Its a shame it isnt like this in Australia
Buying in the UK, England, London
- Thread starter MrStitchy
- Start date
Its a shame it isnt like this in Australia
Great post James - some good info there!
Do you know what the story is when in the auction guide says "The property is subject to a Regulated Tenancy"? Is the buyer obliged to keep the property rented at the same (really cheap) rent? or is it subsidised by the gov? or something else.. There are some great listed guide prices there, or they at least appear so on paper.. it's just the listed rents look way too low.
James' advice is bang on, I'm currently an Aussie expat living in London and have for many years.
Yields in the UK only 10 years ago were routinely 10-12%, this collapsed to near Aust levels as the fad of owning investment property really took off from 2002 onwards (driven by cheap money mortgages etc). Yields I think are likely to remain around Aust levels for the long term now.
One key additional point of care for the uninitiated is you need to file tax returns here and in Aust. for the property. The tax breaks in the UK aren't as good as Aust. For instance you won't get the same level of depreciation as you do in Aust. e.g. you don't get Deppro or Depreciator firms here for that reason. On the other hand you will get the same depreciation rights as you would if the property were in Aust. (that’s why you want a Deppro tyoe company in UK!). I’d advise if you are serious about the UK that you model a UK tax return in tandem with your Australian tax return for your chosen type of UK property as you may find the aggregated result isn’t quite what you expected! Thankfully there is a double tax treaty in b/w UK and Aust, but if you pay more tax in the UK on this property than you would in Aust you'll likely lose the excess tax paid.
Also you need to be clear if default on your mortgage in the UK there is a treaty between UK and Aust to allow that debt to be collected in Aust (courts will support it) and visa versa. Additionally if you think you can dud the UK tax authorities then think again the ATO happily collects UK tax debts for them (and visa versa). I've seen this done to a temp who worked here went back and 3 years after returning the UK tax authorities went to collect $100k from him for not paying on time in the UK.
As you'll be required to complete an annual tax return in the UK James rightly notes that if you don't get pre-approval from the tax man then the agent is obliged by law to automatically take 20% off your gross rent each month to ensure they get their tax from non-residents. This obviously makes a very big impact on your cashflows so you need to be on top of this one!
One upside unlike Aust you won't pay UK CGT on sale in the UK as a non-resident (but you will pay tax on your UK gain in Aust though - bugger!) and there are no such thing as non-resident tax rates here in the UK. If you do need to pay CGT then the rate is a flat 28% with the first £10k tax free. There are also some strange tax rules about remortgaging IP (essentially where you are doing equity take out as part of remortgage) and the deductibility of your debt for UK tax purposes.
As James said investor loans are not interchangeable with owner occupied loans like in Aust, they are seen as very different risks and priced as such (mostly because more loans end up securitised here). In fact (ridiculously) if you let out your old PPOR home out and haven’t told your bank then the FSA regulator says its fraud (!) and treats you as thus (explains why Agents demand to see approval from your bank re mortgage type). Right now some banks and non-banks will lend up to 80%, but in practice the LTV’s are more 60-75%, personally I’ve found the more limiting factor is not LTV’s but the fact the banks demand you have rent cover at least 125% of the interest - the ‘benchmark’ in many cases for this test is not the discount rate you are paying but some notional other one they choose . Also IP loans all come with relatively large upfront fees (usually 1-3% of loan), which can be added to loan – so don’t be fooled by a loan headline rate! I’m not aware of any IP loans here with offset facility either.
With mass redundancies taking place in the UK public sector over the coming months and years you’d be very brave to buy north of the Midlands and indeed any city where the major employer is government. There are plenty of cities Midlands upwards here that resemble Canberra in terms of the top employer being Government (previous UK Labor government wanted to create jobs for its voters predominantly in the north). These redundancies have only really started taking place in late 2010, as the new government finally got round to withdrawing funding for all levels of government and this will continue while the UK government work to reduce the deficit to manageable levels envisaged to be 2015 at best.
It’s also essential to understand there are very crudely two residential markets in the UK, London (around M25) and everything else. Unsurprisingly London is a global town so buyers are global and growing – Sydney/Melbourne don’t have the degree of this dynamic as London does. With a very cheap pound at present, new wealth in Asia and the crisis in Egypt/Portuagal/Italy/Greece (i.e. cash flight to safety into London) there have been huge flows of money into London real estate (house prices are in the centre are back at their highs of 2007). This is not true of non-London property, this is why looking at UK real estate results as a whole are very misleading as it averages out the highs of London v lows of non-London.
