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Inferior investments – and how to avoid them!

25th April 2012

The experts at Belvoir reveal the three main warning signs of a poor investment property...

Make sure you know the three telltale signs that indicate a property could prove to be a bad investment choice before signing on the dotted line, say the experts at Belvoir...

1.) The property

“When viewing a property for investment purposes, stand back, literally,” advises proprietor of Belvoir Falkirk, Mike Campbell. “Go across the street and look at the building. Start with the roof and look at the ridge – is any mortar missing? Look at the slates or tiles – does the roof look in good order? Look at the gutters and downpipes – are there any leaking joints which have caused staining on the wall? Move on to the windows – are there any obvious defects? Do the same at the back of the property.

“Internally, look for staining on ceilings, plus look behind wardrobes or other furniture pressed against walls for signs of condensation. Look at the window seals for the same. Also, look at the bathroom floor for any leaks from the shower screen and look under the bath too if possible. If a kitchen or bathroom look new, what sort of quality is it, will it last? Also, look at the fuse board and the switches and sockets – does the wiring look old?”

But, even the most well-presented properties can have hidden problems. Think about the construction of the property. Is the property of a standard construction? Have any additions to the property, such as extensions or conversions, been granted the necessary planning permission and passed building regulations.

“Non-standard properties cause more concern to mortgage underwriters than properties of a standard construction – and if it causes concern to them it really should cause concern to the buyer,” says proprietor of Belvoir Peterborough Terry Lucking. “And, even if you are a cash buyer you need to think about who will buy the property from you when you come to sell it.

“Non-standard properties are often seen as a higher fire risk too. For example, if you have a brick built property with a standard roof it usually can sustain a fire. But if you have a thatched property or a timber clad property you are quite likely going to lose the property in the event of a fire.

“Post-war pre-fabricated properties can also be problematic. The concrete is reinforced with steel rods and over a number of years, maybe 30 or 40, the steel rusts and when it rusts it expands which can crack the concrete. A sectional concrete property or pre-fabricated property may be difficult to mortgage and therefore to sell on – it won’t be difficult to buy for cash but it should be substantially lower priced than standard built housing. 

“If a property has had any additions, whether the property be of standard or non-standard construction, then I would advise investors to make sure that the alterations conform to two forms of compliance,” continues Terry. “Firstly, planning permission. Was it required? If so, was it obtained? A solicitor is likely to pick up on these questions but do you want to spend £400 or £500 on a solicitor before finding the answers? And, what happens if they don’t pick up on it for you?

“Secondly, have any alterations or extensions been done in a safe and compliant manor within building regulations? Always look at the reports or, if they are not available, get your own report done by a surveyor, who can do a survey retrospectively.

“If a property looks as though it has been extended it is advisable to get a professional opinion.”

Leasehold properties with limited years left on their lease can also prove problematic, as most mortgage lenders like to see a minimum of 25 years left on the lease at the end of the mortgage term.

“Mortgage companies don’t like lending on properties with short leases,” says Terry Lucking. “If the number of years left on the lease is short, the current leaseholder would need to buy a new lease which will slow down the sale and, obviously, there are costs associated with this too.”

And, whichever property you choose to purchase, make sure you do adequate research before committing...

“Structural and maintenance issues are sometimes missed in properties that are available via auction sites where investors only have 30 days to complete and do not have the chance to get a proper in-depth survey carried out,” says Major Mahil, proprietor of Belvoir Birmingham Central. “In these circumstances it is of extreme importance to do your research properly in terms of telltale signs of damp, wood rot and legal implications for letting the property, such as if the property needs a new boiler etc.”

2.) The maths

“Again research is key here,” says Major Mahil. “Investors have to ensure they budget for any works required and, as renovation and maintenance costs can quickly escalate, it is wise to take a qualified builder along to inspect the property at the initial purchase stage if a property requires renovation or refurbishment.”

Assess hidden costs too.

