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Residential buy to let provides high rental income from a hassle-free, fully-managed property. Plus a great opportunity for capital growth  Firstly, let’s run through a quick summary of why it’s so appealing … then we’ll delve deeper into how Residential buy to let works.

Investing in “Bricks & Mortar” is a proven, tangible asset. Cash-only, re-mortgage or buy-to-let mortgage – option to re-finance 6 months later.
The purchase price is £75,000 up to around £400,000. Capital Growth: benefit from area growth as well an annual growth.
Variation of tenants – no restriction – young professionals, families and mature students – some offer Serviced Accommodation which can almost double your annual net income. Professionally fully managed: no looking for tenants, no void-periods, no maintenance or repairs to organise.

Residential Property

What is the best location for residential buy to let?

Location is really important, but why? What should you consider and be mindful of when comparing one city or town with another?

  • Regeneration in specific areas can be paramount – the future vision that creates industry hubs, perfect job opportunities for post-graduates and attracts university leavers to stay. It creates relocation opportunities for young professionals and a trendy social scene that all young professionals and families want to be part of. And for the investor it means high capital growth and high year-on-year rent increase.
  • Distance – tenants want to be in walking distance to where they work & play and this can dictate a premium.  Convenience is proven to maintain high occupancy levels.
  • Under supply of homes due to the housing crisis in the UK.  There is approximately one buyer to every four renters and certain locations have seen an influx of young professionals looking for long-term tenancies. Naturally it means demand far out-weighs supply in many cities and towns.
  • Strong economy – low unemployment, good infrastructure and leading universities.

 

Buying purpose-built residential buy to let off-plan

Investing in off-plan property is as simply as it sounds; you are buying off an architects’ floor-plan and the property is yet to be built. Many developers that present off-plan opportunities to investors, offer a number of benefits.

  • Off-plan prices are around 10% -15% lower than market value during construction and by the time the development has completed, the apartment would have increased by this margin and increased in line with current market value too.
  • In some areas you can make up to 40% growth within 3-4 years when purchasing earlier in the construction phase.
  • First pick of units – with the entire phase available this is another reason why investors like to invest early into the development. High floors, units with balconies and penthouses or duplexes are often the first to be snapped up.
  • If the project is buyer-funded you will likely earn interest on the deposit you have paid to the developer for your property, normally between 2% -5% p.a.
  • If the development is buyer-funded or the developer requires pre-sales, there will be pre-launch two – four months before the construction start date. Commonly with residential property the incentive will be connected to the appreciation, with an additional discount from the purchase price.
How are Residential off-plan buy to let projects funded?

This needs to be broken down into two sections. Funds are required to buy the land and cash-flow/funding is needed to build the development.

Buying the land
The developer will set up an SPV so each development site has its own entity and depending on how the build is funded the developer will ring-fence the monies used exclusively for a development.

Commonly the land is purchased with use of:

  1. Profit made from the last completed development
  2. A Bridge-Loan (see below)
  3. An investor or consortium of investors seeking a return once the project is complete
  4. An investor or consortium that will buy the free hold from the developer

Building the Project

Commonly the land is purchased with use of:

Buyer-Funded is when the developer uses client funds for the build. This is not a bad thing and designed to work extremely beneficial for both parties. It’s cheaper for the developer to pay interest to the investor (commonly 2% -5%) than a bridge-loan or other forms of borrowing.

Bridge-Loan is a short-term loan used either until permanent financing has been obtained or money has been earned from profit eg: completion of a project.

Contractor funded – if a developer works with a large contractor to build-out the project, the contractor may provide funding.

Development Finance companies that specialise in residential and build loans only. A range of different types of finance to suit the developer: build to let, commercial; mezzanine.

Peer-to-Peer is another investment model going on behind the scenes. Instead of the buyers funding the build, the developer will borrow from a company who has attracted “lenders” earning a fix term interest paid monthly on the money they lend.

Self-funded may not be the most common way for a developer to finance a development –often there is not enough profit from one development to fund the entire next project – certainly a contribution of developer funds could get a project of to a great start.

Combination – with a brief overview of the most common developer lending and funding options, often there will be a combination of two of the above eg: Bridge loan and buyer-funded.

Read full blog “How do developers fund their off-plan property developments?

Fixed assured rental income verses non-fixed rental income

The reason you’ll see some projects offering a fixed assured income but others stating you will achieve “circa 6% net per annum” is dependant on area, town/city and development company.

A developer’s core business is to develop in the right high-growth area, where demand exceeds supply and you purchase the property at a great off-plan price – the incentive to offer you an assured rental will not be beneficial to either party.

Each city and town have different rent rises and some are increasing as much as 4% -5% per annum – this is a good reason to start off on a non-fixed income.

All the hassle-free, hands-off conveniences still apply, and your developer will introduce you to the Property Management Company a month or two before completion of your property. If you’re buying an already-operational property the introduction and income will be immediate.

What happens if I am not happy with the management company?

Look at your current property management agreement and check the terms and break clauses and subsequently give them written notice you will be terminating your agreement. Simultaneously find a new management & letting company you are happy with. Once you have agreed new terms, the transition process for you should be seamless.

