I had an interesting email from fellow property investor, leasehold expert and property manager Bernie Wales after one of my recent Watford property investment updates. Bernie asked my thoughts about the Chiswell Court development on the corner of Sandown Road and Balmoral Road and whether the service charge was prohibitive for landlords looking for a good return on their Watford property investment. A very good question I thought and the answer has to be “It depends.”
Depends on what you might ask? Well let’s have a look at an example in this block specifically to give you an example. The most recent sold price for 2 bed flat in this development was £223,500 in October 2014. Assuming it was in reasonable condition you would be able to rent it out for up to £1050 per month which gives you a gross yield of 5.6% making the flat decent buy-to-let investment looking at yield alone.
The service charge on this flat is approximately £1300 per year so if you subtract that from your yearly rental income it drops your yield down to 5.0%. This is a top line figure and if you are going to start making deductions from your yield then you should also be considering the other costs like management, voids, maintenance, insurance and of course mortgage interest to find your net yield.
If buying with a mortgage and assuming a 5% capital increase in the next 12 months, as some sources are predicting, then your return on your £55,875 mortgage deposit could be around 22% which is extremely good!
But going back to the original question and my answer “It depends.” The service charge will affect your yield and does make the investment seem less attractive. The question however is not always how much the service charge is but what you actually get for it. If your management company have a regular maintenance and cleaning schedule and the building and grounds are well looked after then that service charge can be worth its weight in gold and when the time comes sell the property you will be in a far greater position than if you’ve had a poor management company that has done none of the above and let the property fall into disrepair. Your service charge could actually create you a higher return on your investment over the long term.
How do you know if your development has a good management company? Perhaps that’s a question for another day or perhaps Bernie Wales – leasehold expert and owner of www.bwpropertymanagement.co.uk can help us work this out?