Yesterday the Bank of England kept interest rates to the record low 0.5% level again, however very clear signals are being given that rates will rise either later this year or early in 2016 - what impact will that have on Sunderland Landlords?
The media is full of typically hysterical tales of Buy-To-Let Armageddon - click below for a sample of articles from the Financial Times and City AM in recent days
http://www.ft.com/cms/s/0/c42b86fa-3aae-11e5-bbd1-b37bc06f590c.html#axzz3i7NRoolm
http://www.cityam.com/221779/super-thursday-interest-rate-rise-bank-england-could-end-buy-let-boom
Both of the above estimate over 5,000 Buy-to-Let repossessions per year as a result of interest rate increases
But is this likely?
An increase of 2.5% would mean someone with a £75,000 mortgage would have to fork out an additional £156 per month, so for those who have rental properties where the rent is just about covering the existing mortgage payments it could create a significant and unsustainable shortfall unless rents increased significantly to compensate
I'm not really sure that a typical Sunderland tenant would accept an £160pcm increase in rent, even if it was gradually increased over the years...given the majority of Sunderland properties are rented for around £500pcm this would represent a 32% increase
The increase in interest rates is not going to happen overnight, with most observers suggesting rates will increase to 1% by the end of 2016, 1.5% by the end of 2017 and 2.5% by 2025
This does mean that there is plenty of time to plan a strategy to minimise the negative impact of such increases
So what can you do now to protect yourself from interest rate rises when they do arrive?
The following is taken from some typically insightful analysis from the excellent Mark Homer of Progressive Property, which I thought was worth sharing
Mark suggests there are 4 strategies that professional property investors can implement to survive and thrive in times of rate hikes
1. Fixed Rate Mortgages
2. Tracker Mortgage
3. Self-Insure
4. Equalise
Fixed Rate Mortgages
Depending on the market, you can get 5 and 10 year fixed rate mortgages, which cannot go above a set level in the term of the fixed part of the loan
This is a safe way of protecting against rate rises, and very secure. You know from day one what you’ll be paying. You can work out more precise, less ‘variable’ cashflow figures. Downside protected, and you can sleep easy
But…you will overpay for a fixed rate vs. a variable (tracker) rate mortgage
You’re paying extra for the security
The banks want to hedge against future rate rises by charging you more; an insurance policy of sorts. You are also tied in for a longer period so your exit is restricted. But if rates don’t rise, you could have paid significantly more over the term, which could have gone in your pocket
A borrower with a 30% deposit would be paying a 2.3% premium if they took out a five-year fix over a tracker
But is it worth the risk?
Tracker or Fixed? Increased Risk or Overpayment?
The smart money is in diversifying your mortgage products so you have spread risk across tracker and fixed rate mortgages
Your hands may be tied by what mortgage products are available, but across a full cycle it is savvy to have a balanced mortgage portfolio of tracker and fixed products and to ‘Self-Insure’
Self Insure
Compare the current tracker and fixed rate mortgage products, take the tracker and pay the difference in cost each month into a savings account
You are in effect stock-piling cash as your own insurance policy for rate rises, by paying the fixed rate but covering the potential future rise yourself
You win either way, because if rates rise you’re as covered as you would have been with a fixed rate (barring serious disasters), and you get to save, earn on or lend out the cash if the long term tracker ends up less expensive
Equalise
Use all 3 strategies in a diversified strategy, across different markets, mitigating any major market change
You can leverage your self insurance money for a compounded 5-8% a year return in a liquid investment, and each subsequent tracker mortgage becomes less risky in isolation
Now I'm no Independent Financial Adviser but the above advice from Mark Homer seems to make sense
It's inevitable that interest rates will rise so it will be far better to protect yourself in one or more of the above ways as having done so, if Buy-to-Let Armageddon does occur as has been predicted, it will undoubtedly present opportunities for those in a secure position with available funds - that will allow them to benefit from the discounted properties coming onto the market through repossessions
Call me on 0191 567 8577 or email neil.whitfield@belvoirlettings.com to discuss any aspect of property investment in Sunderland
Given the blog post last month suggesting properties in SR6 should have strong tenant demand, this 3 bedroom first floor flat looks worthy of investigation
It's being auctioned with a starting price of £58,000 and a £6,000 buyers premium
It does need full renovation throughout but given the most recent sale for a comparable 3 bedroom flat in this street was in December 2014 for £72,000 (and from memory this was another one that needed work)
