Can you still make money from property?
When house prices were flying before the financial crisis, doing up and selling on property was seen as a way to make easy money. Countless TV shows promoted it, dinner party talk obsesses over it and thousands banked large profits by actually doing it.
It no longer looks so easy in today's property market, with signs that house prices have hit a plateau. So can you still live the Sarah Beeny dream?
Where to buy
Almost anybody can make money in a rising property market but you have to be more clued-up when prices are flattening out.
There is still some growth out there, with prices up 9% in the last year, according to Nationwide, although they rose just 0.5% in October. Some areas are still booming. Wealthy commuter town St Albans has seen price growth of 24% in the past 12 months, Nationwide says.
The prime London luxury home market has stagnated but other parts of the capital are rapidly playing catch-up. Prices in Camden rose 42% in the past year, while Lewisham, Tower Hamlets and Waltham Forest all grew more than 30%.
Across the UK, Cambridge, Reading, Belfast, Nottingham, Bradford, Greater Birmingham, Bristol, Aberdeen, Plymouth and Glasgow all posted double-digit price gains in 2014.
James Hyman, head of residential agency at Cluttons, says would-be property investors should look for an area that is coming into fashion. "Improved transport links, new facilities and local investment all help. Target areas that have just started to attract young families, as they should have a good stock of affordable family homes to do up."
Before you buy, decide your target audience when you sell – for example, families or first-time buyers. "And remember there are price thresholds in certain areas, above which buyers are reluctant to go."
Canny buyers can turn a slower housing market to their advantage, Hyman says. "Tired properties needing work are much harder to sell in a flat market, so you may be able to pick one up at a discount."
One big factor in your favour right now is that finance is cheap. If you have plenty of spare equity in your own property, the cheapest and easiest option is to remortgage your own home. With a lender price war going on, you can pick a competitive mortgage from 2% or 3%.
Watch out for fees
Check out fees as some lenders are charging arrangement fees of up to £2,000 for their cheapest rates, and don't lock into a long deal if you plan to sell on the property quickly. Remember, if you borrow against your home it could be at risk if your project is a disaster and you can't clear the debt.
If remortgaging isn't an option, consider bridging finance. Mark Harris, chief executive of mortgage broker SPF Private Clients, says bridging finance isn't as scary or expensive as it sounds. "A few years ago, you could pay rates of 13% or 14% a year but competition has squeezed rates to as low as 7% or 8%," he explains.
Stephen Johnson, managing director of commercial mortgages at Shawbrook, says using a short-term loan to refurbish property allows you to make a profit in a short period of time: "It is a quick and efficient way of raising finance, particularly if you are buying property at auction, where time is of the essence."
Jonathan Samuels, chief executive of Dragonfly Property Finance, says if you're buying properties in need of major refurbishment, a bridging loan may be your only option. "No mainstream high street lender will touch a property without a bathroom, for example. You could take out a bridging loan and when you have finished refurbishing the property, either sell it to clear the loan or refinance to a standard mortgage."
Again, a bridging loan will be secured against your property, so your home could be at risk if you are unable to clear the debt. Consider taking specialist independent advice to find the right finance.
Philip Harvey, managing partner at home-buying business Property Vision, says amateur property developers typically make two big mistakes: "They overestimate how much value they can add by doing up a property and underestimate the cost of the building work. Both squeeze their profits."
Adding value takes vision, skill and hard work. "Most amateurs don't want to get their own hands dirty but using a builder really hits your margins, especially on smaller projects."
Negotiate every building cost and fix the price where possible, he says. "Builders on an hourly rate tend to be less productive than those on a fixed price for the job."
Resist the temptation to do up property on the cheap, as buyers can quickly see through poor craftsmanship and won't want to reward you for doing a shoddy job. Harvey adds: "Don't let your personal taste dictate the job or spend money on things that don't add value, such as an exclusive kitchen."
You should also resist the temptation to cram in as many bedrooms as possible, as maximising space and light is critical, Harvey says.
Guy Meacock, a director at buying agency Prime Purchase, says doing up a property tends to take longer than most people think and costs a lot more. "You should set up a contingency fund of at least 10% to 15%, as you will inevitably overrun your initial budget."
Also, consider hiring a project manager. "It may cost you an extra 10% or 20% but they will manage your costs and negotiate the best terms with contractors."
John Candia, chief executive of the iProperty Company, says strategic use of high quality materials can help maximise your investment. "You could fit good quality door handles without replacing all the doors or high quality kitchen worktops without splashing out on expensive cabinets."
He says you should also be prepared to shop around for materials. "Salvaged or antique material can work well - for example, old, stone basins combine nicely with modern finishes."
When you sell the property, conduct viewings yourself, Candia adds. "That way, you can highlight the efforts you have made in sourcing materials and using space."
Steve Bolton, founder of Platinum Property Partners warns that a refurbishment can quickly become a full-time occupation. "Too many people only focus on the end profit and fail to calculate how much they would have earned in a steady job over the same period."
Also, be warned, a lot could happen to house prices market during the build. "You are at the mercy of the market when the time comes to sell, and that is increasingly difficult to call," Bolton says. And if you can't sell your property at a profit, you do have the fallback option of buy to let: "This can give you a double return on your investment, in the form of steady rental income and potential long-term capital growth."
You face another major cost right at the end of your project, when you sell the property. High street estate agents typically charge around 1.5% of the sale price, so if your home sells for £400,000, they pocket £6,000. That money comes straight from your bottom line.
So if you're not careful, the estate agent could earn more from the build than you do, for just a few hours work.
But you can slash the cost by selling through one of the new breed of online estate agents, such as Emoov.co.uk, Hatched.co.uk or Housenetwork.co.uk.
They will help you sell your house for a flat fee of between £400 and £1,000.
While you don't pay tax on the profits from selling your main residence, HM Revenue & Customs will want a share of any profit from an investment property.
Capital Gains Tax
Sean McCann, chartered financial planner at NFU Mutual, explains: "If you sell a holiday home or buy- to-let property, you may face a capital gains tax bill on any profit. But if you are doing up properties to sell on, the Revenue could view that as a trade or business and charge income tax instead."
This will be added to any income from other sources and taxed at 20%, 40% or 45%, depending on which tax bracket you fall into. You can reduce the bill by offsetting some of your costs against tax, such as stamp duty, solicitors' fees, estate agency and surveying fees, he says.
You can also claim any building work done to enhance the value, such as an extension or central heating, so keep all receipts, "but you can't claim work on general upkeep of the property, such as hiring a decorator to paint the house,"
McCann says. It is still possible to make money from doing a property if you plan your project carefully but after your lender, builder, solicitor, estate agent and the taxman have taken their cut, there may not be much left for you. Proceed with caution.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
People who have bought a property before they’re able sell their existing property often have to take out a bridging loan, a temporary short-term loan to “bridge” a gap in finances. Because bridging loans are made available very quickly, and because they are short-term loans, borrowers are charged higher rates of interest by the lenders.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.