Buying property to let is getting tougher as house prices rise. Experienced landlords are looking to cheap but derelict houses and then developing them to create quality lettings.
The Telegraph has recently reported a rise in the trend of buying run-down houses in order to develop them. This “Refurbish-to-Let” trend is the result of rising house prices and diminishing rents meaning landlords have to find other ways of making a return.
Buy-to-let property investors and landlords are currently facing several challenges as property prices remain high and buy-to-let mortgage deals are hard to obtain. 2014 has seen a surge in the popularity of HMOs as they tend to provide the highest rental yields.
Bonus Long Term Benefits
More investors are overcoming the issue of low returns by buying run down or dilapidated houses and then radically refurbishing them. Landlords and investors purchase property through auction or clearance, and then refurbish the property as cheaply as possible, converting and adding bedrooms in the process to allow more occupants. They then let the property as a HMO so they benefit from individual rental fees.
This is proving a positive strategy as it dramatically increases the property’s capital in a short space of time. It also means less maintenance is needed and a high-quality property will attract quality, low-risk tenants such as professionals or students.
Hurdles to Overcome
But the process of developing a dilapidated property to let isn’t straight forward. Some landlords will choose to buy a high quality or even new-build home upfront because they can’t afford the excess cost of refurbishment.
Financing refurbishment or renovation projects is tough; you can either remortgage the properties you have to cash in on the equity gained; take out a loan or a combination mortgage.
Taking out a mortgage on a rundown property isn’t straightforward as some lenders will simply refuse to finance a property that is deemed uninhabitable.
The simplest solution to financing both a property purchase and a sizable development project is by securing a combined mortgage which covers the property and refurbishments. This seems like a dream to the aspiring property investor, however they are rare and hard to acquire.
A combination loan consists of a mortgage rate and then an added lump sum for the development project. The borrowing rate is high – as much as 10% but this is due to the fact such loans are rare so there is no market competition. Many landlords deem the steep mortgage worthwhile because despite hefty interest, a renovation project can increase the property value by as much as 40%.
In summary, refurbish to let is a smart short-term solution for beating both high house prices and stable rents. Properties can be sourced cheaply from auctions, ex-council property or even commercial property that can be converted through permitted development rights.
Belvoir Cambridge is not just a letting agent, but is also a resource for expert buy-to-let advice and guidance. We can help you source the right property and guide you on the renovation needed to create an attractive HMO. If you have questions, we want to hear from you. Call Belvoir today on 01223 352225.