Given the value per square foot of London property, there is rarely a case where extending a house or flat is not worth it – and that applies to investment properties as much as primary homes.
The ‘“improve, don’t move” mantra has led to skips and scaffolding taking over suburban streets everywhere as loft conversions and new rear extensions take shape.
But adding value is similarly high in the minds of buy-to-let owners in London, where rental yields can be modest but the potential capital uplift from a newly improved property is huge. There is another benefit of improving a property for landlords in particular: capital expenditure can be offset against capital gains tax.
Any extension or improvement work should be kept in proportion with the property’s value. It’s pointless putting in a Poggenpohl kitchen in a student house as it would take decades to recoup the costs. But in a large family house in a sought-after area, an upgrade on the space and spec will lead to higher rent and eventual higher sales price.
“A client in Wimbledon had a house that was achieving £4,500 a month. They spent £90,000 on an extra 900sq ft with two additional bedrooms and two more bathrooms. The house’s value increased by five times the spend and the rent increased by £2,000 a month, so they recouped their outlay in less than four years,” says Marc von Grundherr, director of Benham & Reeves Lettings.
It is common wisdom that the fastest way to add value to a property is to add a loft extension to create extra bedroom space and, in buy-to-let properties, increase occupancy. Disruption is a concern for anyone undertaking big building works in their home, but for landlords it comes with the added worry of how long their investment property will be out of action.
“Lofts can take as little as six weeks and you can remain in the property while the job is carried out. The majority of the work can be accessed from the roof, which minimises disruption,” says Lisa Simon, head of lettings at Carter Jonas.
Rear or side return extensions are far more intrusive. “They can disrupt use of the kitchen and living areas and can take up to 18 weeks, which is potentially a big dent in rental income,” says Ms Simon.
And basement extensions can bring a year of disruption and fraught neighbourly relations. They are an option purely for the super-rich with properties, probably in central London, whose every additional square foot pays back in spades.
“Investors must be careful not to upset the apple cart. Profitable property investments are always a careful balance between capital, rent, upkeep, tax and mortgage,” says Rob Weaver, director of property at Property Partner.
“Any large financial commitment is unlikely to be worthwhile if it doesn’t boost capital value along with rent. If you are planning to restore a rundown property, you are unlikely to make much money unless you plan to extend as well. Extensions are a great way to boost not just rents but the value of the house when you sell.”
For smaller home improvements, such as a new kitchen or bathroom, the return on investment should be no less than 10pc, “because you should expect to redo the work every 10 years”, says Mr Weaver.
“Landlords need to add the loss of rent to the overall cost of the work. This is the main reason that work to rental properties is delayed until the property stands empty between tenancies.”
Finally, landlords must remember that improving an investment property is not about how they like to live, “it’s about maths and finance”, says James Greenwood, a regional director for Stacks Property Search.
“Before lifting a paintbrush, the owner should get the agents round and ask them for sales and rental valuations with and without the work they are thinking of doing. Ask what work they would advise doing to maximise rentability and return.”
Buy-to-let should be regarded as “a long-term business decision”, says Jeremy Leaf, who runs Jeremy Leaf & Co estate agency in London. For those who treat it that way, the right investment in the property now will almost certainly pay off in the years to come.
Safer buy-to-let investment
Whether you are thinking of investing or are already a landlord, the Telegraph, on behalf of Direct Line, has created useful information on the ever-changing buy-to-let market.
Direct Line landlord insurance is five-star-rated by Defaqto (Defaqto is an independent researcher of financial products) and has more than 250,000 landlord customers. It has been crowned What Mortgage Landlord Insurance Provider of the Year for four consecutive years.
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