Investment Properties: In What Areas and What Type of Property Should You Buy?

People regularly say to me that they are thinking of buying an investment property and ask my advice as to what sorts of areas they should buy the property in.  They rarely ask what type of property they should purchase but, to be honest, that’s probably as important as the area.  The idea of this article is to try to address those two issues.

One of the issues that I have with this article is that, of course, it depends hugely on what part of Scotland you are planning on purchasing a property in.  This article therefore necessarily has to be fairly vague.  To try and give some illustrations, I shall give some examples in Scotland’s capital city, Edinburgh.  However, I believe that the principles are quite generally applicable.

I have to stress of course that I am not a property investment consultant,  Even if I was, I would not be able to provide any guarantees as to whether or not following anything that I suggest will give you good yields or shield you from any kind of disastrous investment decision.  All that I can do is to provide some informal experience and lessons that I have gained through some good and not so good property investments myself and also some of those that I have seen other people make.  As always, investments can go up and down in value and you HAVE to do your own research and take your own risks.  That disclaimer out of the way, now we can crack on!

Best Areas to Buy Property In for Capital Stability

 

To take Edinburgh as an example, the most established and desirable areas, in terms of flats, are probably those areas around the New Town.  That would include the New Town, Stockbridge, the West End, the areas just off Broughton Street.  The more central New Town, the better generally.  These areas tend to be fairly bullet-proof.  The property crashes of the 80s, early 90s etc just by-passed Edinburgh altogether.  However, when property prices were falling across the board in 2008/09, Edinburgh experienced the first proper dip in property prices that it has experienced in recent decades.  Even so, properties in the New Town held their value and continued to sell.  It’s just THAT much of a Des Res area.

In Glasgow, for example, the West End is probably quite equivalent to Edinburgh’s New Town in that it’s a very established area of quite expensive and desirable housing stock of architectural beauty.

Best Areas to Buy Property In for Capital Growth

The flip side of all that is that when prices WERE rising very rapidly between 2004 and 2007, the more established areas experienced a lower rate of growth than other areas of Edinburgh.

I believe that this is a phenomenon that you’ll see in most cities.  In other words, when prices are booming and people are swarming all over properties, they are driven to purchase in the more outlying areas because the most Des Res properties are getting snapped up so quickly and for such high prices.  This fuels disproportionate boom in those areas that traditionally aren’t quite so desirable.  However, when the market and appetite for property buying contracts, those areas then experience a disproportionate drop in values.

Best Areas to Buy Property In for Highest Yield

Edinburgh and Glasgow (being the Scottish cities I personally know the best) are totally quite from London, for example, from what I’ve seen, when it comes to rents.  There seems to be a fairly direct relationship in London (only from what I’ve seen and from speaking to friends there, not from any in depth analysis) between the capital value of a flat and the rental that you can achieve on it.  From what I’ve seen in and around Edinburgh and the Lothians and Glasgow, this relationship isn’t quite so favourable.  In other words, I’ve seen people achieve a £650/month rent on a two bedroom flat (relatively central), in pretty average condition and with a capital value of around £150,000.  Then I’ve seen people looking for £650/month on a flat with a capital value of around £400,000.  The reasons: it was a modern-build flat (not as desirable as a traditional tenement flat with high ceilings and some original features) and wasn’t quite so central.  Now, frankly Edinburgh is a tiny city and the transport system is actually really good here, so I’m surprised that people can’t see beyond that and, for me personally, I’d far rather live in a stunning flat with three bathrooms, a balcony and panoramic views, but that’s just me!  Across the board, the best yields for two bedroom flats seem to be for the more central, traditional-style flats.

However, the highest yields seem to be for ex-Council/local authority properties in slightly less desirable areas.  A lot of people exercised their ‘right to buy’ in the last few years so a lot of these types of properties are in private hands.  These types of properties are generally in what remain less Des Res areas and in these areas property values rose the fastest during the housing price boom, fuelled by high availability of mortgages for First Time Buyers, those with less perfect credit ratings and high incomes, and also desirability to buy-to-let landlords who liked their relative affordability and decent rental returns.  These types of properties have taken big hits in their values since property prices took a bit of a tumble in the last few years, given that the core buyers of those properties (mentioned above) dried-up.

From a rental point of view they can represent good value and returns: they often have three bedrooms, some garden space and are suitable either as affordable living accommodation for students or families, providing quite a wide rental market.  Yields can be MUCH higher than on flats.  For example, a three bedroom ex-Local Authority terraced house within a couple of miles of ‘Little France’ (Edinburgh’s relatively newly-built principal hospital, on Edinburgh’s South Side) might rent for £600/month.  However, it might only cost £100,000 to purchase.  Other ex-Local Authority flats nearer Edinburgh’s city centre can be selling for as little as £80,000 at the moment when some of these same properties would have been fetching up to £110,000 only three years ago, yet the rent might be as much as £550/month.  These are yields of more like 8%.

What Type of Area Should You Buy a Property In Then?

All of these types of properties have their positives and negatives from a landlord’s point of view.  Much of your enjoyment or otherwise of being a landlord comes down to the type of tenant that you have in your property.  Here is where I need to be very careful about stereotyping and making myself very unpopular!  However, you have to generalise sometimes to help you to make decisions about what you buy.