What are the risks of buying off-plan?

The REW Property Check is so imperative to the process.  We’ll ensure that the common risks and developer pitfalls are either mitigated or do not exist on a project – otherwise we’ll not take it on.

Construction delays occasionally happen with off-plan development for several different reasons.  A developer may have an issue which causes a delay, but time lost can often be made up by the contractor and the project will still complete on time. The most common reasons are: site testing and clearing; a hold-up with funding or the Contractor not meeting its deadlines.

The developer protects unforeseen delays with a Long-Stop date in the purchase contracts. This gives a buffer of up to 12-months to complete the development – if something was to happen out of their control.

A project that fails to be delivered is normally due to the project not being ring-fenced properly or cash-flow not being managed properly. A project should always have someone e.g. a quantity surveyor, an architect or a company, cost-managing the project efficiently.

For more information on this subject please read our blog “What are the risks of buying investment property off-plan?

How Does It Work - FAQs

FAQs about Residential buy to let development

Purpose-built Residential buy to lets, especially the off-plan project we include in our portfolio must have a superior specification as this will make a world of difference to the end-user and investor. We consider growth in regenaration areas as a main factor and these buy to let hotspots dictate a high level of quality externally and internally.

A long stop date from the developer’s perspective protects the overall delivery of the project from unforeseen delays caused by issues commonly out of its control. A long stop date is part of the purchase contracts and it gives normally a 12-month time buffer to complete the development, sometimes the longstop can be 18-months or 6 months. In the unfortunate event the developer does miss the completion date and the project falls into the long-stop period, any interest you are earning on deposited funds during the build will continue to be paid to you as normal by the developer.

The developer will provide a 10-year warranty on build. This will be NHBC or similar such as CRL or Zurich.

We need to bring it back to the due diligence we do. The residential developments we put within our portfolio are in new regeneration areas, that have huge demand and low supply due to: local industry hubs, job creation, the social scene and easy transport links.

FAQs about PBSA purchasing

We always have a solicitor that we can recommend to you on every project. This solicitor will already be familiar with the project due to the standard 28-day turn-around to Exchange. They have already received a full contracts pack from the seller’s solicitor and have already prepared their Report on Title. The other benefits are: the solicitor fee is pre-negotiated and very reasonable and they specialise in long Leasehold purchase and property management contracts. From our experience we have found traditional conveyance solicitors are barely familiar with long Leasehold contracts – this can cause unnecessary delays and puts you at risk of losing the purchase.

Purpose-built student accommodation is classified as commercial, it is not subject to Stamp Duty below £150,000 – some developments start from under £50,000. Multiple purchases will be considered a combined purchase, so for example if you bought three properties and their combined value was over £150,000, SDLT would be payable. Please see the table below.

There is no set time frame between purchases for HMRC to consider them not combined, it would be at least six months, however if you bought a property and your source of funds was savings, then three months later you inherited a sum of money and invested that into another student purchase over £150,000 this would not be considered combined as the source of funds was completely different.

Purpose-built student accommodation is designed as a long-term, high-income investment; however, the answer is yes. The purchase contracts are fully assignable and you can sell your property the same as any property purchase. It is possible to sell your property during the assured rental term as it will transfer to the new buyer along with the property.

Try to leave enough time, there is no guarantee of a quick resale. We have resold property in the same development within one month of coming on the market and other properties it’s taken up to 6 months or more.

Capital appreciation is not so relevant for purpose-built student accommodation, the resale price will be relevant to the annual yield and will be based on a reasonable annual return that is attractive to the new buyer.

If you want to resell your property you will have a number of channels to go via, either ourselves at REW, any local agent or specialist agent and you could even offer it back to the developer. You will be selling a high-yielding asset that is already proven and running operational for x number of years.

In some instances, the developer will have a built-in buy-back at the end of the assured rental period. This will normally be between 100% – 110% of the purchase price. The buy-back will either be optional for both parties or structured where one or both parties can enforce it.

FAQs about the PBSA Market

In 2015 national intake restrictions were removed completely, meaning higher-education institutions can now accept as many students as they can capacitate.   Impressively the UK is the second most popular location for overseas student which has resulted in record student intake numbers for the last four years.

In March 2016 the government introduced an increase in SDLT on secondary/buy-to-let property purchases which was to partway combat the house-crisis issue, caused by residential property being snapped up by seasoned landlords for buy-to-let purposes. The problem was escalating and the predicted shortage of UK homes was a staggering 1.8m by 2025.

Another reason PBSA helps the housing crisis is having only 24% of students housed in PBSA it leaves the vast majority of students in sub-standard accommodation, house conversions (HMO’s) which are likely in run-down areas and a far distance from the university campuses.

This really is a question at the forefront of an investors mind, the great news is Brexit fears appear to have had no effect on investing in UK PBSA, with levels increasing by 17% this year.

  • The status of a degree from a top university in the UK; such as Manchester University or The University of Liverpool isn’t likely to ever go away.
  • Overseas students come to the UK to perfect their English as much as to earn a degree.
  • The low value of sterling is likely to increase the appeal for students from India and the Middle East
  • According to UCAS for every accepted application for a non-EU student to study in the UK there were 7.9 applications

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