Buy-to-let property guide www.knightknox.com
The UK buy-to-let market has gone from strength-tostrength in the last decade and has been one of the few sectors that has managed to successfully weather the storm during a turbulent period in the UK economy. Throughout the Covid-19 pandemic, there was a mass influx of people looking to buy or rent a new home which put even more pressure on the UK’s already limited housing stock. This has made UK buy-to-let one of the strongest ventures for investors looking to put their money into an income generating investment class.
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Contents Page 4-5: An overview of the UK property market
Page 16-17: Capital appreciation
Page 6-7: Why invest in UK buy-to-let?
Page 18-19: Things to consider when investing
Page 8-11: Best buy-to-let locations
Page 20-21: FAQ’s
Page 12-13: Why invest in off-plan?
Page 22-23: Knight Knox
Page 14-15: Residential vs Student property
An overview of the UK property market It’s no secret that the UK property market has performed well throughout the past couple of years. In the last year or two, there have been constant reports of sky-rocketing house prices and demand from both homebuyers and renters. What made it even more extraordinary was that it was during a period where there was a global crisis and economic turmoil – a time where you would expect the opposite to happen. According to recent data from the UK land registry, house prices in the UK increased by an impressive 10.7% in the year to December 2021. This was an increase on the equally impressive performance in the same period of 2020, where house prices increased by 8.5%. In the first half of 2021, the large increase in property prices was attributed to the stamp duty relief measures that were in place at the time. While this did artificially inflate the good performance of the UK property market, the statistics clearly demonstrate that demand continued to be strong, even after the stamp duty relief measures came to an end in September 2021. With this level of demand in the buyer’s market, there was always going to be a knock-on effect in the rental market, considering that many prospective buyers were priced out buying a property. In July of 2021, the average UK monthly
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Average monthly rents: Overall average:
£755pcm
Studio:
£595pcm
One bedroom:
£675pcm
Two bedroom:
£750pcm
Three bedroom:
£850pcm
Four or more:
£1,400pcm
ONS, Q4 2021
rent broke the £1,000 barrier for the first time and managed to stay at that level for the remainder of the year. The outlook for the UK property market in 2022 is equally as positive – according to data from JLL, it is estimated that house prices will increase by 4.5% throughout 2022 and will continue to grow at a similar pace in the coming years with a cumulative increase of 15.4% between 2022 and 2026. This is a very exciting time for the UK property market, so investors should take note.
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Why invest in UK buy-to-let? Brexit and the Covid pandemic have led to tumultous times over the past five years, to say the least, and the UK economy has found itself in a precarious position on more than one occasion. Various markets and assets fluctuated dramatically throughout this period, but there was one asset that managed to remain steady and that was UK buy-to-let. UK buy-to-let not only managed to weather the storm, but thrive in a completely unexpected way. According to research by the real estate company Keller Williams, UK property prices grew by 14.1 per cent between the EU referendum in June 2016 and January 2021, which was a year after the UK officially left the European Union. This period also overlapped with the Coronavirus pandemic in 2020, which also had an extraordinary impact on the property market.
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As we all know, the UK economy took a hit with key sectors being forced to close. You would be forgiven for thinking that the property market would suffer as a result of this, but in fact the complete opposite happened. The combination of pent-up demand in the market, and the introduction of the stamp duty holiday caused a huge surge of activity, which is still having an affect nearly two years down the line. According to data from Nationwide, house prices saw a 15% increase between March 2020 and November 2021 – one of the biggest increases since before the financial crisis in 2007. The past few years have provided more than enough evidence that property is one of the most reliable investment ventures available, and investors should be looking to this tangible asset as a means to start or add to their portfolio.
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Best buy-to-let locations Manchester Manchester has been a big name amongst property investors in recent years and with very good reason – as the London property market became increasingly saturated and unaffordable, investors turned to Manchester thanks to its rapidly growing economy and higher performing yields. The city has everything that an investor could want – a young and skilled population, a thriving economy and ongoing development throughout the city region. According to data from JLL, the city is expecting to see impressive growth in property prices in the coming years. They predict that house prices in Manchester are expected to grow by 25.8% in the next five years, and rents are expected to grow by 15.9% in the same period. Manchester is an absolute powerhouse at the minute and investors should be taking full advantage of its success.
