Welcome to the first post in our regular series of investment case studies. Every month we’ll bring you a real-life property investment query and outline our advice and suggested strategies. We believe these case studies will serve as a handy ‘cut-out-and-keep’ guide to buy-to-let investing in Belfast.
This first feature was inspired by a landlord who emailed for advice on buying a property to let in Northern Ireland. Although settled in England, he is originally from the Province and many close family members still live in the country. For this reason, he’d like to invest his £100,000 budget here.
It’s a smart plan. The investor lives across the water, so buying bricks and mortar in Northern Ireland firstly affords him an emotional connection to his homeland – that’s a pattern regularly observed of ex-pat investors.
With banks paying peanuts in terms of interest, the Northern Ireland property market’s probably never looked more interesting, especially with a 7.8% increase in the overall prices of houses* compared with last year.
On a practical level, it’s savvy too as he’s going to benefit from having trustworthy ‘eyes on his property’; ie close family members who can physically be there when needed.
The first question we put to him was:
“Do you ever want to live in this property yourself?”
It’s the number one question if you’re thinking of becoming a landlord, or investing in a new property. To be blunt, if the answer is yes – don’t kid yourself that this is an ‘investment property’.
That’s not to say it’s not a valid purchase decision, but you need to acknowledge that it comes at a price.
We’re no longer looking primarily for a property for you to invest in; we’re looking primarily for a house and an area that are acceptable for you to live in. Allowing for this factor often comes at the cost of sacrificing what ordinarily would be an investor’s prime concern – yield.
The other end of the scale is the purely yield-focused, unemotional investment. These investors scrutinise their statements and inspection reports, observe the bottom lines, but don't have a personal connection with their investment.
I have a landlord with a portfolio of circa 40 residential properties - they regularly request market valuations, re- mortgage rates, pay close attention to yield versus outlay versus actionables stemming from surveyor's reports.
They’ve paid their money and now they want it to work for them. A simple financial transaction – zero emotional connection. It’s all about the yield for someone like that, and it’s the extreme example of the perfect buy-to-let investment approach.
There are little pockets of Belfast that, while there is nothing at all wrong with them, for one reason or another you wouldn’t choose to live in yourself. This could be for a myriad of reasons, including cultural background, transport links, and proximity to friends, family or work.
Imagine a young person of 20, who has grown up in one of these areas, maybe started their first job nearby. It’s a tight-knit community and most of their family and friends live here.
There’s a high chance when she comes to rent her first home, she’ll choose to stay in this area.
Scale that up to several hundred families and you can see that in many areas, there is a continuous supply and demand issue in your favour as a landlord.
For the maximum investment yield ratio, approach it the way commercial property investors do - you have invested in a property you are never going to live in.
So, once you’ve decided on an investment or a future home, you need to ask key question number 2:
“Which is more important – capital appreciation or yield?”
Capital appreciation refers to the likelihood and speed of your property gaining re-sale value over the years. Yield focuses on the earning potential of your rental income. So what matters more to you – how much rent you earn every month, or how much this property will rise in value?
For capital appreciation, you need to pick an area that is just about to go up, up, up in terms of property value. We outlined two smart strategies to our investor.
The first was to buy a property right in the city centre – but pick the worst property you can. Think… a flat above the adult shop in Gresham Street.
You’re getting the most you can for your £100,000. By buying in the city centre, you’re maximising capital appreciation – re-sale values are only going in one direction and that’s up.
But what about finding a tenant? Remember what we said earlier – everyone has to live somewhere. We’ll always be able to find someone who wants a home like this; every tenant has their own unique and specific needs and priorities.
A place like this will suit somebody’s personality and lifestyle, and they will happily pay you rent each month.
Strategy number two for capital appreciation is the suburban family home. In terms of yield this won’t pay you – the ratio between what you pay for the house and what you can charge for rent is going to be far lower than other areas.
However, there is huge demand for that type of house, allowing you to cherry pick your ideal tenant. If they are, for example, a young family with kids at a nearby school, you could maybe negotiate longer lease terms and guarantee your rental income.
The right house in the right area is only going to gain in value. Plus, if you manage to secure long-term tenancies, there will be no voids to worry about so you’ll save money on advertising for new tenants too.
The Four Winds Family Home
57 Windermere Drive, Belfast
Currently on the market for £195,000.
Assuming rental income of £750 per calendar month, it takes 21+ years to earn back the investment – a 4.6% yield.
Compared to that 7.8% house price rise, while this house exceeds our £100k budget, it’s a neat demonstration of the investing for capital appreciation vs yield. *NI House Price Index (April – June 2016)
Investment involves risk and the value of capital and the income derived from it may go up as well as down. Past performance is no guide to future performance. Unless otherwise stated, the views expressed here are those of The Belfast Property Blog. Nothing in this article should be regarded as advice, it has no regard for the requirements of any particular person.