Case study - assessing a buy-to-let opportunity

19 George Street, Dunblane - a three-bedroom ex-local authority mid-terraced house.

In this article we are going to look at an actual property and assess its suitability as a buy-to-let investment. We’ll be looking at the following aspects to judge how good an investment it is.

1.       Location

2.       Condition

3.       Financials

4.       Rentability

5.       Prospects for capital appreciation

6.       Health and Safety requirements

7.       Energy efficiency

8.       Mortgageability

9.       Pros and cons - conclusion

19 George Street has been on the market for a couple of weeks at the time of writing this article. It is a three-bedroom semi-detached house in central Dunblane. It has previously been let out and is now on the open market for sale. 

Let’s now look at the buy-to-let potential of this property.

Front view of 19 George Street, Dunblane

1. Location

The property is located near the very centre of Dunblane about 2 minutes’ walk from the train station and the local supermarkets Tesco and Marks & Spencer. George Street itself is made up of a mix of housing, many of them are ex-local authority, now in private ownership. There are flats and houses on George Street mainly built around the 1930ties. Curb appeal of the properties is limited and the general price level of in George Street is at the lower end of Dunblane’s properties.

2. Condition

A Home Report was carried out by DM Hall Chartered Surveyors in preparation for the sale. In Scotland Home Reports are a legal requirement for selling properties on the open market. They include a property survey, a mortgage valuation, an Energy Performance Certificate and a Seller’s Questionnaire. The survey rates the condition of the property on a scale of one to three broken down into several categories of the property. A ‘1’ rating signals no issues with the condition, ‘2’ highlights recommended maintenance to be carried out, whilst ‘3’ points to serious issues that need to be addressed urgently.

The survey in this case is relatively ‘clean’ with only ‘category one’ and ‘category two’ ratings. Recommended repairs that have been highlighted refer to roof maintenance, failed double glazed units, boundary walls, and decorative repairs to ceilings.

An in-person inspection that we have carried out identified also a number of decorative repairs that are needed such as replacement carpets as well as internal and external decoration.

One more costly item for consideration is the kitchen. Whilst functional, it is not very attractive and of an age that would require replacement.  

Overall, the property needs to be made more attractive for the rental market or it will struggle to attract good tenants and achieve the required rent to make this a financially viable option.

Current kitchen at 19 George Street in need of an upgrade

3. Financials

At the time of writing, the property is on the open market at ‘Offers over’ £170,000  and the home report gives a market valuation of £175,000. There is a steady level of interest and five viewings have taken place within the first week of advertising.

To purchase this property I assume that you would have to bid £175,000.
 
The following table shows my financial assessment of it:

Financials 19 Goerge Street

The key figures here to look at are the net yield and Return on your investment. This purchase requires quite a bit of cash available and the additional cost of repairs (carpets, decoration and kitchen) keep the ROI well below 10 % which in many comparable properties could be achieved. The rent is maxed out at £925 and the calculation assumes that you self-manage this property with no letting agent fees taken into account. The monthly net cash flow is still relatively healthy and should mortgage rates drop to previous levels, i.e. 3% then this property would cash flow around £600 per month and achieve an ROI of about 10%

Alternatively, if you could keep your repairs to about £5,000 then your monthly cash flow would not be affected but the ROI would jump to 9%.

To make a full judgement on the financial viability of this option you would have to compare it to other opportunities in the current market and draw conclusion from there.

4. Rentability

A key question to answer is how easy it is to let this property. Is there demand for 3 bedroom houses in Dunblane in this location at the price that this property would be advertised.
From local market knowledge we are clear that there is sufficient demand for this kind of home. At the time of writing there are only two properties advertised to rent in Dunblane. One is a bedroom bungalow for £660 and the other a two-bedroom flat for £750 pcm. Since Dunblane is in a great central location, has a good schools and generally good amenities we would see no problem finding suitable tenants for this property.

5. Prospects for capital appreciation

Whilst the area in and around Dunblane has seen strong market growth over the last 3-5 years I see the prospects for capital appreciation with this property limited. In line with other streets that are mainly made up of ex- local authority housing we have seen the prospects for capital growth much slower than with other types of more modern properties and in more desirable locations. Whilst the monthly cash flow could be reasonably strong (if mortgage rates were to come down) this is not a strong contender for capital growth.

6. Health and Safety requirements

This property has previously been let out and all safety certificates are in place. For properties in Scotland the following are required before a tenancy can begin:

a) Energy Performance Certificate (EPC)
b) Electrical Installation and Condition Report (EICR)
c) Portable Appliance Test (PAT)
d) Landlord Gas Safety Certificate (LLGSC)
e) Carbon monoxide detector
f) Smoke and heat detectors
g) Legionnaires Disease Risk Assessment (LDRA)

It would be advisable to renew the Legionnaires Disease Risk Assessment before the next occupation. Other than that, no other requirements need to be renewed and no further cost would need to be incurred.

7. Energy efficiency

The energy efficiency rating of this property has been classified as ‘C – 69. The average rating for EPCs in Scotland is band D (61). This property’s rating is future-proof as from 2025 all properties that are let out need to achieve a C rating. There are no concerns in this area. No improvements need to be made and no further cost is anticipated.

8. Mortgageability

The current home report states that the property is suitable for mortgage lending and there are no factors that will restrict lending. The home report value of £175,000 will determine the mortgage amount that can be borrowed. On a typical mortgage of 25% deposit and 75% lending you will be able to borrow £131,250. The rest of the required funds including any part of the purchase price that exceeds the HR value (or refurb cost) need to come from your own funds. Based on a current indicative mortgage rate of 5% (interest only) the monthly cost will be £546.87.

9. Pro and cons – conclusion

19 George Street would make a relatively ‘easy’ buy to let investment for a number of reasons: It’s in a popular town in a central location to schools and amenities. Whilst there are some cost savings to be had as all safety certificates are in place, it does require a fairly significant spend (~£15k) to make it presentable for the rental market. At a projected gross yield of 6.3% and net yield of 2.5% the financials are not very strong. The Return on investment of 7.3% and the limited prospects for capital growth make this in my mind only an average buy-to-let investment.

You might find though that this article can be very helpful as a reference point for your own investment assessment of a property. See how your potential purchase scores on the above criteria and see if you find a better opportunity.

If you would like help assessing a buy-to-let investment or you would like our help to find a good one then please do get in touch on 01786 821012 and we’ll be glad to help.