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Sheffield The South Yorkshire city of Sheffield is slowly but surely becoming a favourite location amongst buy-to-let investors. It might not be the biggest city, but what it lacks in size, it certainly makes up for in potential. Sheffield offers its residents an enviable lifestyle, desirable city living whilst being surrounded by stunning natural landscapes in the form of the Peak District National Park. It is also ideally positioned in the strategic heart of the country which means that it is accessible to various parts of the UK, making it ideal for those that are commuting in and out of the city. According to Homelet, house prices in Sheffield increased by 8.2% in the year to December 2021. The city is also home to two prestigious universities, and according to data from Knight Frank, around 40% of those graduating from Sheffield’s two universities are planning to stay in the city for work, meaning that there will continue to be plenty of demand in Sheffield’s rental market.
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Liverpool As a former capital of culture, Liverpool has long been known for being an economic powerhouse and the modern day is no exception. The city generates a GVA of around £19bn and is home to around 49,000 local businesses. This wealth of opportunity means that Liverpool is consistently attracting a young and skilled population that are looking for rental properties within the city. The property market in Liverpool is also thriving – in their Residential Forecast report, JLL predicted that house prices in Liverpool will increase by 5% in 2022 and will see a cumulative increase of 21% in the period between 2022 and 2026. Rental values in the city will also be on a similar positive trajectory – in the same report, JLL predicted that rents in Liverpool will see a 3% increase in 2022, and a cumulative increase of 13.7% between 2022 and 2026.
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Bradford Bradford might not be at the forefront of your mind when it comes lucrative property investment, but overlooking it would be a huge mistake. This West Yorkshire city has seen a tonne of investment in recent years, and it’s emerging as one of the most exciting markets in the UK. The city is home to a highly-regarded university and a number of its graduates choose to stay in the city for work, meaning that Bradford’s population is young and extremely skilled. According to Bradford City Council, around 70% of its population is aged 50 or under – the prime demographic of renters. In 2021, Bradford experienced the 11th highest property price increase in the entire country. According to Halifax, house prices in Bradford grew by 15.8 per cent in just 12 months. Despite this, however, the average prices in Bradford still sit well below the national average of £323,355 – this makes now an ideal time to invest in the area.
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Why invest in off-plan?
One of the most lucrative forms of property investment, off-plan developments are geared towards the thriving rental market. Many investors prefer off-plan properties for a variety of reasons. Here are just a handful of benefits of investing in off-plan property:
£
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Lower entry price
Choose your ideal investment
One of the biggest selling points of off-plan property is that it’s a lot cheaper than similar properties on the resale market. The lower entry price also means that you will have more scope for capital growth with an off-plan property than one that is already built. Due to inflation, the price of your property will have already increased in value by the time the it has been completed, so your property will be earning money before your tenants have even moved in!
When you invest in off-plan property, you have the ability to choose your ideal property and tailor it to suit your investment needs (depending on availability of course). When you speak to your consultant, they will send you floor plans so you can see what the layout of your property will be, and where it will be positioned in the building, so you can choose the property that is most suited to your investment needs.
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More appealing to tenants
Energy efficient
Newer properties are always more popular with tenants – they have modern features and it generally feels a lot nicer to live in a property that hasn’t been lived in previously. This also usually means that tenants are prepared to pay a premium for a newer property, because they know that it will be a lot easier for them to maintain. There is also an added bonus for tenants if they have access to a facilities like gyms, communal spaces and outdoor areas, which are now all common features in new-build properties.
On the back of the last point, your property will also be more popular with tenants as energy bills will be more affordable for them. Off-plan and new-build properties adhere to the latest energy efficiency standards, so you will not have to worry about getting work done to make sure that your property is up to standard.
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Residential vs Student With buy-to-let investment, there are two distinct types that you can choose between - residential and student. Residential properties are let out to private tenants, usually on long-term tenancies. You are free to sell, buy or rent these on the open market. Purpose Built Student Accommodation (PBSA) has specific planning in place that only allows the property to be rented to students. They are usually found within walking distance of university campuses and traditionally have lower void periods. Both forms of investment have their benefits for investors, so if you’re unsure about which type of investment to go for, we have broken down all the benefits of both residential and student investment to help you decide!
Residential High demand It’s no secret that there is a chronic housing shortage in the UK at the moment, and this has been exacerbated by the ‘race for space’ throughout the pandemic. Consequently, this has had a positive knock-on effect on the UK rental market. The UK rental market is already busy with around 4.5 million household in the private rented sector and right now, there are currently not enough rental properties to address the demand.
