Property renovation to increase income yields

Posted: 19th Jun 2015

renovation buildingIf you are on the look out for a property to buy to let – and a lot of aspiring landlords are aiming to do just that – is it better to buy one that still needs to be done up and renovated or one that is all ready for tenants to move into?

The decision might prove quite critical, since buying to let is a business in which the economics of investment and return from rents is especially important.

The cost of the investment

It is important to gauge right the price you need to pay for the principal investment in a buy to let business; namely the property itself. A property that has been properly renovated to an adequate standard is considerably more likely to generate the income yields on which a landlord’s successful business depends.

In this light, therefore, there is some interesting research by the bank and buy to let mortgage lender, HSBC.Published in the latter part of 2014, the research showed that property still in need of renovation before letting to tenants is an average of £58,500 cheaper than property which has already been refurbished.

At an average purchase price of £194,599 for a ready to occupy, buy to let house with two bedrooms, this is 43% more expensive than a similar property still in need of renovation, with an average purchase price of just £136,042.

It may give some idea of the accelerated appreciation in the value of buy to let property of all kinds to compare the £194,599 quoted by HSBC with our own experience here at Cover4LetProperty, where our data from 2013 indicates that the average total building sum insured on a let property was £141,301 (and allowing for the fact, of course, that purchase price and sum insured are two different measures of value).

What’s involved in renovation

If you have decided to pursue the option of buying a property to renovate before letting it to tenants, what are some of the principal considerations?

  • research, planning and preparation are probably the key words behind any successful renovation project;
  • the research might involve discussions with friends, relations and other landlords who may have gone down the same path, but might also benefit from input from the professionals – some of whom were happy to give completely free advice and guidance when they manned the stalls at the National Homebuilding & Renovating Show at the NEC, in Birmingham at the end of March this year;
  • planning is likely to demand both your time and patience as you apply for and await the necessary permissions from your local authority’s planning and building control departments – pressing ahead regardless, without those permissions, might result in your having to tear down any renovation work already completed;
  • an overview of the planning requirements and building standards maintained by your local authority is contained on the relevant government website – and gives some idea of the many hoops you may have to jump through;
  • from the moment you buy the property, you are likely to take the precaution of ensuring that it is adequately insured;
  • a potential stumbling block here might be that some insurers are reluctant to provide cover from inception (the time you buy it, that is) for property that is unoccupied, because it is under renovation – at Cover4LetProperty, on the other hand, we are able to arrange cover in precisely these circumstances;
  • an essential part of careful preparation calls upon all your judgment and skill in commissioning the most competent, reliable and economic builders to carry out the works;
  • once again, you might want to question the experiences of friends, relatives or fellow landlords who have hired such contractors themselves – since their own happy and successful experience is likely to be a good sign that yours is going to be the same;
  • however glowing the reference your contacts may give for a particular builder, however, you might still want to insist on getting at least three estimates and quotations in writing from other candidates;
  • it is essential to be perfectly clear about what you expect from your contractors and when – a detailed schedule of works, for instance, commits both parties to the extent and standard of building to be done and the due dates for any interim payments;
  • before making the commitment to your chosen contractor or contractors, you might also want to ask for the addresses of other sites on which they have recently worked, so that you might do your own drive-by and judge at least some of the results for yourself.

With the works themselves tackled in a carefully planned and commissioned way, therefore, the purchase of a property in need of renovation might prove a sound investment in terms of the typically lower purchase price and the possibility of attractive income yields.