There are lots of residential properties on the market that are returning in the double digits. Whether the property market is moribund or not this kind of yield gives a compelling case for considering them as an income source.
There is one particularly hated, and therefore often overlooked sector of the market which I think is ripe for the pickings in the current market. The headline of the blog may have given it away if you did the maths, we are talking about pre-63's.
Pre-63 means the property has been continuously let out since 1963 which was prior to the building regulations being issued. This was a time when tenement style housing was common in our cities and sadly, many of the buildings with this designation are not much improved today, but they have several things going for them.
1. If a property has been let out for over 45 years continuously then you know in advance there is a rental demand in the area, otherwise it wouldn't hold this designation. That conquers one of the key fears of property investment – namely, whether or not somebody will want to live where your property is located.
2. Pre-63's on the market at present are (not all but a high percentage of them) liquidator sales and motivated seller sales. This gives considerable negotiating power to the buyer. The downside is you'll probably have to be a cash purchaser. I have been doing viewings of pre-63's for several months now and the other people I bump into at viewings seem to be fairly clued in investors.
3. Pre-63 properties have a bad name, that makes them unloved, and in the way you can buy a stock on a contrarian basis you can do the same in property. The actual buildings are often sound and have stood the test of time, the materials used in the supporting structure are often of a quality you can't easily buy any more – that also makes them expensive to maintain which is a downside.
4. Many pre-63 landlords are getting out of their investment because of the upcoming changes in the building regulations for rented property. That makes the time between now and 2013 a key buyers period for these properties – and of course, summer often helps because the reduced activity in the market makes any offer that little bit more attractive.
Let's take a look at two examples, one is on the north-side of Dublin at the gates of the Phoenix park, a popular spot and a run down property that needs more than some tender love to put right. The location is good, the building has been allowed to degenerate and the main issue I saw while there (representing an interested client) was the difficulty in bringing the place up to code and amalgamating bedsits.
The only thing that makes sense is to get away from the bedsit proposal and turn them into 1 and 2 bed units (there are also minimum footage aspects that must be met from 2013). These buildings don't require planning for internal changes so putting in steel and knocking rooms into each other is allowable and construction work is cheap at the moment.
So in this instance it's a good location, a mediocre building but a bad proposition because of the layout. Which is why this one, on the south side in Rathmines is different. This building has a few issues, in particular that some of the units to the rear would need to be joined up between floors otherwise only one unit has access to the rear of the area. There is also the typical leakage between floors where the bathrooms are situated (normally shower trays are the culprit), some real work would need to go into this building, it's a receiver sale as well meaning you won't get to talk to the owner to find out some of the nuances like how the common heating is set up etc.
Having said that, if you were able to bid this property at about 25% below it's list price – and in pre-63 properties I have personally seen this happen on more than one occasion, you could do some nice remodelling and be in the double digits of a yield.
Multi units are nice in that one vacancy doesn't have the same impact as with single houses, the area also has a high demand and rents fast so vacancy risk where it occurs is reduced. The 12 foot ceilings and building in general is broken into units in a much more sensible fashion than the one on NCR. A big issue would be to re-slab (for fire safety even though a cert is not required) and re-wire then strip out bathrooms and re-install them minus the leaks.
A proposition like this could (if you were to close at €450k and spend 60k getting it done up) easily put you in the 12% yield range, giving a repayment period of 8 years, and if you held for 7 years you are then CGT free as well on any gain, which if you were to obtain any rent increase and price based on a 10% yield would see considerable uplift.
This type of investment is not for the feint of heart, if you haven't built or developed already and are not familiar with renting out properties, the laws surrounding it and building code then either seriously up-skill or stay the hell away, but for those with the appetite and money to do it, pre-63's are a golden opportunity.
You can take a look by going to 'advanced search' on the homepage then just enter the words 'pre 63' in the blank details box at the bottom of the search area.
Happy hunting!
