If buy-to-let is now buy-to-lose, what makes a buy-to-win?
Buy-to-let property has been one of the most popular and well-known investment approaches for years; everybody knew what was required and it was promoted endlessly on daytime TV as a simple way to make some money.
Things have now changed, however, with the chronic shortage of homes in the UK forcing the government to take action to curb this runaway sector. Quite simply, there is a drive to increase the percentage of owner-occupied accommodation and limit multi-property ownership.
Serviced apartments have been one key sector to emerge as an appealing alternative for disgruntled landlords, attracted by effortless, fixed, high NET yields.
But not all serviced apartments are the same.
Four key questions to ask before purchasing a serviced apartment
- 1. “What are the yields?”
These vary hugely from developer to developer. Not only that, but while some are fixed and assured, others are rather vague and variable.
Ultimately, any yield above 7% NET is considered attractive – but, do pay close attention to what other costs you are responsible for, as NET doesn’t always mean NET.
If the yields are variable, this is not necessarily a bad thing, but do ensure that there is some evidence of demand and revenue-generation and, most importantly, ensure that the projected yields make sense.
- 2. “If these is a fixed income contract, for how many years is it?”
Again, certain companies can be quite vague about the length of the fixed income term. Some offer “buy-backs” after a certain number of years, but these are often one-sided and down to the developer’s discretion.
As a rule of thumb, the longer the fixed income turn the better. A short fixed income term tends to mean one of two things:
a) The level of demand and revenue generation is not assured
b) The developer is supplementing the initial yields with profit from the sale of the units
Such agreements are, therefore insecure and can result in sizeable costs soon after investing.
A fixed income term of between 8-10 years is the most attractive, with such an agreement providing enhanced security, solid assurances with regards additional costs and flexible resale options.
- 3. “What else am I going to be charged for?”
Once again, NET income unfortunately doesn’t always mean NET.
It is always important to study the small print and ask your consultant to be completely transparent about any additional costs – either planned or unforeseen.
When you agree to a fixed NET income contract, there should really be no additional costs whatsoever – bar an initial legal fee. This should also be the only cost you incur at purchase – you shouldn’t have to be a consultation or agents fee at any time.
You should also ensure that if there are any maintenance or repair costs, these don’t impact on your yields – which, after all, should represent a true NET income.
- 4. “What assurances should I ensure when purchasing off-plan?”
There are a few ways to ensure that your capital is secure when making an off-plan investment.
Firstly, you should ensure that the developer and management/operations company involved are well established and experienced in the sector – there are several “cowboys” chancing their arm to access some of the high income available.
A good way to ensure the capabilities of your developer is to check for industry accreditation and past awards.
Secondly, you should always check to ensure that there is a warranty in place on any new build property – this should ideally stretch for 10 years (again, the longer the better).
Finally, when it comes to fixed income agreements, you should ensure that there is a firm start date for this clearly visible in your contract. This will mean that regardless of any construction delays, your income will start as and when expected.