If somebody told you that you could buy a fully refurbished 3 bedroom house for less than £50,000 what would you say? My initial reaction when I heard about these opportunities was a mix of intrigue and disbelief.
Having now been sourcing and selling these properties for several years, I am able to pass down some of my knowledge and advice about these deals and offer a full overview to investors who work with Prime Property.
Buying cheap freehold property offers 2 main benefits:
- High rental yields
- High returns on investment
In the following article I will outline how and why hundreds of our investors buy into these deals each year.
What exactly are ‘cheap houses’?
We classify ‘cheap houses’ as being sub – £60,000 and offering a rental yield of 8% plus.
According to the Office for National Statistics 2010 English Housing survey, end terraced, terraced and semi detached houses accounted for roughly 50% of all privately rented dwellings in England.
Considering there are roughly 4.5 million rental properties in England, this represents a huge amount of housing stock to choose from.
There are literally hundreds of thousands of UK landlords that are benefiting from renting these types of properties out to tenants.
Naturally, city centre areas will usually see a higher percentage of the population living in flats and apartments. Terraced properties are now more prevalent in suburban / semi rural areas as large amounts were replaced during urban regeneration projects in the mid twentieth century.
Our low cost property deals are predominantly located around the County Durham area. Including, but not restricted to major cities such as Sunderland and Newcastle, towns such as Hartlepool, Bishop Auckland and Seaham as well as smaller neighbouring villages.
Historically, the North East region has offered some of the lowest property prices in the UK and therefore it is a good source of cheap property stock.
Why would I buy one?
From my perspective as an agent, I’ve seen a varied mix of investors purchasing these types of deals, from first time investors through to those with 50 + properties within their portfolio.
The simple reason why these are so popular is that they’re great for cash flow and require very low deposits.
It’s often beneficial to diversify a portfolio with a mix of assets that will offer long term capital appreciation, with cash flowing assets that will offer a monthly income.
Cheap houses therefore satisfy the need for cash flow generation at the expense of a major uplift in value over the short to medium term future.
Will these properties increase in value? Yes, they usually will if you hold onto them for a fair amount of time BUT this shouldn’t be your main objective when buying into these deals.
These deals are all about YIELD and generating cash on a monthly basis.
Income figures and finance
Prime Property Agents have traditionally advised that our clients leverage purchases wherever possible and it’s no different with our cheap house deals.
We’ve found that lending is available at the lower price levels (subject to status).
- Lending is typically available to limited companies based on a minimum purchase price of £50,000. I usually see the sweet spot for buyers being between £50,000 – £70,000
- There have been occasions whereby our clients have purchased sub £50,000 houses with mortgages in their own name by approaching lenders directly and not through a broker
Let’s use a £50,000 house yielding £450 PCM as an example and assume you’re going to leverage the purchase with a 75% LTV mortgage.
You’ll be putting in £12,500 of your own cash into the deal and securing a loan of £37,500 to cover the balance. Interest rates are still competitive at these levels so let’s assume you secure a fixed rate at 3%.
The mortgage payment on the loan will be only £93.75 PCM!
Your other main expense will be management (usually 10% of the rental income) and the rest is effective profit from your investment!
Your net income would be roughly £311 after mortgage and management costs. This translates to a yearly income of around £3,700 and a NET return on investment of around 30% considering you only put £12,500 of your own funds into the deal at the point of purchase.
Nissan’s Sunderland car manufacturing plant – often seen as a success of modern North East industry
Factors to consider
One of the main concerns for many investors when deciding whether to invest into these deals will usually come down to the wider social and economic factors that may impact the ability to secure a long term, reliable tenant in the area.
Investing into property which is at the lower end of the price spectrum will often increase the potential that tenants will be receiving housing benefits or be out of full time employment.
The low mortgage payment will limit your exposure during any void periods. Although these are frustrating, pretty much every portfolio will be able to handle a monthly void when the overheads are this low.
I’d argue that many of these risks can be found in most areas of the UK and are not restricted to individual areas or regions.
The County Durham has traditionally had a strong manufacturing industry and while the collapse of the mining industry had negative impacts during the 80’s, employment levels are now around national average (72%), with unemployment rates significantly down over the past 20 years too.
One of the best ways to mitigate many of these concerns is to employ a reliable management agent to handle the property and needs of the tenants.
It’s human nature for us to want our assets be located close to us and I understand this may be one of the major concerns for those of you weighing one of these deals up.
Relinquishing the management to a local agent is commonplace for many large portfolio investors and is a vital step you’ll need to take if you wish to diversify your portfolio nationwide.
We understand the importance of getting this right when you’re based several hundreds of miles away from the property or based overseas.
Our North East team are on hand to advise of trusted local agents who manage many of our clients portfolios. Before committing to any of our deals we’ll happily put you in touch with one of our North East team who will be able to give you an overview of specific areas and the management process.
In an age where information is a click away on the internet, I’d argue that there is nothing better than old fashioned local knowledge when it comes to property & we’ll happily put you in touch!
Buying these properties is a straightforward process and should take around 4 – 6 weeks from the point of reservation.
Prime Property Agents source and sell roughly 75 – 100 ‘cheap houses’ every year and we’re well placed to handle and manage the purchase process with the seller.
Once you have paid your reservation fee, our Client Service team will walk you through the process step by step, whether you’re purchasing with cash or a BTL mortgage.
For more details about these opportunities, please contact me directly on 0115 985 3968 or drop me an email firstname.lastname@example.org
Jack Holland Prime Property Agents