Solihull Buy to let –Freehold House or Leasehold Apartment?

Well, my Solihull Property Blog reading friends, as seems to be all the rage with Jeremy Corbyn asking the PM questions emailed in to him at Prime Minister’s Question Time, I too wish to answer a question emailed into me from a potential Solihull landlord last week. A nice gentleman who lives in Elmdon Heath and it turns out after having a coffee with him, he works in IT, has a spare bit of cash (now his children have flown the nest) and wanted to buy his first buy to let property.

His main question was ... Do I buy a freehold house or a leasehold apartment in Solihull?

Most people will say freehold every time, because you own the land. However, it’s not as simple as that (it never would be would it!). The definitive answer though is to research what tenants requirements are in the area of Solihull they are considering! The tenant is ultimately your customer and if they don't want to rent what you decide is the best to buy property, then you are not going to have a successful BTL investment. So, starting with the tenant in mind and working backwards from there, you won’t go far wrong. In a nutshell, find the demand before you think about creating the supply.

Leasehold apartments in Solihull are excellent in some respects as they offer the landlord certain advantages, including the fact an apartment can be initially cheaper to buy. Yields can be quite good, offering better cash flow. The building will already be insured and yes there is a service charge, but it’s still for a service at the end of the day and that cost is spread between many others (i.e. when your freehold house roof goes, its falls 100% on your shoulders) and one of my favourites is that there is often no garden to maintain or blown down fences to replace!

However, some Solihull leasehold apartments can suffer from poor capital growth. Some have no cap on the level of the service charge and it may get out of control. The length of the lease will significantly affect value if not renewed before it gets too short. Thankfully there’s not many, but some Solihull apartments have burdensome clauses. Finally with leases, there can be sub-letting issues – which means you can’t let them out.

So what do the numbers look like? Well, since 2003, the average freehold property in Solihull (detached, semis and terraced) has risen from £216,259 to £347,095, a rise of 38% whilst the average Solihull leasehold property (apartments) has gone up in value from £123,584 to £162,576, a slower rise of 32%. 

I was really interested to note that of the 7,795 rental properties in the Solihull Metropolitan Borough Council area that the Office of National Statistics believe are either let privately or through a letting agency, 3,296 of them (or 42.3%) are apartments. However, there are only 15,360 apartments in the whole council area (be they owned, council rented or privately rented), which represents 17.8% of the whole housing stock in the area. This really intrigued me that, quite obviously, there is a high proportion of Solihull’s leasehold apartments rented to tenants compared to detached, semi’s or terraced. Fascinating don’t you think?

Every Solihull apartment block, every terraced house or semi is different. Like I said at the start, research what your tenants requirements are in the area of Solihull they are considering. Demand for town centre apartments near transport links can be popular and can offer the Solihull landlord very good yields with minimal voids. However, Solihull terraced houses and semis, whilst not always offering the best yields (although not always the case), do offer the Solihull landlord decent capital growth.

My advice to the prospective landlord as it is to you is do your homework.  One such website, which only talks about the Solihull buy to let Property Market, is the Solihull Property Blog. Another source of info many Solihull landlords use is me! Now is a really good time to buy property, as demand is outstripping supply. What many Solihull landlords do, irrespective of whether you are a landlord of ours, a landlord with another agent or a DIY landlord, if you see any property in Solihull, that catches your eye as a potential buy to let property, be it a terraced house, semi or apartment ... is to email me and I will email you back with my thoughts (although I will tell you what you need to hear .. not want to hear!)

Is this the end for buy to let in Solihull?

 Well George Osborne, in his autumn statement last week, caused Solihull landlords to ask whether buy to let is still a viable investment option, when he announced that landlords, when buying another buy to let property from April 2016 will have to pay an additional 3% stamp duty on top of the current rate. So this means for example, the stamp duty bill for a £285,000 buy to let home will rise from the current £4,250 to £12,800 from April next year. 

Will property in Solihull be worth less because potential landlords will not be willing to pay as much for them? If house builders or existing home-owners don't feel they are going to get as much for them, then there will be less motivation to build / sell them... and the person we can blame for this is George himself. Back in 2012, he chose to utilise the British housing market to kick start the UK economy, with subsidies, funding for lending and ‘Help to Buy’. However, whilst that helped the Tory’s get back into power in 2015, some say this impressive growth in the UK property market has been at the expense of pricing out youngsters wanting to buy their first home.

This, some say, may be the straw that breaks the camel’s back, as over the next four years landlords will also slowly lose the ability to offset all their mortgage interest against tax on rental income, after changes announced in the summer budget.  At the moment, landlords can claim tax relief on buy to let mortgage monthly interest repayments at the top level of tax they pay (ie 40% or 45%). However, over the next four years this will reduced slowly to the basic rate of tax – currently 20%.

Surely this is the end of Buy to Let in Solihull? Possibly… however before we all run to hills panicking, let me remind of the situation a year ago.

Stamp Duty rules were changed in December 2014. Prior to this, landlords were eagerly buying up properties under the ‘old slab style Stamp Duty’ system. For example, the stamp duty bill on that £285,000 property was lower on the old slab style duty (pre Dec 2014), at £8,550, yet this wasn’t a million miles away from the £12,800 stamp duty under this new ruling. Interestingly though, George Osborne has left a legal loophole in the new rules, because when it comes to selling up, they can offset purchase costs against any eventual capital gains tax, including stamp duty.

I believe that total returns from buy to let will continue to outpace other investments, such as the stock market, gilts, bonds and even pensions. Also, the best part about investing in property is that it is bricks and mortar. You can touch it, you can feel it, and it isn't controlled by some City whiz kid in Canary Wharf... the British understand property and that says it all!

Buy to let has enough impetus behind it so prospective landlords will continue to buy even with an increased stamp duty bill. Solihull landlords will need to be savy about the type of property they buy to ensure the extra stamp duty costs are mitigated.   Buying a buy to let property is a long term venture. In the past, it didn't matter what property you bought in Solihull or at what price – you would always make money. Now with these extra taxes, the adage of ‘any old Solihull house will make money’ has gone out the window. People wouldn't dream of investing in the stock market without at least looking in the newspapers or asking for advice and opinion from experts in their field, the same should apply when investing in a buy to let property in Solihull?