Considering Buy to Let?

Buy to Let has become an extremely popular way to invest in the UK property market, and the attraction has been obvious - low interest rates, high capital growth and a strong rental market.

Increasing numbers of people are deciding to use their savings, or the equity in their primary residency to purchase a second property - usually a flat or a small house - with the aim of renting it out ie buy to let. The rental income is meant to cover the cost of the mortgage/agent costs and wear & tear and can even leave a residual income, with capital gains (i.e. house price increases) producing the profit over the longer term.

For greatest benefit this is a medium to long term investment, as in the short term the selling/buying costs can outweigh any capital growth.

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Buy to Let - What to consider

As more people are investing in properties to rent out, the supply of rental properties increases and tenants have a much greater choice and can therefore negotiate cheaper rents.

So if you are entering the buy to let market, or buying again in it, are some basic things to be aware of:

How much money do you have available, and how much will your purchase cost?

If you are thinking, “I’ve got £20,000 available, great I can buy a £100,000 apartment. The selling agent has told me I’ll get £500 a month rent, that’s 6% per annum. Excellent my mortgage is only 5%, that leaves me £1000 for a nice holiday, and with house prices growing by 15% per year, I’ll sell in 2 years and make £30,000 profit!”

Sound good?!

I don’t mean to insult anyone, but I have heard people talk about buy to let deals like this, who get a harsh reality check when complete on property!

Lets go through some of the additional costs with buying a property,

You'll need to pay for valuation, solicitors' fees, surveyors fees, and generally stamp duty, although some areas, are stamp duty exempt, which can make good difference. On average would say this is around 3% of purchase price.

There are numerous home buying expenses that you need to think about. Even if it is a brand new property, will normally be recommended to furnish property and buy appliances. On a 2 bedroom flat this can cost, for beds, sofa, tables, curtains etc around £2500. Obviously if is older property, will usually need at very least, new carpets, painted, perhaps a new kitchen/bathroom.

Then need to actually get tenants in! If is local to you, you may consider managing yourself. This will obviously save letting and management costs. However you must decide if you are prepared for a phone call at 4am to tell you about a burst water pipe, or hassles getting new tenants, or doing the inventory. This is obviously not possible if not local to property.

However with the power of the internet, it is easier than ever to find a tenant and you can purchase a tenancy agreement from online solicitors. Otherwise a letting agent will take care of this.

Letting agents obviously add an additional layer of expense to your Buy To Let project. They will usually offer various levels of service. By opting for a full management service, if your margins allow it, you will be letting them deal with all the stress of landlord/tenant relations, and putting in a safeguard against non-payment as a managed service should include insurance for this.

It may also make more mortgages available to you as lenders feel more comfortable when lending, knowing you have the additional security of a management company.

For a full managed letting service, you can expect to pay your agent about 15% of the monthly rental income, so in our example this would be around £75 a month on the £500 rent. Some also charge an up front amount to find the tenant, which can be anything up to a month's rent. I would always shop around, as it is not necessary to pay this much.

Ongoing Costs

Repairs/Maintenance/Damage – Generally this will obviously be higher on older properties, than new build. Problems such as leaking showers, damp, new furniture etc should be budgeted for. A month’s deposit should always be taken to cover for any damage done by tenants.

Adequate insurance should also be taken – I’ll never forget walking into my flat in Edinburgh on Dec 27th a few years ago, which I had agreed a sale on and was due to complete in 10 days time, to find the kitchen ceiling had caved in due to a burst water pipe in the upstairs flat!! That was a challenging few days!

Tenant stops paying rent - In some unfortunate scenarios, the tenant may stop paying rent, either because they cannot afford to pay or because they are refusing to pay. This may seem very unlikely, but happens to even experienced investors - I know people who have let to friends who have then struggled to get full rent, so always be aware of risks.

For these reasons, you should keep some spare money aside as you could find yourself in a void period/have a sudden unexpected cost to property. You will still be responsible for all the costs, and your lender will still require your monthly payments whatever happens.

So if we go back to our example, if investor has £20,000 available, should be looking at spending around £16,000 on 20% deposit, leaving him/her with £4k for buying costs. This would bring price range down to around £80k for property. Or say managed to find another £4k and bought this place.

On a hoped for £500 a month rent, say there was little interest after first month, and was advised to put rent down to £475.

After that gets a tenant, but has to pay 15% management/letting fee, so ends up with £400 a month but with void of first month, on a mortgage repayment of 5%, or roughly £417 a month. So out of pocket by approx £600 for the year, plus say £1000 for repairs/maintenance, and suddenly is a totally different picture!!!!

That holiday is not looking quite so likely.

And what about if interest rates go up another 1%?!

However that is not to say do not invest in buy to let, far from it, just as with any investment do your homework!!

To have a look at some recent deals my team have sourced, see Uk Buy to Let deals!

Location, location, location

The one other key consideration is of course location, location, location! Check out my thoughts on this at Location, location, l...
For buy to let, this may sound obvious but you can't earn any money unless you can rent it out ie if it is in the middle of nowhere with hardly any access to local amenities then you could find trouble letting it, or if the market is already overheated, or the property doesn’t suit the market ie family homes, when market wants 1 bed studio apartments. You should generally look to buy somewhere within walking distance of local amenities and public transport. Or near a large market ie hospitals, universities.

If this again sounds a lot of work, this is where profesional finders/property groups come in. For some it is worth paying a finders fee, knowing that the area will have been all checked out, and often a discount also negotiated due to buying power.

There is no point trying to save on paying a £2000 fee to a finder, and buying a place yourself without properly doing your research on property and the area.

Over the last 3 years, we have put a team in place of full time professional finders around the UK, in Buy to Let hotspots generating yields of minimum 7%, and often into double figures - and now source more high yielding deals for investors than any other company in the UK!

Often these will already be tenanted, so the yields are clear to all.

I shall be discussing this in newsletters but to make sure you are added to the mailing list, and kept informed as soon as deals come up, because they often go within 24 hours, please sign up at Property Investment Deals - they get reserved within 24 hours!

This covers all the latest UK and overseas deals I recommend.

Also check out Overseas Property Investment deals

Another useful site to check out, if looking at UK Buy to Let's, is The Association of Residential letting Agents who will offer excellent help and advice on rent around the UK.

Buy to Let can still be a very good option!

Just be aware that buy to let is a medium to long term investment, and you have a cash safety net to cover voids/interest rate rises/repairs - but this is the most powerful pension you will ever have in my opinion.

You must get it right when you first buy ie aim for a property that will give a high enough rent to cover your mortgage payments and other costs, and ideally also a net income.

If you have a 10 year, or 20 year goal, and every month you can cover all your expenses, and your property goes up in value over this time scale, you can do very well.

Before you forget, sign up for my buy to let deals at Property Investment Deals! to be kept informed as soon as new high yielding - 7% minimum - become available. Finance and legal help can of course be given and we always have a managing agent all lined up.

Two other good resources for those interested in buy to lets in the UK are, Up my Street _ Good for local info and The Times Online - Property Section

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