LANDLORDS are pouring into the buy-to-let property sector, but experts say they get better returns by choosing to buy a house that has already been modernised or needs no work doing on it.
With property giving better returns than many other forms of investment, and with a shake-up of the pension rules set to see more first-time landlords coming into the market, advisers say that buyers need to be careful which building they choose.
New research by HSBC shows that almost half of existing landlords are so happy with their investment they aim to expand their portfolio in the near-future.
But the majority – two-thirds – want a property that requires no spending.
HSBC says its data shows the most popular choice for a second buy-to-let property is a two-bedroom flat ready for tenants to move into, even though it costs more to buy initially.
The bank says that a property needing no renovation typically returns an average yield of 5.4 per cent, or one per cent more than those needing work.
Peter Dockar, head of mortgages at HSBC, said: “Ready-to-move-into properties are often the better choice for landlords looking to purchase additional BTL properties.
“Not only does this avoid the need for lengthy and expensive renovations, it can also result in higher yields in most areas of the country.
“While the initial purchase price will be significantly higher, rental returns are also improved, making monthly mortgage and maintenance costs more palatable.”
The higher initial purchase price of a renovated property is a barrier for more than a quarter of investors, but they need to factor in the cost of refurbishing one in poor condition.
HSBC says that a new kitchen, new bathroom and redecoration of four rooms will cost a four figure sum, but will however add a lot more than that to the value of the property.
A higher value will also help when it is time to re-mortgage, as the higher property price could mean that borrowers can apply for a lower loan-to-value mortgage and get a better rate.
Peter added: “The choice is clear for landlords hoping to make the most out of their buy-to-let investment. Either purchase or renovate a property to good condition or risk lower rental income and reduced overall yields.
“Maximising return on investment is crucial for landlords hoping to add more properties to their portfolio, and will help build a solid stream of income to supplement existing earnings, or act as an alternative savings plan.”