Buy to Let
Buy-to-let has seen phenomenal growth throughout the 90’s and continued growth into the 21st century. Now the quality and quantity of housing available within the rental sector has increased, thereby making the idea of renting a more attractive option.
The buy-to-let market is expected to continue to grow, this is due to a number of factors: an increase in the average age of first time buyers from 21 in 1989 to over 30 today, an increase in single person households, high divorce rate, longer life expectancy, increased migration, job mobility and contract work. This all adds up to an increased demand in the rental market.
Buy-to-let is an attractive investment due to it being understandable, being directly controlled or indirectly controlled through a letting agent. Buy-to-let is not subject to the roller coaster ride of the stock market nor the volatility that pensions and annuities have had due to the knock on effect of the stock market. Many shares offer high returns and high risks. Long-term property investment tends to be lower risk.
Buy-to-let is a medium to long term investment, typically 14-20 years, however, anyone playing the short term, stack them high, buy them on 100% loans should seriously think again, buy-to-let is not a get rich quick scheme. In a bad market you may be unable to sell your property therefore make sure you do not need to release your property investment for a few years after buying. Allow yourself a minimum of five years preferably ten years or more before you consider selling your investment.
Investigate, understand and plan
You need to invest time, effort and patience before it will reward you. I have seen hundreds of landlords get it wrong and just as many get it right, make sure you fully understand what you are doing, investigate the market and plan.
Certain properties and areas may be in more demand than others. Look at the demand in a particular area and investigate the local Tenants market. Speak to the local letting agents.
Ask yourself questions like:
– What area am I going to buy in?
– Is the market made up of commuters, national companies, local universities, a seasonal workforce?
– What type of let do I want? Company let, professional let, short lets, holiday lets, student lets, DSS lets?
– What types of properties are on the market?
– What types of properties are being let quickly?
– Is the demand from single people, young/older people, couples, people sharing, families, professionals, executives or students?
This type of research will determine what type of property you will be looking for: studios, terraced housing, sea view apartments, executive housing, etc.
It’s important to understand the tenant demand in a particular location.
Buy with conditions
A good property investment is to buy the right property to meet the demand at the right price. To have a positive cash flow with strong and (preferably) growing rental demand in that area.
There are two ways your investment will pay off: Capital growth and Income.
Capital Growth is generally made by having a property for the long term or by buying in an up and coming area. The income is the difference between the rent received and all the outgoings. As a rule of thumb, the rental value should exceed the mortgage repayments by at least 130-140 %. That should cover the mortgage repayments, letting agent’s fee, maintenance, insurance, ground rent and service charges, void periods and a small profit on the rent received.
By buying a property in demand it will mean having less void periods and if the demand is growing in an area then the rent will increase with time.
As a rough guideline to compare buying one property to another many investors work out the rental yield.
Achievable monthly rent x12 = Rent achieved per annum divided by cost of property x100 = the GROSS rental yield
e.g. £1,250 x 12 = £15,000 £15,000 / 165,000 = 0.09 x100 = GROSS yield 9.0%
It is a simply guideline, however, still do your sums for each individual property, the actual costs and revenue received. The gross yield should increase over time as rents increase. So the 9% becomes 12% as the rental income received increases and the amount you borrowed remains the same.
Set yourself conditions, criteria and guidelines for the property you are looking for.
Do your sums
Use a spreadsheet about your prospective property investments. To include all outgoings: set up costs, stamp duty, fees, refurbishment costs, void periods, letting agents fees, maintenance costs, insurances, mortgage repayments, tax and income. A basic profit and loss sheet. By crunching the sums you will avoid making a loss, financially viable and be able to plan for the future.
Choose the right finance, most buy to let mortgages work on around 80 – 85% loan to value (LTV), which means you need a deposit of 15-20% of the purchase price. Ask for advice about the mortgage market. There are over sixty lenders offering buy to let mortgages with over 100,000+ different mortgages to choose from. Before choosing a mortgage ask yourself some questions:
– What are your plans for the short and long term?
– Will the property you want to buy fit the lenders criteria? e.g. over four storeys high, ex-council, over commercial premises, studio flat
– Have you ever had any credit problems?
– Will the property be in your name or a limited company?
– Single assured tenancy or multiple tenancies?
