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Investing in ‘Right to Buy’ Council Houses

Whether you are starting out as a property developer or considering expanding your property portfolio, you have probably considered buying ex-council property. Former social housing can be an attractive prospect for investors, as homes often sell for 80% of the price of privately built property in the same location. This offers landlords a reduced risk and a potential for high rental yields and steady capital growth. There have been more than 1.3 million council homes sold through the ‘Right to Buy’ scheme since 1980, which means that there are a lot of opportunities for landlords and developers to find ex-council homes at lower prices in some of the best locations.

Buying Property from Tenants through the ‘Right to Buy’ Scheme

Council tenants who have lived in social housing for more than five years have the right to buy their home at a discount of up to £75,000 (or £100,000 for those living in London). In areas of high housing demand investors and developers have approached council tenants to encourage them to take advantage of the ‘Right to Buy’ scheme and sell on their properties. Anyone considering this approach should be aware that former tenants who sell their home within five years of buying it from the council will have to repay a percentage of the discount they received at the time of the sale, on a sliding scale of 100% of the discount within a year of the purchase, to 20% of the discount in the fifth year after the sale. It is possible to avoid this penalty by transferring ownership to another family member before the sale, but the council has to agree to the transfer and legal advice must be sought.

shutterstock_151076135In addition, any ex-council property must first be offered to the council or social landlord from whom it was purchased before it can be put on the open market. If the former landlord doesn’t agree to buy the home within 8 weeks it is then open to any buyer. The value of the property is either agreed with the former landlord or is valued by a District Valuer and the home must be sold at full market value. The asking price shouldn’t be a block for potential investors, as former council housing usually commands a 20% lower value than privately built homes in the same area. However, buyers should be aware that just as social housing comes at a reasonable price, it is often subject to a price ceiling, which will undoubtedly affect the resale value. In this case it is very important to do your research on similar properties within the area to make sure you are paying a competitive price for your investment.

The Advantages of Investing in Former Social Housing

Other than price, there can be many advantages to purchasing former social housing. Properties built before the 1970s are likely to be larger than more modern properties and will benefit from good design and lots of natural light. These features will make them desirable to tenants, especially in prime locations close to transport links and local amenities. In addition, the properties are likely to have been well maintained over time, which should avoid costly repairs and renovation. Often property located on social housing estates benefits from broader estate management, such as maintenance of the surrounding grounds and common repairs, which are often ongoing if some of the tenants in a building still rent from the council or a social landlord.

Former social housing can be a particularly attractive option for investors in the London property market, where ex-council homes in Zones 1 and 2 can command rents of up to £2000 per month with little risk of loss. In Q4 of 2012 landlords in London reported average yields of 7.0%, with 7.5% average yields in the East Midlands and 5% yields reported in Yorkshire. The Buy to Let market has undergone consistent growth over the last two years, and by Q4 of 2013 landlords were reporting record average yields of 8.9%. With significant housing shortages in many parts of the UK, demand is high and average rents across England and Wales rose to £867 in December 2014 (a 6.6% increase on the previous year, according to the Home Let rental index). At the same time most lenders have recognised that large yields can be made through Buy to Let mortgages for property in the right location, so canny landlords can take advantage of a range of competitive deals.

Ex-Council Housing: Things to Consider

shutterstock_11875582While there are a lot of advantages associated with investing in ex-council properties it is wise to undertake careful research before buying. Remember that location is the key asset of any investment property. Many former council homes will be in a location with established demand, but consider the percentage of people living in the area who are still social tenants. If the numbers are still high, it may be that the area is less attractive to professional people, as they may feel unwelcome in the area. Make sure that you take into account the rent that you will need to charge to cover your mortgage payments. If the rent seems high for the location, you will not attract the tenants you want and may not be able to pay the mortgage. In areas of high demand, such as London, this should not be an issue as long as your property is near transport links and has access to amenities.

There are also important legal issues to consider when buying ex-council homes. If you buy a former council house you should be able to buy the freehold, but councils often tend to retain the freehold in the case of flats. This means that ex-council flats are likely to be leasehold properties, which means you will be liable for service charges and fees for planned maintenance. If you are considering buying a flat, check what the service charges cover and ask to see previous bills to get an idea of how much annual costs will be. In addition, check for any scheduled maintenance or renovation. A good way to discover important issues is to find out whether there is a local Residents’ Association, and if there is, to get in touch. They will be able to provide information on any planned maintenance and other current issues.

Do Your Research and All Should Be Well

If you are considering investing in ex-council property you should be given an assignment pack from the council in question detailing any works that are required to the building. As with any other property, make sure you do your research and carry out the usual surveys and legal searches prior to exchanging contracts. If the case of ex-council flats, be aware that it can be more difficult to obtain a mortgage on a property in a building with more than 5 floors. With careful research and a clear knowledge of all of the facts, you should end up with a fine investment that offers high yields and steady capital growth.

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