I have personally bought a couple of ex-Local Authority properties in the last few years.  They’ve fallen hard in terms of capital value.  I bought in areas where there aren’t many private tenants so the tenants have usually been DSS/Housing Benefit tenants.  On the plus side, they tend to stay for quite a long time and prefer unfurnished properties.  On the negative side, the Councils started paying the rent directly to the tenants and my experience has been that when things get a bit tight for these tenants there is a risk of the rent suddenly not coming through.  Therefore, although the yield for these types of properties can be better, if the rent stops coming through but the tenant does not move out, the yield becomes slightly theoretical!

Of course, you have a choice of whether you wish to take a tenant who relies on Local Housing Allowance to pay the rent.  But if your property is in an area where that tends to be the norm, you can wait quite a long time to find a higher-income tenant who wishes to live there.  From personal experience, I can vouch for the face that when you’re very busy and have got better things to be doing with your time than having to pursue eviction actions in the courts for several months to get rid of a non-paying tenant, you start wishing you’d never considered renting-out a flat.

A far safer choice, in my personal opinion, is a traditional (i.e. Victorian or Georgian) two bedroom flat in a more established, central area.  You can decide whether you want to cater for students or young professionals.  If you want to cater for students, taking Edinburgh as an example again, somewhere near the University of Edinburgh is a good choice or, in Glasgow, somewhere near the University of Glasgow or Strathclyde.  If you want to cater for young professionals, in Edinburgh, somewhere in Stockbridge or the New Town would be a good choice.  The rent is proportionately smaller when compared to the capital value of the flat, in comparison with an ex-Local Authority property, however when your tenants move out you are likely to have a shorter ‘void’ period with no tenants as there is ready and consistent demand for these types of properties.  You are also less likely to have rent arrears/non-paying tenants.

And What Type of Property Should You Buy Then?

I’ve written mainly about flats so far, not houses.  I know that in England my friends, particularly when they were at University, all seemed to live in houses, shared with up to seven other people.  This just doesn’t seem to be as popular in Scotland as it is down south, possibly because of the relatively high capital values of houses that are in areas near Universities.  It might also be because, down south, people are just used to living longer distances from where they work or study than we are in Scotland.  Equally, there are less people around who want to rent family homes than who want to rent flats.  For that reason, unless the figures really stack-up (such as with ex-Local Authority terraced houses), I wouldn’t even usually consider them as being an option, which is why I haven’t really mentioned them.

For what it’s worth, I’d personally avoid one bedroom flats given the way that the property market has gone in the past few years.  From a rental point of view, you are less likely to benefit from there being a second flatmate who can pay the rent if one of the tenants is having a tough month.  From a capital value and re-sale point of view, First Time Buyers are in scarce supply at the moment and prices for one bedroom flats have taken a bit of a battering in the last few years, none of which bodes particularly well in the event that, for whatever reason, you decide that you want to sell the property in a couple of years.

I’d also personally recommend avoiding modern-build flats in slightly more outlying areas of a city, which are the areas where most of these types of properties have been springing-up in the past few years, unless they really stack-up from a yield point of view.  Quite simply, there are less people out there who want to live in modern-build flats than who want to live in more traditional Victorian and Georgian flats with high ceilings.

From a capital value point of view, these types of flats are more likely to dip in value if we do have a bit of a double-dip recession or double-dip housing market crash.  That said, because these flats have already been hit quite hard by the housing market crash that we’ve already experienced, some of them can represent good value for money and give good rental yields, so just choose wisely and beware that if there is another drop, they’ll be the less desirable ones on the market if there is a lack of buyers around so they’ll be most likely to fall the furthest in terms of capital value.

Conclusion

The decisions that you take are really all about risk and reward.

The risk of buying a cheaper property in a less Des Res area is that you don’t get quite the same quality of tenant, however the reward is a much higher yield if you do get a good tenant who does pay regularly.  And in terms of capital values, the more outlying or less Des Res the property is, the more proportionately it will rise in a booming market.  However, it will also fall further in the event of the property prices dipping across the board.  For what it’s worth, regardless of where it is I’d avoid modern-build flats if you are having an eye on capital appreciation/depreciation although the benefit of course is that they are less likely to need considerable maintenance and are covered by an NHBC warranty if less than 10 years old so, if the numbers stack up, it might be a risk worth taking that a tenant will be more difficult to come by than if you had bought a more traditional property.  The safest choice, as I see it, is a two or three bedroomed Victorian or Georgian flat in a traditionally desirable and relatively central area: the returns are lower on paper but the chance of getting a good tenant who consistently pays their rent and doesn’t damage the property are higher.  Again, I know this might appear to be awful social stereotyping but, sadly, it’s a real phenomenon amongst landlords and is probably borne of painful and expensive experience of doing otherwise.

If you do have any questions, please don’t hesitate to drop me a line.  If you require a solicitor to buy a property for you (you’ll of course need one to do the conveyancing on the purchase) then please do bear me in mind: we offer very competitive conveyancing rates, amongst the lowest that you’ll find anywhere in Scotland.

3 thoughts on “Investment Properties: In What Areas and What Type of Property Should You Buy?

  1. Good summary, and a change from the nonsense you see in some publications!

    Now polish up the crystal balls and tell us what happens next.

    Will Vince Cable attack the wicked landlords, or Edinburgh Council rule no one has to pay rent? (election due soon).

  2. Haha! I’m sure that the Councillors would love to make such a ruling in the run up to the election but from a quick polish of my crystal ball I don’t think that’s going to happen! I’m not sure if the Lib Dems think that landlords are terribly evil. Certainly wasn’t something I spotted in their manifesto. I’d like to hope that they see landlords who have to buy and maintain a property as being slightly different from institutions that trade non-physically existent entities for money!

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