The Importance of Price Per Square Foot in Property Investment
Property has always been one of the most important asset classes. With the opportunities for ongoing rental income and longer-term capital growth, property investment has the potential to bring fantastic returns.
When deciding upon your investment property, there is a multitude of factors to consider, from yields and mortgage products to the areas experiencing capital growth and deciding between HMOs and single lets. Another factor that has always been considered by savvy investors is the price per square foot of their investment properties.
The Office of National Statistics (ONS) shows that the average price per square foot in 2016 was around £211. This average figure is affected to a great extent by regional differences. Where a square foot in Kensington comes in at around £1400, a square foot in South Wales is sat at around £79.
What is price per square foot?
Price per square foot is also referred to as £/sqft and is simply the value of each internal square foot of a property. A calculation is used to determine how much each square foot is worth and is used as a tool to compare a property against other similar properties.
Price per square foot can be a useful metric when comparing properties of a similar size. This is important to bear in mind when using price per square foot in your decision-making process. Looking at a 1,000 square foot property against a 3,000 square foot property is unlikely to be a fair comparison, and so the value of the data gleaned may be less.
The overall asking price of a property is very important. However, drilling down to the price per square foot allows you to monetise your investment property to a greater degree.
What affects a property's £/sqft?
The price per square foot of an investment property depends on the quality of the internal area of the property. A good layout or flow, high quality internal finishes especially in kitchens and bathrooms, and a well-kept condition of the property will all contribute to a higher £/sqft.
In most areas in the UK, price per square foot decreases as the property size increases. However, in prime areas this relationship reverses, and price per square foot increases as the property size increases. The PropertyData Local Data tool can tell you which trend applies in any given, which can inform whether a strategy or merging or splitting properties would be profitable.
How do you calculate cost per square foot?
At a basic level, the price per square foot is calculated by taking the sale price of the house and dividing it by the square footage of the property. A price per square foot calculator can assist you with this but, using round numbers to keep things simple, let's look at an example of how this works.
Take a typical 3-bed house with a square footage of 1000. The house is on the market with an asking price of £200,000. So we take the asking price, in this instance £200,000, and divide it be the how many square feet the property is, in this case, 1000. So we have:
(£)200,000/1000(sqft) = 200.
So, in this case, the price per square foot is calculated as being £200.
Why do property investors buy based on square footage?
Price per square foot is a great indicator of the value of the property, and the ability of an investor to add value. Buying a property at a lower £/sqft value (perhaps because the property is unmodernised at the condition is poor) and refurbishing to increase the £/sqft on sale is a reliable investment strategy.
Adding square footage is also one of the most important ways for investors to add value to a property (use our development calculator to quickly assess if a development might be profitable). When adding square footage to a property, even if the £/sqft is the same on sale as purchase, the investor can realise a profit.
How important is price per square foot when buying an investment property?
Price per square foot is a key element to consider when buying an investment property. However, it is only one part of the whole picture that needs to be considered. Using a price per foot calculator will give you useful data when it comes to negotiating an offer on an investment property but, as we have seen, it is important to ensure that when doing this, you are comparing like for like. Deciding on which comparables you are using is a key factor in determining the accuracy of using price per square foot.
Other factors that need to be considered along with the price per square foot are yield and capital appreciation. Rental yields can vary across the country but are an important factor when considering an investment property. Yield is referred to by a percentage and is calculated by the yearly total of rental income divided by the amount invested in the property. For example, if a property cost you £100,000 and you achieved £500 rent per month, the yield would be worked out as follows:
Rental income x 12 (500 x 12) = annual rental income (£6,000)
Annual rental income (6000)/total investment (100,000) = 6
Therefore the yield in this example is 6% (see the best UK yields here).
Capital appreciation refers to how the property will increase in value over time. Certain areas of the country offer the best capital growth at certain times. Buying in an area where you know that there is likely to be major investment in infrastructure or the creation of jobs is likely to see accelerated capital appreciation.
What do you count as square footage in a house?
Generally, when calculating the square footage of a property, it is correct to include all areas in the property that have residential use. In short, that means rooms, and parts of rooms, that can actually be used to sit or sleep in.
This would mean that obvious inclusions would be reception rooms, kitchens, bathrooms, and bedrooms. The likes of hallways and landings would also be used as a part of the price per square foot calculation. In terms of loft space, this should only be included if it has been converted into living space and has a ceiling height of at least 7ft.
In terms of garages, it is common for the square footage to be taken and then shown as a separate figure. As this is not a habitable living space, it could be construed as misleading if this was included in the overall total price per square foot. It is standard practice to show this as a separate figure. Although some people then choose to display the property's overall square footage using 2 figures: one including the garage space and the other excluding this.
Is the garden included in the square footage?
No, a garden or any parking or outside area is not taken into consideration when calculating the price per square foot. That is not to say to an investor that a sizeable garden has some advantages, but it is not something that is included within the calculation.
As well as excluding gardens, outbuildings are also something that is not included when it comes to working out the price per square foot of a property. This means that the likes of sheds, barns, and stables would be excluded. These are all factors that may add to a property's overall worth and desirability but, as they are not habitable living spaces, they are not used when considering the overall square footage.
How to find square footage of a house online?
Using our internal area lookup you can quickly and easily look up the square footage of most properties in the UK.
The database for this tool includes any property that has had an energy performance certificate (EPC) carried out in the last 5 years, which typically happens whenever a property is listed for sale or rent.
How to find properties by square footage
Using our Local Data tool is a simple and quick way to identify properties by square footage and price per square foot. Our interface allows you to select an area where you are seeking to invest. Once you see results displayed for this area, you visit the 'Prices' tab and then easily switch this to 'Asking prices (£/sqft)' (full tutorial).
As is always the case with PropertyData, what you will be presented with is live market data. The information is presented to you in a scatter format, with properties having larger square footage being displayed at the top. PropertyData goes further by then distinguishing between the properties that have a cheaper price per square foot and those that are expensive. The properties that have a cheap price per square foot appear on the left, with those that are expensive appearing on the right.
Having being presented with the price per square foot, you can then click and get further information. You can even then click through to the listing on the relevant property portal should you wish to.
Although it is only one part of an overall picture, the importance of understanding price per square foot as a property investor can not be underestimated. This figure shows you the value of any property that you are considering investing in.
PropertyData allows you access to this key information, as well as the other factors that add up to create the overall picture, allowing you to decide whether a property is indeed worth investing in.