“When buying flats or apartments investors should consider the charges that relate to ground rent,” continues Major. “This is often forgotten by investors and they sometimes think it can be charged to a tenant, which is incorrect. The same goes with Service/Management charges – these can be as much as a few hundred pounds a quarter, which needs to be budgeted for.”

Also, think about the annual rental return you can expect and the yield the property can achieve. While having a healthy rental yield which covers costs is important, an overly-high yield can indicate hidden issues. Proprietor of Belvoir Shrewsbury Paul Wallace-Tarry explains...

“An average yield is about 5 and a half per cent and very high yields can be misleading,” he says. “As the yield is the ratio between the annual rental income and the value of the property, a high rental yield can mean that the property has been bought very cheaply. In my experience if you’re getting something very cheaply there’s probably a reason why and it’s often an indicator that no one else wants to buy that particular house, perhaps because of the area it’s in or its quality.

“A high rental yield doesn’t necessarily indicate a property’s going to be a good investment. Many of these types of properties tend to be in low-quality areas, attract poor quality tenants and achieve poor capital growth.

“When you do a paper exercise on these types of properties you find that although the yield is very high the cost of running it is high, the chance of voids is high, the chance of damage is high and the chance of tenants not paying is high. I usually advise investors to steer clear of these types of properties.”

Mike Campbell adds, “The old adage about ‘buying cheap, paying dear’ definitely applies to the purchase of investment properties, so don’t always go for the cheapest short-term solution. Think about the long-term and whether the property has the potential to benefit from capital growth.”

3.) The local area

The local lettings market can often give indicators about whether a property would make a good or bad investment.

“Find out if there is already an over-supply of a particular type of property,” advises Craig. “Too many two bedroom nearly-new builds is often a good sign the area is getting saturated.”

“Is there a forest of ‘for sale’ or ‘to let’ signs?,” adds Mike Campbell. “Do a bit of research and find out how long properties have taken to let in the particular location or street you are looking at.”

And, think about the neighbourhood too – the area itself can also reveal several telltale warning signs...

“Do neighbouring properties look run down?,” asks Mike. “And, how well are neighbouring gardens maintained? Also look around the street for common maintenance or structural problems that the neighbouring properties are experiencing.”

Major Mahil adds that viewing crime statistics for the area can also be valuable, plus reminds investors that adequate local amenities are also vitally important to most people looking for rented accommodation.

“Do research with the local police station to ensure the crime rate levels in the area are low,” he says. “Also, are there adequate amenities in the area? Ensure the property you’re looking at is in the catchment area of a good school, with shops, hospitals and rail links close by.”

And, finally, never be afraid to walk away from a purchase opportunity if becomes apparent that the property itself, the finances or the local market are likely to make the investment a poor one.

Do you need help in finding the right investment property?

If you’re in doubt as to whether a property would make a good rental investment, seek advice from your local letting agent. Belvoir Lettings, for instance, do not sell properties, and are therefore in one of the best positions to give free and independent advice.

“The agent can identify the local trends, such as which type of properties are the most popular (2 beds, 3 beds; houses, flats; Victorian houses, new builds etc) and what area is most sought after by tenants,” says Major Mahil.

“When you’ve found an agent you’re happy with, work with them to establish where the hotbeds are and what bits of the town are driving the market,” adds Terry Lucking. “When you’ve found properties you are considering ask the agent for their opinion on them.

“Ask them to meet you at the property to look at it and, if you’re not local, ask them to visit on your behalf – there’s no reason a person living in South Wales couldn’t buy a property in Lincolnshire as long as they had a good working relationship with a local agent.”

Mike Campbell agrees and says, “As well as knowing the properties and locations with the highest tenant demand, a good agent, such as Belvoir, can help you avoid the pitfalls of investing in the wrong property and expensive near misses.”

Paul Wallace-Tarry concludes, “We can help to source a property and advise where, how much, what to do with it and how to make it into a property that lets well. We steer people away from what at first may appear good on paper and towards what’s backed up in practice.”

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