Some 22 years ago, I recall going into an estate agency in north London to enquire about a potential investment purchase of a three-bed flat, which had conversion potential within the loft space. Due to head height restrictions I decided after an inspection at the property not to proceed, but I clearly recall what the agent I spoke with said about investment prices and yields as he stated: “for rental property, always remember the rule of thirteen and don’t pay any more than that multiplier of the annual rental income.”
What that agent, who had been in the trade for some 30 years, was referring to in the year 2000, was to not buy at less than an 8% gross yield. Fast-forward some 22 years and you would struggle to find anything around London as a single let that would achieve much above 5% gross, despite the recent rises in average rents. The rule of thirteen may well have been a valid guide for vanilla investment purchases in the mid-1990’s but it was certainly an outdated concept when the BOE bank rate was less than 1% for a over a decade. Once lenders recovered their nerve to start lending again from around 2010 onwards, we saw swift yield compression in a low interest rate environment, an unprecedented era which of course has now ended.
One residential sector trend that I have observed and acted upon myself over the last 20 years is that of investors seeking higher yield stock to - in theory - maximize their rental returns. That can of course be done by switching towards – for example - a shared accommodation strategy, but what many have done is to look further afield and to buy property in locations where a combination of low average wages and a poorly performing local economy equals low house prices but also higher rental gross yields. This cyclical trend has of course been accelerated since 2016 with the impact of the Section 24 tax changes, which made buying in high value and low yield areas for buy to let somewhat less attractive.
Putting aside the complexities of tax and whether or not to buy in a SPV or company ownership, the logic of buying low value and higher yield stock is one which for many investors and landlords is still appealing, but there are some pros and cons to consider and that is what this article is intended to highlight.
Until recently, the minimum purchase price where SDLT starts was at £125,000 and that level for me defines a low value property. And it is at around that price level, and below, which we will focus on in this article. Do note however that the Chancellor Kwasi Kwarteng has now revised the minimum level at which SDLT will be paid up to £250,000. What should also be noted is that there would still be an SDLT charge of £3,750 on a £125,000 property due to the 3% additional tax for anyone owning two or more properties in their personal names.