My own view is I think the pound is at a historical low and the Aussie at a historical high so there will be some gain to be had from holding Pound assets over the next 5 years, conservatively my view is circa 20%. Personally I’d only buy in the London M25 but the downside is this is the most expensive market but on the other hand its less less risk. I’d also go for a fixed rate mortgage unless you are certain you can manage both FX movements on your net flows (rent less interest) and also deal with variable interest rates. Also be careful as interest rates are only going one direction here and that is up form a very low base; the equivalent Reserve Bank Rate is 0.5% here and I can see this rising to more normal levels of 5% over the coming 2-3 years. You nee dot besure if you go variable that you can handle this 4.5% interest rate rise whilst the 20% appreciation in the Pound is taking place at the same time. If you can, then I foresee your 20% FX gain being enhanced by another 20-50% house price increases to 2015 as the economy recovers. Even if I’m wrong on house prices then rental yields will creep up as it would be clear that a mortgage drought is stopping people moving so rental demand increases (this is already happening in London).
Yields in the UK only 10 years ago were routinely 10-12%, this collapsed to near Aust levels as the fad of owning investment property really took off from 2002 onwards (driven by cheap money mortgages etc). Yields I think are likely to remain around Aust levels for the long term now.
One key additional point of care for the uninitiated is you need to file tax returns here and in Aust. for the property. The tax breaks in the UK aren't as good as Aust. For instance you won't get the same level of depreciation as you do in Aust. e.g. you don't get Deppro or Depreciator firms here for that reason. On the other hand you will get the same depreciation rights as you would if the property were in Aust. (that’s why you want a Deppro tyoe company in UK!). I’d advise if you are serious about the UK that you model a UK tax return in tandem with your Australian tax return for your chosen type of UK property as you may find the aggregated result isn’t quite what you expected! Thankfully there is a double tax treaty in b/w UK and Aust, but if you pay more tax in the UK on this property than you would in Aust you'll likely lose the excess tax paid.
Also you need to be clear if default on your mortgage in the UK there is a treaty between UK and Aust to allow that debt to be collected in Aust (courts will support it) and visa versa. Additionally if you think you can dud the UK tax authorities then think again the ATO happily collects UK tax debts for them (and visa versa). I've seen this done to a temp who worked here went back and 3 years after returning the UK tax authorities went to collect $100k from him for not paying on time in the UK.
As you'll be required to complete an annual tax return in the UK James rightly notes that if you don't get pre-approval from the tax man then the agent is obliged by law to automatically take 20% off your gross rent each month to ensure they get their tax from non-residents. This obviously makes a very big impact on your cashflows so you need to be on top of this one!
One upside unlike Aust you won't pay UK CGT on sale in the UK as a non-resident (but you will pay tax on your UK gain in Aust though - bugger!) and there are no such thing as non-resident tax rates here in the UK. If you do need to pay CGT then the rate is a flat 28% with the first £10k tax free. There are also some strange tax rules about remortgaging IP (essentially where you are doing equity take out as part of remortgage) and the deductibility of your debt for UK tax purposes.
As James said investor loans are not interchangeable with owner occupied loans like in Aust, they are seen as very different risks and priced as such (mostly because more loans end up securitised here). In fact (ridiculously) if you let out your old PPOR home out and haven’t told your bank then the FSA regulator says its fraud (!) and treats you as thus (explains why Agents demand to see approval from your bank re mortgage type). Right now some banks and non-banks will lend up to 80%, but in practice the LTV’s are more 60-75%, personally I’ve found the more limiting factor is not LTV’s but the fact the banks demand you have rent cover at least 125% of the interest - the ‘benchmark’ in many cases for this test is not the discount rate you are paying but some notional other one they choose . Also IP loans all come with relatively large upfront fees (usually 1-3% of loan), which can be added to loan – so don’t be fooled by a loan headline rate! I’m not aware of any IP loans here with offset facility either.
With mass redundancies taking place in the UK public sector over the coming months and years you’d be very brave to buy north of the Midlands and indeed any city where the major employer is government. There are plenty of cities Midlands upwards here that resemble Canberra in terms of the top employer being Government (previous UK Labor government wanted to create jobs for its voters predominantly in the north). These redundancies have only really started taking place in late 2010, as the new government finally got round to withdrawing funding for all levels of government and this will continue while the UK government work to reduce the deficit to manageable levels envisaged to be 2015 at best.