My advice is to find a good mortgage broker, many will not charge you a fee and can offer their valuable experience and knowledge. The broker can identify which lenders and schemes quicker, handle all the administration and continue an ongoing relationship to build the most profitable portfolio and inform you of the ever changing rates and schemes available. A good broker can save you thousands. If you have an existing mortgage, you must check with the mortgage lender and insurance company before you let the property out – you may need to get a different policy.
Look at the tax implications www.inlandrevenue.gov.uk , you maybe liable for income tax and capital gains tax (CGT) make sure you keep all your records and spreadsheets. Remember costs such as insurance, repairs and maintenance, management fees, wear and tear, mortgage interest is all tax deductible.
Always think of them NOT you
Don’t let personal taste cloud your judgement; try to look at what potential Tenants would like. Buy good quality goods, generally not designer, and spend money on the kitchen and bathrooms but not so much on carpets and curtains, so long as they are in good condition and come up to the current regulations there is no need to buy the best.
You must meet all the fire and furnishings regulations so avoid buying old second hand furniture, as these will probably contravene the furniture and furnishing regulations. To get a copy of the leaflet Furniture and Furnishings Fire & Safety Regulations click on www.dti.gov.uk/publications.
Think of the maintenance, a large garden might be nice but usually it’s not important to tenants and will require extra maintenance.
A void period is when the property is empty between Tenants and can dent your income if prolonged. To avoid having long void periods ensure your property is and remains attractive to the mass (or chosen) market, complete repairs quickly and ensure the property remains in good condition and well decorated. Make sure all electrical fittings are in good order. Take care to ensure that wiring and plug sockets are checked properly by a qualified electrician.
Heath and Safety – You must have a gas check and maintenance carried out by a Corgi-registered technician once a year. If the tenant asks for the certificate you are required to produce it.
Don’t try to be friends – keep it business like
Be considerate, pleasant, and fair, try and keep them happy, however, be firm, do not accept any nonsense and do not become friends with them, keep it business like. Do not give them another chance; if the Tenants are not fulfilling their side of the contractual agreement, take legal action.
Use a letting agent
Property investments come with responsibilities and legislation, it can be hassle, stressful, non-profitable and time consuming if not properly managed. Using an agent can substantially reduce the risk.
Choose a letting agency that is reputable and has a high success rate, meet them face-to-face, and choose someone you like and think you can trust. Remember the most important thing is to go with a good agency and a good agency does not necessarily mean a big agency.
Key source of advice
An agent can help with advice in finding the right property and advise on what the demand is. Use them; they have the day-to-day experience of making lettings work. They can tell you why your property is not letting or why it is not attractive to Tenants
Maintenance, Unpredictability and inconvenience
Problems do arise that need to be dealt with straightaway, some examples are: The bathroom is flooding, the washing machine has broken, the rent cheque has just bounced etc. An agent is easily accessible and in the right place to deal with any problems regarding maintenance or if something goes wrong with the property.
Dealing with Tenants
Letting agents will help finding Tenants, collect references and rent. It is sometimes good not to be too close to Tenants, keeping it business like and not personal. They will take the necessary action if once let, the Tenant refuses or is unable to pay the rent. They tend to know what to say and how to say it. A letting agent carries out references and tends to be familiar with good and bad Tenants and instinctively know whether something is not right.
A professional agent will manage all documentation; they will cover and advise on many of the legal responsibilities and liabilities and ensure the right notices are issued, an inventory and use the correct agreements.
People looking for properties through the private ads and newspapers tend to be looking for budget accommodation and looking to save money. It’s the professional busy people who can afford more and want the agency to do all the legwork for them.
Corporate companies use good letting agents, without an agent you will exclude corporate lets and limit the market.
Reduce void periods
Agents will try and show your property to prospective tenants before the existing tenancy comes to an end reducing the void periods. A letting agent will have a list of prospective tenants waiting or will advertise your property (only paid if successful), saving you time and weeks without rent.
I hope the above tips are of some help and I wish you ever success with your buy to let property.
(Written By James Scollard, Proprietor of Clifftons Estate Agents)
We have given these buy-to-let tips in good faith to help people understand, think about and plan their buy-to-let, however, we can hold no liability for damages arising out of or in connection with the use of these buy-to-let tips and as with all investment advice, you are advised to take proper financial and legal advice at all stages. Remember investments can decrease as well as increase.