Purchasing a residential investment property in London may be a smart decision, as it’s one of the most stable markets in the world. Real estate investors constantly flock to the capital – in times of financial duress and prosperity, property in London can be considered a great place for individuals to park their money. However, before sealing the deal for your piece of London real estate, there are five key factors you need to consider:
You really have two options when choosing a location for your residential investment property: You’re either going to be in central London or in an outer borough. Most investors would prefer to be in Central London due to its prestige, however the outer boroughs offer the most bang for you buck.
It’s a mixed bag at the top. On average, home prices have grown in areas like Kensington & Chelsea (12.8%) over the past year, despite the fact that 35.8% of homes on the market in the same borough have seen their prices slashed. The City of Westminster is no different, with prices increasing on average by 2.4% since last June 2016, but 33.9% of homes in the area have seen their prices drop since being first put on the market. There is demand in the market for certain properties – especially luxury apartments – that are pushing up the average prices, but investors are not buying everything, which is making other sellers reduce prices.
If you’re looking for a high-yielding return then you need to head east. Boroughs such as Barking & Dagenham (94%), Croydon (86%), and Sutton (85%) have seen the highest returns since 2009. These same areas saw a 12%, 6%, and 6% annual increase in their property prices, respectively.
There are four main types of residential property in London: detached, semi-detached, terraced, and flats – with flats being the most popular property type purchased. If you look at the past 22 years, the prices of all types of property have increased exponentially. The average property selling price in January of 1995 for all homes was US$137,600 (GBP107,587). Fast forward to May 2017 and that number is US$869,400 (GBP679,692). That’s a whopping 532% increase. Prices of detached homes grew at the slowest rate, a mere 494%, while terraced homes prices saw the biggest rise – 559%.
Legal property ownership comes in two forms in the UK: freehold and leasehold. Leaseholds – which enable the buyer to occupy a property for a set period of time – run to a maximum of 999 years in London, and are far more widely seen here than in the rest of the UK, specifically in the ownership of apartments. Purchasing a leasehold is common, and should not be problematic unless the end of the lease is nearing. Under these circumstances, properties tend to be discounted and leasees will need to pay to extend the lease on their property.
Freehold gives the owner absolute possession of the property, including the land, and the opportunity to then grant someone a lease. These types of properties tend to be much more valuable and harder to come by in the UK’s capital.
Financing for your residential investment property can be acquired many different ways. Here are the most common methods of financing:
– Standard residential mortgage for EU nationals up to 95% loan to valuation (LTV).
– Residential mortgages for non-EU nationals, which have several requirements for buyers including:
– Buy-to-let mortgage. These typically offer investors the opportunity to attain a mortgage with up to 75% LTV. The buyer must obtain rent at around 140%-145% of the mortgage payments, depending on the lender.
Tax must be paid by all property investors, including foreign buyers. The four main taxes are Stamp Duty Land Tax (SDLT), Annual Tax on Enveloped Dwellings (ATED), Income Tax, and Capital Gains Tax (CGT).
SDLT needs to be paid when you purchase a property valued at over US$160,000 (GBP125,000). For freehold properties that percentage ranges from 2% up to 12%. Leasehold properties are slightly different. If you purchase a new lease, then you have to pay 1% on the portion above US$160,000 (GBP125,000). However, if you purchase an assigned lease, then the buyer usually will need to calculate the amount of tax payable based on the same rates as a freehold property.
ATED is charged to non-natural persons who have purchased residential property in the UK valued at US$639,197 (GBP500,000) or more. The amount owed is on a band system and currently ranges from US$4,474-US$281,679 (GBP3,500-GBP220,350) per year.
Income Tax may be applicable if you earn an income from renting out your property. This can run at 20% if you are not a resident in the UK.
CGT is paid when you sell the property. The rate paid is either 18% or 28%, depending on your income level. This amount is only paid on any gain made on the value of the property after all exemptions.
We just sent you an email. Please click the link in the email to confirm your subscription!
OKSubscriptions powered by Strikingly