It’s also essential to understand there are very crudely two residential markets in the UK, London (around M25) and everything else. Unsurprisingly London is a global town so buyers are global and growing – Sydney/Melbourne don’t have the degree of this dynamic as London does. With a very cheap pound at present, new wealth in Asia and the crisis in Egypt/Portuagal/Italy/Greece (i.e. cash flight to safety into London) there have been huge flows of money into London real estate (house prices are in the centre are back at their highs of 2007). This is not true of non-London property, this is why looking at UK real estate results as a whole are very misleading as it averages out the highs of London v lows of non-London.
My own view is I think the pound is at a historical low and the Aussie at a historical high so there will be some gain to be had from holding Pound assets over the next 5 years, conservatively my view is circa 20%. Personally I’d only buy in the London M25 but the downside is this is the most expensive market but on the other hand its less less risk. I’d also go for a fixed rate mortgage unless you are certain you can manage both FX movements on your net flows (rent less interest) and also deal with variable interest rates. Also be careful as interest rates are only going one direction here and that is up form a very low base; the equivalent Reserve Bank Rate is 0.5% here and I can see this rising to more normal levels of 5% over the coming 2-3 years. You nee dot besure if you go variable that you can handle this 4.5% interest rate rise whilst the 20% appreciation in the Pound is taking place at the same time. If you can, then I foresee your 20% FX gain being enhanced by another 20-50% house price increases to 2015 as the economy recovers. Even if I’m wrong on house prices then rental yields will creep up as it would be clear that a mortgage drought is stopping people moving so rental demand increases (this is already happening in London).
The Department of Communities and Local Government has an explanation of regulated tenancies as does the homeless charity Shelter.
In short Regulated Tenancies are very controlled tenancies. The tenant is responsible for the upkeep of the inside of the property, while the landlord is responsible for the outside. The rent can only be increased every two years and cannot be anything other than a "fair" rent. The tenant can only be evicted after a court order is obtained by the landlord.
If you want to get an idea of just how high/low the rents are normally look at RightMove.co.uk for property listed to sell and rent across the UK.
Then use MoneyFacts.co.uk to compare Buy-to-let mortgage rates.
Thanks for the links James, I think a regulated tenancy is something to be avoided? "Fair" rent seems to be set by a rent officer which is a lot short of "market" rent.. and ending the tenancy early seems like more trouble than it's worth?
What are your thoughts on a leasehold property? Does the state just renew the lease at the end of the term?
From what I see the yields look pretty good.
What are your thoughts on a leasehold property? Does the state just renew the lease at the end of the term?
Insight, have you looked into buying at auction? e.g. allsop.co.uk
From what I see the yields look pretty good.
Check out the government's information on buying property in the UK. The explanation about leasehold property is here.
Leasehold property is fine, most flats/apartments will be leasehold. Traditionally the lease was for 99 years. In the last few years it has become more common for owners in a building to buy up the freehold with a company (of which each owner is a shareholder) and extend each lease to, say, 999 years. These sorts of properties are advertised as "share of freehold" although the flat/unit is still on a lease. This is because there is no strata title or community title in England. As far as I am aware, this position also holds for Wales, but I'm not sure about Scotland. Be VERY wary of leases with less than 80 years - a mortgage company certainly will be. Freehold is held by private individuals or companies - not the state. There are now many protections in place to allow tenants to buy the freehold and to renew their lease at expiry. I'm well used to to this system now. I bought a flat with only 76 years left on the lease and negotiated a lease extension to 250 years for GBP6,500.00 with each party paying its own legal fees. However, lease extensions usually start around GBP10,000.00. Blue chip property in central London can be purchased for very low prices but with a bit of digging one discovers that there is 25 years left on the lease and the extension will cost hundreds of thousands of pounds. It's also important to ensure that "ground rent" is reasonable. My place has ground rent of GBP25.00 per year (capped).
Properties sold at auction in the UK are usually poorer quality and cheaper or major development lots. Housing trusts/local authorities often clear stock this way in order to offload older, run down properties. Re-possessed property is commonly sold this way. Property with "potential" is often sold this way. Check out a British programme called "Homes under the Hammer" to get an idea of the sort of property sold this way. I would be happy to buy at auction in the UK - but I would do very thorough due diligence first, as with any property purchase.
