It is tempting to consider the buy-to-let market as an investment, because interest rates are so low and the uncertainties of the stock market are not for the fainthearted.
Don’t consider BTL if you are looking for a high yield, fast return investment; this has to be regarded as a long term investment which, as long as it is managed carefully, will provide some reasonable income and capital appreciation.
1. Find out if this is really the investment for you (see our remarks above).
It is hard work and requires consistent application and determination to make this type of investment successful. Could you get the same rate of return (or more) from other investments?
2. Be constantly aware of the likely pitfalls.
Interest rates will undoubtedly raise; property prices may remain stagnant or fall; managing agents will factor in additional fees for looking after your property; there will be problems with tenants; rent arrears (tenants in rent arrears have doubled over the last 6 years); damage, re-decoration and modernisation costs; insurance; regulatory issues such as Tenants’ Deposit Schemes, houses in multiple occupation and health and safety; fiscal changes, e.g. the new restrictions on Capital Gains Tax relief to be in force after April 2014.
3. Determine what type of tenant that you are looking for. Corporate tenants? Young professionals? Families?
If you settle upon a particular tenant market, that will help you look for the correct area in which to buy your property. Ask yourself what the property standard expectations of your ideal tenant(s) would be and are you prepared to spend money on the property in order to attract this type of tenant?
4. Research your preferred location thoroughly (Please see our recent blog detailing the UK regional areas and their average gross yield for 2013: Buy to Let Market (UK) 2014 – 06 January 2014).
London isn’t faring so well in comparison with the regions; London rents are only giving 5.1% gross yield at the time of writing, largely because capital costs (property acquisition) are so high.
We would advise that you look at those areas giving a medium average gross yield because you will find a high demand for rental property and reasonable property prices. High populations generally mean more reliance on the private sector, e.g. university towns where there is a variation of available housing stock, such as Oxford, Southampton, and York.
The highest average gross yield areas are to be found in those regions where growth prospects for property prices are weak.
Visit the area of your choice often and get to know it well. Speak to estate and lettings agents as well as other experienced BTL investors who are active in the location. If you are happy about the available housing stock and the convenience of the location, e.g. transport, schools, colleges, universities, and shopping, stick with it.
Two bedroomed houses or flats are those most in demand, larger houses (unless you are intending to let as a house in multiple occupation) are harder to let.
5. Buy your stock at as low a price as possible, stick to your budget and don’t get carried away by the property. Remember, this is a business deal, you are not planning on living there, so use your head not your heart. Most tenants are attracted by sparkling new properties, so consider buying a wreck cheaply and doing it up yourself, if new(ish) two bedroomed properties are hard to find in your preferred location.
Professional property developers use a crude calculation when costing development builds or refurbishment, i.e. cost of acquisition + cost of works + 20% profit.
6. How are you going to fund the purchase of the property?
The good old boom days are long since behind us and BTL mortgage lenders are an increasingly wary bunch. In truth, they would much prefer to be dealing with experienced BTL investors with average portfolios of ten properties or more. As a result, BTL mortgage lending criteria has tightened up considerably. So currently mortgages are around the 5% mark and most BTL lenders demand a deposit of 40%.
However, don’t be deterred by this. Shop around the various BTL lenders; it has recently become an increasingly competitive market and you will undoubtedly find the BTL product that is suitable for you.
BTL lenders will expect that you earn a minimum income from your property and that it should cover the mortgage payments by 125%.
7. Who is going to manage the property?
It goes without saying that it will be cheaper to manage the property yourself, but seriously consider whether you have the time to manage, chase rents, market, and repair the property by yourself. If you have decided to invest away from the area in which you live, you will also have to factor in travel and the time involved.
Managing agents are expensive and costly (watch for those hidden extras). It is a cutthroat business and there are number of excellent independent agents, apart from the high street names, with whom you can negotiate. Be ruthless and exact; make sure that you know exactly how much they are going to do for you and what they are going to charge for it.
We have a team of specialist buy-to-let property lawyerswyers who have many years’ experience in the UK market, and we will be happy to guide you efficiently through any purchase that you are making for your portfolio.
Contact us on 020 7387 2032 or complete our online enquiry form here.