Recently 2 bedroom flats (in better condition) have been bought in this street for £75,000 and £80,000 there is scope for picking this up at a price that makes it a worthwhile investment
Ultimately whether it makes financial sense will depend on the interest in the room on the night of the auction
Let's assume you can pick it up for £75,000 (inc Buyers Premium) and spend £10,000 on it, there may be scope to make 7.0% Gross Yield based on £495pcm rent
Click here for details https://www.onthemarket.com/details/1274905
Call me on 0191 567 8577 or email neil.whitfield@belvoirlettings.com to discuss this or any aspect of property investment in Sunderland
We know this 3 bedroom larger style terrace next to Sunderland Royal Hospital will be popular as we manage a couple of similar properties on this street and are just about to relet one later this month to a family where the mum works full time at the Hospital
It's on the market for 'Offers Over' £89,950 and will need a little work - there's no kitchen photo and it would benefit from redecoration and flooring, so I'd work on a total investment of around £100,000
It can work as a single family let, getting £595pcm and delivering 7.1% Gross Yield based on a total investment of £100,000
It could also work as a Multi Let with 3 lettable double bedrooms using one of the ground floor reception rooms as a bedroom
This will require work to reinstate a partition between the open plan 2 reception rooms and is based on forgoing the smaller upstairs bedroom (using it for storage or a study)
Based on a 3 room Multi Let at £90 per room per week would return £1,170 per month but to do so will require additional spend to redecorate and furnish to a high standard, so you should work on the total investment increasing to around £115,000
Even so this would deliver 12.2% Gross Yield
Click here for details http://www.rightmove.co.uk/property-for-sale/property-39431233.html?utm_content=v2-ealertspropertyimage&utm_medium=email&utm_source=emailupdates&utm_campaign=emailupdates1day&utm_term=buying&sc_id=10668247&onetime_FromEmail=true
Call me on 0191 567 8577 or email neil.whitfield@belvoirlettings.com for more information on this property, to discuss the 2 potential strategies or for a free, no obligation chat about any aspect of the Sunderland property market
This could be a great opportunity to pick up a ready made portfolio of 21 apartments in Sunderland & South Shields at a knock-down price, or pick them up in 4 units clusters (still at a good price)
The portfolio is split between Riverview Sunderland and The Cove in South Shields
Regular readers of this blog will know that I consider 2 bedroom apartments in Riverview, Low Street to make decent investments that are popular with both working professionals and students
Purchasing the whole portfolio for £900,000 works out at just under £43k per apartment or £50k if you buy 4 for £200,000
Based on Riverview prices this looks good, given Riverview apartments tend to go for around £65,000 - click here for a link to a blog post from June on this very subject http://www.sunderlandpropertyblog.co.uk/2015/06/at-65000-do-2-bedroom-apartments-in.html
I've not come across The Cove and we don't deal with South Shields so you'd need to do your own due dilligence on that one, I'm afraid
The selling agent advises that the total gross rental income is £126,120 per year which based on the £900,000 selling price gives a 14% Gross Yield
Click here for details http://www.zoopla.co.uk/for-sale/details/37680163?tmad=c&tmcampid=35&utm_campaign=buy-alert&utm_content=contact-type-listing&utm_medium=email&utm_source=alert#ApRIkiyEF3lijAcf.97
Call me if you'd like to discuss this opportunity or for any aspect of property investment in Sunderland - call 0191 567 8577 or email neil.whitfield@belvoirlettings.com
This one caught my eye for a couple of reasons, firstly the price of £39,000 for a 2 bedroom house is pretty eye-catching and secondly we've managed one in the same row for a number of years
Having managed the next door property we know that Dalton-le-Dale is a sought after village between Seaham and Murton, close to the Dalton Park shopping outlet
We also know that it's is on the a main road so will have road noise and that the second bedroom is very, very small and can be offputting (so it may be beneficial to use some of the very large front bedroom space to sort out a better upstairs layout)
Either way, it needs work internally needing a new kitchen, decoration & flooring throughout (£10k should do it, assuming you keep the layout the same, it will be more if you make significant changes) and once done it will let for £350 - £400pcm
We've achieved £425 in the past but £400 is more normal and I'd suggest given current market conditions you should budget on £350 (that's what we're getting at the moment) - even based on this lowers amount it will return 8.6% Gross Yield
Click here for details http://www.rightmove.co.uk/property-for-sale/property-35525361.html
Call me on 0191 567 8577 or email neil.whitfield@belvoirlettings.com for more information on this investment or any aspect of property investment in Sunderland or surrounding areas