Do not be deceived by the low interest rates in the UK this might look attractive from a country (australia) which notoriously averages around 7.5%, however I can tell you from experience that this is the least of your worries if contemplating investing in London.
The reality is that if you are planning on buying in London for the purpose of investment then you can expect to pay 10-11% of your annual rent UPFRONT just to find a tenant and another 6% for the property to be managed. I am an investor in both countries and have also worked in property in both including for the aforementioned Foxtons who charge 17% for full management.
To cap this off London doesn't have 1% vacancy rates like many of Australia's major cities and you would be wise to forecast at least 4 weeks out of each biannual where you're property will be vacant.
I'm not saying dont invest there as if you know what you're doing there is most definitely opportunity, but the reality is London has both one of the most expensive and more importantly competitive property markets in the world.
The reality is that if you are planning on buying in London for the purpose of investment then you can expect to pay 10-11% of your annual rent UPFRONT just to find a tenant and another 6% for the property to be managed. I am an investor in both countries and have also worked in property in both including for the aforementioned Foxtons who charge 17% for full management.
To cap this off London doesn't have 1% vacancy rates like many of Australia's major cities and you would be wise to forecast at least 4 weeks out of each biannual where you're property will be vacant.
I'm not saying dont invest there as if you know what you're doing there is most definitely opportunity, but the reality is London has both one of the most expensive and more importantly competitive property markets in the world.
Hi Mr Stitchy,
We have 4 properties that we rent out in London after living there for 8 years (moved back to Brisbane in 2009). We are finally starting to see some good cashflow after most loans came off their fixed rates. All our properties are in West/ South West London and seem to have good demand. They now pay for themselves and we plan on keeping the excess funds in the UK to use on a family holiday.
Some points to consider:
1. Management can be a hassle. We pay 12% for one of our properties (includes finding the tenant and management). This same property had a tenant die in situ (not in the actual property) and this took ages to sort out - we lost about 4 months rent plus lots of stress. Luckily we have an aussie couple in one property that have been there since 2003 and they organise any repairs themselves and we reimburse them so this property is self managed. Its always a concern to me that something major could go wrong and whether we can depend on the agent or someone else to sort it out.
2. If you're non resident then it may be difficult to get a loan (already difficult as it is).
3. Tax - you have to apply for exemption from having tax deducted at source but once this is sorted you just settle up the difference at tax time. We have to submit returns still (by 31st Jan) but we have a UK expert do this for us. You can't claim as much as in Australia and no negative gearing (just have to carry forward any losses) but if you let a furnished property you can claim 10% wear and tear allowance. This added up to a nice 2400 GBP on our most expensive rental.
I haven't looked at the property market lately but we were able to find cashflow properties back in 2003 to 2007 when property was still going up.
Let me know if you need any more info,
Rachel
We have 4 properties that we rent out in London after living there for 8 years (moved back to Brisbane in 2009). We are finally starting to see some good cashflow after most loans came off their fixed rates. All our properties are in West/ South West London and seem to have good demand. They now pay for themselves and we plan on keeping the excess funds in the UK to use on a family holiday.
Some points to consider:
1. Management can be a hassle. We pay 12% for one of our properties (includes finding the tenant and management). This same property had a tenant die in situ (not in the actual property) and this took ages to sort out - we lost about 4 months rent plus lots of stress. Luckily we have an aussie couple in one property that have been there since 2003 and they organise any repairs themselves and we reimburse them so this property is self managed. Its always a concern to me that something major could go wrong and whether we can depend on the agent or someone else to sort it out.
2. If you're non resident then it may be difficult to get a loan (already difficult as it is).
3. Tax - you have to apply for exemption from having tax deducted at source but once this is sorted you just settle up the difference at tax time. We have to submit returns still (by 31st Jan) but we have a UK expert do this for us. You can't claim as much as in Australia and no negative gearing (just have to carry forward any losses) but if you let a furnished property you can claim 10% wear and tear allowance. This added up to a nice 2400 GBP on our most expensive rental.
I haven't looked at the property market lately but we were able to find cashflow properties back in 2003 to 2007 when property was still going up.
Let me know if you need any more info,
Rachel
Rachel - interested to know who you use as an agent in SW London. Are you talking Battersea/Clapham/Balham area or more Wimbledon/Colliers Wood way?