Student Lower entry prices As student property tends to be smaller than the typical residential property, entry prices tend to be a lot lower. This often means that you will get a better return on investment as student property tends to offer higher yields than residential. However, it is worth noting that due to their size, purpose-built student apartments cannot be purchased with a mortgage, so it will need to be a cash investment.
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Residential
Residential
Capital gains
Rental income
One of the biggest benefits of residential property in the UK is that you can earn money through capital gains, as well as through rental income. This is especially the case in the current market where house prices have been increasing dramatically over the last two years. According to data from Nationwide, house prices in the UK have increased by 10% in 2021 alone, and they’re expected to increase even further.
A lack of available stock paired with extremely high demand within the private rented sector has seen average monthly rents soar in recent times, resulting in a massive increase in rental income. They are expected grow even further in the coming years – according to JLL, it is expected that average rents will increase by a cumulative 15.4% in the next five years.
Student
Student
Higher yields
High demand
Student properties also offer higher rental yields so you are more likely receive a better return on investment than if you were to invest in residential property. According to Paragon Bank, student properties offer an average gross yield of around 6.15% to 6.6%, compared to 5.43% to 5.6% with residential properties.
UK universities are becoming increasingly popular, not just with domestic students but international students as well. While this is great news for universities across the country, it also means that there is growing pressure to house students, as there are not enough university-owned student beds to go around.
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Capital Appreciation Capital appreciation is essentially the rise in an investment’s market price over time. In the case of property investment, it is the increase of your property’s worth. UK property prices have been consistently on the rise in recent years and there is no sign of that changing anytime soon. Many investors have been turning to property for this exact reason. To the right is an infographic showcasing the predicted rise of UK house prices in the next five years:
House price change (%pa) JLL, Q4 2021
2021
5.0%
4.5%
2024
2025
3.0%
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2022
3.5%
Capital appreciation vs rental yield: Which is more important?
2023
4.5%
2026
4.5%
Investors benefit from both types of return for the most part, so generally, you can’t really say that one is more important than the other. However, on a personal level, one type of return can certainly benefit you more as an investor than the other – it all depends on what you want to achieve with your investment. This will often dictate what kind of investment you go for. If you are looking for a top-up on your regular income then you will need to look at properties that offer high yields, which can usually be achieved with apartments or student accommodation. If you’re investing in property as a long-term investment strategy, it’s important to look for properties that offer substantial potential for capital appreciation in cities that are set to see house price growth above the national average in the coming years. Those that are looking for the best of both worlds would benefit from looking in areas in the North West of England such as Manchester and Liverpool as these locations are seeing their house prices rise dramatically but are still considerably cheaper than properties in the likes of London and the South East.
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Things to consider when investing in buy-to-let There is a lot of planning and key decisions to be made when you’re investing in buy-to-let, and it is vital that this is done properly so that you make the most of your investment. More often than not, first-time investors tend to forget that buying a property is only the first of many steps – you will also have to think about ongoing costs, finding tenants and maintaining your property. Here are the key things to consider when investing in buy-to-let:
Research the market Research should be the first and foremost thing to do before you even start looking at properties. You need to be looking at market trends, what locations you should be investing in, what type of investment is best for you, and how you will finance your investment. This isn’t just a vital step for new investors, it’s also important for seasoned investors as well. The market is constantly fluctuating and developing, so it’s important you keep up to date.
Financing your property One of the biggest decisions to be made when investing in property is how you’re going to finance the property and any ongoing or unexpected costs that you might have. When buying your property, you need to figure out whether you’re going to buy it as a cash purchase or use a mortgage. It’s important to remember that certain properties, such as student apartments, cannot be funded by mortgages, so that is something that you will need to check before investing. It’s also important to budget for an emergency buffer for any unforeseen situations.
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Choosing the right location A good way to help you choose the right location is to first think about what type of tenants you want – if you want to attract young professionals then inner-city areas are your best bet, but if you want to attract families then you might be better off looking at suburban areas. You will then have to look at what areas will you get the best value for money with your budget, and what area is the best performing. This information can be easily found by looking at property market indexes online or looking at sold prices on property portals such as Rightmove or Zoopla.
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Buy-to-let FAQs What is buy-to-let investment?
How does buy-to-let work?
In the simplest terms, buy-to-let is the purchase of a property with the intention of renting it out to tenants, as opposed to living in the property yourself.
