Proven Capital Growth Using Property Investment

Proven Capital Growth Using Property Investment

So what sort of property to buy and where? At this point you
have to decide what you want to achieve – capital growth, yield
(or both) and over what term.

CAPITAL GROWTH
Straightforward enough. If you buy for £100,000 and sell for
£200,000 you have capital growth of £100,000 and can feel very
pleased with yourself. However, there is no certainty of capital
growth (a sudden downturn in the market can put paid to that)
and, in some cases, you would be wise to expect none at all from
the outset.

This is particularly so for certain types of properties in certain
areas. For example, whole streets of little terraced houses in
rundown parts of the north and the Midlands are frequently
bought for next to nothing by local estate agents or developers
and sold on for a quick profit, with DSS tenants already in place
(social housing tenants only because other tenants don’t want
such properties). The attraction for the purchaser is the high
rental yield (see below), but any claims of future growth should be
treated with derision. Nobody wants these properties. Only
another investor (possibly believing the tall tales of capital
growth) would consider buying them.
Conversely, there are areas where growth, given the right
conditions, could be expected to be greater than average and
achieved sooner than elsewhere. Central London is the obvious
example. It is a truism to say that, when the market moves it
moves first in central London. The downside, of course, is the
pitiful rental yield. There are no free lunches.
Apart from central London (where you just have to sit patiently
and wait for the action), what can you do to improve your chances
of capital growth? The one-word answer is research.
Town hall planning department
First, check the planning department of the local town hall. Has
the mental hospital been sold to a property developer (care in the
community!) and are there plans for a housing development?
Perhaps what used to be a local council department of education
has been sold and is set for redevelopment. Other clear indicators
of future growth are plans for new transport links, by rail or
road, new shopping centres, new supermarkets. Information on
these and any other developments are freely available at the
planning department of the local town hall. This should be your
first port of call.

Land Registry
Information on prices (by region, county, borough and local
authority) is available directly from the Land Registry on
www.landreg.gov.uk.

The web
The Land Registry has spawned a variety of websites offering
information and analysis of all sorts, mostly based on Land
Registry data. Check the following:
www.houseprices.co.uk
www.myhouseprice.com
www.upmystreet.com
www.hometrack.co.uk
www.nationwide.co.uk/hpi
www.housepricecrash.co.uk
www.ourproperty.co.uk
uk.realestate.yahoo.com
The Association of Residential Letting Agents (ARLA)
The ARLA (see ‘Useful addresses’) produces regular reports on
the state of the buy-to-let market throughout the country.

YIELD
This is essentially the rent received as a percentage of the price
paid for the property. If a property, bought for £100,000,
commands a rent of £10,000 p.a., then the yield is 10%. This is,
however, the gross yield. To arrive at the net figure, running costs
(such as interest payments on the mortgage, repairs and agents’
fees) should be deducted from the rent. It is clear that the net
figure is the one that really matters. If, in the case of the £100,000
purchase above, the annual costs are £6,500 then the net yield is
just 3.5%. If the rent, however, were only £5,000 p.a. then the
yield has effectively disappeared. In this case you are not covering
your costs and will have to find the difference from your own
resources. When you consider further that there will be an income
tax liability to deal with, then a potential gross yield of anything
less than 6% should be treated with great caution.

INVESTMENT TERM
Property investment should always be for the long term, with 10
years the recommended minimum. Clearly, the longer the term the
greater the chances of achieving capital growth. It follows that, if
a shorter term is envisaged, great care is needed in the choice of
property. It may be that a much lower yield than usual will be
acceptable in the hope of greater capital growth over the shorter
term. As a general rule there is a straight trade-off between the
two. The higher the yield, the lower the likely growth and vice
versa. Alternatively, a property that could be quickly and cheaply
improved might produce an instant gain in the right market
conditions.