Foxton are sharks, mind you many of the others aren't much better. A common agent clause with Landlords should reject outright was 'we get 2% fee if you sell the property to the tenant, regardless of if we are the selling agent or not'. Another one is we get £30-£200 to turn up to simply deal with any issues with the tenant, yes you read that correctly they ask for 17% for full management but then want appearance fees. The simple answer is to go through and strike out any clauses you disagree with and see what they say, unsurprisingly there is far more negotiation required with agents here than in Aust. Agents here also believe they 'own' the tenant they find for you so if you decide to subsequently change agents but you don't want the tenant to change then this can be a challenge with some agreements if you are not careful.
Foxton are sharks, mind you many of the others aren't much better. A common agent clause with Landlords should reject outright was 'we get 2% fee if you sell the property to the tenant, regardless of if we are the selling agent or not'.
Another one is we get £30-£200 to turn up to simply deal with any issues with the tenant, yes you read that correctly they ask for 17% for full management but then want appearance fees. The simple answer is to go through and strike out any clauses you disagree with and see what they say, unsurprisingly there is far more negotiation required with agents here than in Aust. Agents here also believe they 'own' the tenant they find for you so if you decide to subsequently change agents but you don't want the tenant to change then this can be a challenge with some agreements if you are not careful.Probably useful for those wanting an overview of the state of play of financing buy to let in the UK presently.
http://www.ft.com/cms/s/2/cb72d7c8-360e-11e0-9b3b-00144feabdc0.html#axzz1E8fkuVoX
http://www.ft.com/cms/s/2/cb72d7c8-360e-11e0-9b3b-00144feabdc0.html#axzz1E8fkuVoX
We only use an agent for one of our properties - this one is in Kingston and we use KFH. We did use Foxtons once a long time ago and never again - total rip off. We have 2 properties in Wimbledon/ Southfields and both are tenanted to existing tenants or someone we know so we deal with them direct. However, one of the tenants has bought somewhere so I might have to look at using an agent for that property when it comes up for re-letting.
but if that were the case in australia then we too wouldn't need serviceability calcs.
75% of the 8% rent is 6% so you're still sitting pretty with a 150% debt serviceability coverage over 4% interest.
unfortunately for purchasers, in australia the YIELD is 4% and the IR is 8%.
so servieability DOES come into the equation.
I've also been interested in UK property after watching shows like "homes under the hammer" and wondering how cosmetic renos seem to be so profitable
I've found this website to have a load of info for learning more about the buying process and costs..
I think some of the main differences are: You're more likely to get a bargain at an auction in the UK as they explain here. There is no stamp duty to pay on a purchase less than £125k, above £125 it's still pretty low comparitively. Holding costs are lower - interest rates are at 3.5%. If you're buying to hold the tenant pays the council tax.
But min deposit for "buy to let" is 25%, (Barclays require 40%) and you need a minimum income - from memory £35k/pa for Lloyds TSB.
I'm not sure what your budget is, so can't recommend any areas in London.. Have a look at http://www.foxtons.co.uk/ to see where you can afford, and compare them to the rentals to calculate the yields.
I'm not sure what is more common in the UK, self managing or using a PM. Each property I lived in when I was there was self managed, but I think that had more to do with the flat share arrangement I went for.
Good luck, and post any more info you find
Hey VB,
I haven't looked for a while, but I was under the impression that interest rates are quite high for buy to lets.
It seems ok if you were going to buy a house as PPOR, but an investment prop hikes up the rates.
F
Hey alexlee,
Agents do a pretty good job. they seem to be on the ball and keep me up to date with my prop. They do sales and letting, and are very similar to what I see over here.
F
To get you thinking, why not try
http://www.propertysnake.co.uk/
This site tracks how long properties have been on the market, and what reductions they have been subjected to.
F
I think you can do better than 4.8% gross yield, but even that could be cf+ at the moment with current interest rates and their cheaper buying/holding costs.
I'd do a bit of research into Hackney which is the area of the 2012 olympics.. A few years ago when I was there it was a dump.. but I suspect it still is. I'm not too sure about how well these areas will be gentrified considering the demographic. I remember catching buses through there and feeling like I was driving through downtown Mogadishu
I here ya,
I might have been there the same time you were.
They obviously have big plans for the gentrification due to the Olympics.
I can remember the best thing they did to Hackney was divert the eyesaw of all the overhead power lines (the big beasts) and put them all underground. This was around the marshes I think.
F