The concept of buy-to-let is pretty straightforward – as an investor, you will purchase a property with the sole intention of renting it out in the private rental market. Once the purchase is complete, you will then be the landlord of the property and rent it out to a tenant for a pre-agreed monthly amount. Both you and the tenant will need to sign a tenancy agreement that will outline all the obligations both sides will have. Your tenant will be the legal occupant of the property and will be responsible for the monthly rent and bills. As the landlord, you will be responsible for the overall maintenance and legal requirements of the property.
Are there any risks with buy-to-let? Like any investment venture, buy-to-let does come with its own set of risks. That being said, buy-to-let presents far less risk than other investments such as stocks and shares, or cryptocurrencies. The biggest risk with buy-to-let is external factors such as a financial crash or a slowdown in the economy, which could affect the value of your property. Another issue for landlords is when your property is experiencing a void period where it’s empty and not receiving rental income, however, the impact of this can be reduced with proper financial planning and budgeting.
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Can I get a mortgage with a buy-to-let property? This depends on what type of property you’re investing in as some types of property can only be a cash purchase, such as student accommodation. The criteria to get a buy-to-let mortgage is very stringent – lenders need to be satisfied of the price and projected yield of the property. You will also need to have already owned a property, whether you own it outright or with a mortgage still outstanding.
Can I purchase a buy-to-let property as a first-time buyer?
What is the difference between NET yields and gross yields?
Technically, it is possible to purchase a buy-to-let as a firsttime buyer, however, being a first-time buyer makes the process a lot more complicated. It will be a lot more difficult for you to secure a buy-to-let mortgage because lenders will see you as a higher risk as you have yet to own a property so you will need a much higher deposit (if a lender is willing to lend to you), or purchase the property as a cash purchase.
Yields are basically the annual return on investments expressed as a percentage. Gross yield is the value of your return before you deduct any associated costs such as mortgage repayments and service charges. NET yields are the value of your return with all associated costs deducted. If you want a more accurate idea of what you’re actual income from your property is, you will need to look at your NET yield.
What is leasehold and freehold, and what is the difference?
Below is an outline of how to work out gross and NET yields:
Freehold and leasehold are the two primary forms of legal ownership of a property. Freehold is when you own the building and the land that it sits on. Houses and stand-alone properties will usually be sold as freehold. Leasehold is when you buy the right to occupy a property for a set amount of years (usually 100+ years) by the freeholder who owns the land that the property sits on. It is standard practice for apartments in the UK to be leasehold.
NET – gross annual rent – additional costs / value of property x 100
Gross – gross annual rent/value of property x 100
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Knight Knox make property investment simple. We specialise in the sale of buy-to-let properties in prime city centre locations across the UK.
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advice and ensure that they see the best possible returns on their investments.
With nearly 20 years of experience under our belts, we are perfectly positioned to give our clients property investment advice that is perfectly tailored to them, and make the property investment process as simple as possible.
From the moment you make your first enquiry, you will be assigned your own specialist property consultant who will help you find your ideal investment. Once you’ve found your perfect property, you will be passed over to our aftersales department who will assist you through the conveyancing process.
We specialise in both residential and student property, we have sold over 11,000 properties to 5,500 individual buyers all over the world. We always strive to give our clients the best
All Knight Knox employees are passionate about what they do, so you can be assured that you’ll be in the best possible hands.
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What our clients have to say
I’ve dealt with Knight Knox for the past 5 years in which time I have purchased six properties all of which have given me an excellent return on investment.
S Ackers, Knight Knox Investor
The two ladies I have dealt with during the purchase of two student buy to let’s have always been both polite and professional in their dealings with me and I am happy to recommend them to any potential purchaser of Knight Knox without reservation.
Initially I was daunting by the whole process as I’d never bought off plan, but that all soon changed. There was always someone at the end of the phone line - a human, and a friendly helpful one at that. No question was too small. They made me feel valued. Every single one of the staff I dealt with were simply amazing, approachable and nothing was too much trouble. I would definitely use Knight Knox again and highly recommend them as true professionals. Their customer relations and service attitude are exemplary. From me, it’s a very easy 5 stars.
M Dove, Knight Knox Investor
D Watkins, Knight Knox Investor
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Website: www.knightknox.com Telephone: (0)161 772 1370 Email: info@knightknox.com
The information contained within this document is correct at the time of printing (March 2022). Any images featured in this document are a guideline and are for representation only; furthermore, any completion dates outlined in this document are correct at the time of publication but may be subject to change. 2022-03_v1