For many buy-to-let looks an attractive income investment, but if you are considering investing in property – or improving your returns on a buy-to-let you already own – it’s important to do things right.
As an income investment for those with enough money to raise a big deposit, buy-to-let looks attractive, especially compared to low savings rates and stock market volatility. Alongside this the local property market bouncing back has encouraged more investors to snap up property in the hope of its value rising.
Mortgage rates are still at record lows which again helps buy-to-let investors make deals stack up – Still today you can fix a mortgage for five years at just over 3 per cent at the biggest deposit level.
But beware low rates. One day they must rise and you need to know your investment can stand that test.
Recent history provides an important lesson in that. Many investors who bought in the boom years before 2007 struggled as mortgage rates rose. A sizeable number were thrown a lifeline when the base rate was slashed to 0.5 per cent.
Rates have stuck there since 2008, but remember they will rise again.
Despite the potential for costs to rise, more tenants in the market, rising rents and improving mortgage deals have tempted investors once more.
If you are planning on investing, or just want to know more, we tell you the ten essential things to consider for a successful buy-to-let investment.
Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares below are Mike Browns top tips for Buy to Let Investment.
1. Research the Market
If you are new to buy-to-let- What do you know about the market? Do you know the risks, as well as the benefits?
Make sure buy-to-let is the investment you want, do consider that your money might be able to perform better elsewhere. A few years ago a high-rate savings account would beat most investments. Right now rates are lower, but investing in buy-to-let means tying up capital in a property that may fall in value, and rates dont always stay low.
Investing in buy-to-let involves committing tens of thousands of pounds to a property and typically taking out a mortgage. It’s a big risk, when house prices rise, yes it is possible to make big gains above your mortgage debt, but when they fall your deposit gets hit and the mortgage stays the same. We have to take the rough with the smooth.
If you know someone who has invested in buy-to-let or let a property before, ask them about their experiences – warts and all. Or you can come and talk to me at my office and I will share a story or two with you over a brew.
2. Location Location Location
You want to choose a promising location, now promising doesn’t mean the most expensive, the coolest, the most run down or the cheapest. A promising location is one where people want to live, can afford to live and there is a demand for rental properties.
Think about it, where has a special appeal? Where has good public transport for commuters? Where are the most sought after schools for young families? Where do the students want to live?
You need to match the kind of property you can afford right now and want to buy, with locations that people who would want to live in those homes would choose.
I work out of East Manchester, we don’t have premiership footballers, millionaires or company directors living here or wanting to live here, so I don’t buy huge properties sat on acres of land hoping to rent them out to Manchester City’s newest signing. The areas I work in have lots of young families, service workers and city centre workers – so I buy and rent accordingly.
This approach may sound overly simplistic, but it is probably the most important aspect of a successful buy-to-let investment.
3. Think about your target tenant
Building on your “where” thoughts, factor in some “who” thoughts. Instead of thinking whether you would like to live in your investment property, put yourself in the shoes of your target tenant.
Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious.
If they are young professionals it should be modern and stylish but not overbearing.
If it is a family they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home.
These tenants will stay for longer, which is great news for a landlord.
4. Do the Maths
Nobody likes it but before you think about looking around properties, sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.
Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals.
The best rate buy-to-let mortgages also come with large arrangement fees.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment work out?
Don’t forget to factor in maintenance costs. My agency will do a full management package at 10%, but there are still costs above this that you need to factor in.
What will happen if the property sits empty for a month or two?
These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.
5. Don’t be over ambitious
We have all read the wonderful stories about buy-to-let millionaires and their huge portfolios. These people do exist, but aren’t the norm amongst property investors.
While we do expect long-term house price rises, and every now and again you could pick up a property and flip it for profit within months. The smarter approach is to invest for income not short-term capital growth. The way I compare different property’s values is to use their yield: that is annual rent received as a percentage of the purchase price.
For example, a property delivering £6,000 worth of rent that costs £100,000 has a 6% yield.
Rent should be the key return for buy-to-let.
Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return on investment you need to do your maths a little differently. Subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.
For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.
£75k mortgage at 5% interest rate = £312.50
£500 rental income x 12 = £6,000
Difference = £2,250
Deposit + buying costs = £27k
Annual return = 8.3%
Don’t forget tax, maintenance costs and other landlord expenses will eat into that return.
This is tax efficient, as you can offset mortgage payments against your tax bill.
You may want to consider whether buy-to-let still beats an investment fund or trust once these costs are taken into account.
6. Don’t be afraid to look further afield
Most buy-to-let investors look for properties near where they live.
Is you town really the best investment for you?
Of course, the advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they will be doing that for you.
Cast your net wider and look at towns with good commuting links, that are popular with families or have a sizeable university. Think again about who your tenants could be, why they would move to an area and what you can realisitcally afford within that area.
It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be negotiated hard on to get at a better price and then spruced up to add value.
This is one way that it is still possible to see a solid and swift return on your capital invested. If you can add some value to a home straight away then it gives you a greater margin of safety on your investment
However, remember to ensure that the price is low enough to cover refurbishment and some profit and that you allow for the inevitable over-run on costs.
A good rule to follow is the property developers’ rough calculation, whereby you want the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.
7. Squeeze every Price
As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount.
If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through.
This can be a major asset when negotiating a discount. Make low offers and do not get talked into overpaying.
It pays to know your market when negotiating. For example, if the market is softer and homes are taking longer to sell you will be better able to negotiate. It is also useful to find out why someone is selling and how long they have owned the property.
An existing landlord who has owned a property for a long time – and is cashing in their capital gains -may be more willing to accept a lower offer for a quick sale than a family that needs the best possible price in order to afford a move.
8. Consider how hands-on you want to be
Buying a property is only the first step. Will you rent it out yourself or get an agent to do so?
Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.
You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.
If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.
Select a shortlist of agents big and small and ask them what they can offer you. I will aim to publish a further post within he coming weeks detailing how to select the best letting agent for your needs.