increased to the point where they take all of the added costs into account before purchasing a property and we end up in the situation whereby we have two different valuations for each property – one for homebuyers and one for investors.
Let’s look at an example of a £300,000 apartment. For a homebuyer, the likelihood is that you are going to put down a 10% deposit, especially for first time buyers, meaning that you are putting in £30,000 as the deposit. With solicitors costs of about £1,500 and stamp duty of £5,000. Therefore the total amount of money that a homebuyer needs, ignoring furnishing costs, is around £36,500 for this apartment.
Now let’s look at the same property from an investors point of view and assume that it is rented out giving a 5% gross yield. Firstly, the standard deposit for a second hand investment property in the UK is 25% meaning that the investors deposit is £75,000. Solicitors costs will be similar at around £1,500. Stamp duty is where the differences to homebuyers start with the 3% surcharge that the investor would experience from it being a second property. Stamp duty on a £300,000 property is £14,000, £9,000 more than if you were purchasing the property as a homebuyer. So overall an investor has to find £90,500 to purchase exactly the same property which is £54,000 more than a residential purchaser would.
This extra expense is why investors are always after a better purchase price and put in offers lower than the market rate. With mortgage tax relief being removed as well reducing the profits that you can make from the property, it is getting harder and harder to justify purchasing a property, especially if it is on the open market through a regular estate agent. Realistically the price for an investor is going to be 10% lower than the market value for a homebuyer.
The government are putting these extra charges in to try and slow down the property market. After the recession, property prices, particularly in the south east, rose at such a rate that they became over inflated. This was obviously making it more and more difficult for first time buyers to get a foot on the property ladder. You can see that with the stamp duty on second properties in London that the prime market has cooled to the point that prices have decreased and the overall London increase has been very minimal throughout 2017. This is predicted to be the same in 2018 as well as prices adjust to their natural level where purchasers are able to afford the properties in line with earnings and mortgage products.
Choices Investments have seen more enquiries from prospective investors since the stamp duty surcharge came in than at any time previously as people are trying to find out the best way to invest their money without being stung by extra costs. The worst thing is that the costs for landlords are only going to get worse as well. With the government banning tenants fees from letting agents this additional cost is going to be passed onto the landlord. The only way to recoup some of this is to increase rents but then you run the risk of having long void periods simply to cover a small extra outlay.
We are working with more and more investors that want advice on the best way to maximise the returns they are getting even with the extra costs. With properties below market value where you have the benefit of instant equity or with stamp duty paid by us, where you can effectively finance your stamp duty by including it in the purchase price, there are still ways to purchase property in an effective manner while still investing in good opportunities.