A few days before Christmas, I got chatting with one of my out of town landlords who was back in Lancaster visiting his family. Brought up in Lancaster, he went to Lancaster Royal Grammar School back in the 1970’s and is now a University Lecturer in central London. To enhance his retirement, he has a small portfolio of four properties in Lancaster and Morecambe and wanted my advice on where to buy the next property in both areas. ( He lives in a college owned flat and put simply, would never dream of buying where he lives in Kensington where the average value of a flat is £1.62m and a City house £4.1m. Eye-watering to say the least! ).
Before I could advise him, I reminded him that the most important thing when considering investing in property is finding a Lancaster or Morecambe property with decent rental yields for income returns, yet at the same time, it must have the potential for capital growth from rising house prices over time. Going into 2016, Lancaster and Morecambe landlords will be under more pressure to find the best permutation of yields and capital growth, as extra stamp duty charges for buying properties and a squeeze on mortgage interest relief will raise their costs.
However, before we look at yield and capital growth, one important consideration that often many landlords tend to overlook, is what the chances are that the rent will increase. Interestingly, the average rent of a property across Lancaster and Morecambe currently stands at £481 per month, which is a fall of 4.1% compared to twelve months ago (although it must be noted this fall in rents is for new tenancies and not existing tenants).
Anyway, back to yield and capital growth. The average value of a property in Lancaster and Morecambe currently stands at £188,000, meaning the average yield stands at 3.07% per annum, which on the face of it, many landlords would find disappointing.
That is the problem with averages, so if I were to look at say 2 bed houses in Lancaster which are the sort of properties a lot of landlords buy, the average value of a 2 bed house is £128,600, whilst the average rent for a 2 bed house is £507 per month, giving a yield of 4.73%.
However, if that wasn’t high enough, there are landlords in both towns who own some specialist properties with specialist tenancies, that are achieving nearly double that yield – again it comes down to your attitude to risk and reward (give me a tinkle if you wanted a chat about those sorts of properties – although they can be fun and games!).
Ultimately investors want to be making gains from both rent and house price growth. When combined, the rental yield and capital growth gives you the return on investment, and that is what I told my University client from Kensington. Return on investment is everything. So, looking at how property values in Lancaster and Morecambe have risen in the last year by on average 2% (it does vary across the town and city) which means the current annual return on investment for a typical 2 bed house is 4.93% a year , not that bad overall.
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Thanks for reading. If you want to chat about this article please pop into my Lancaster office or give me call on 01524 843322. You can also email me at john@jdg.co.uk