I’m looking to purchase a property as a buy-to-let, what things should I consider?
Hello everyone and welcome to Episode five of Ask the Estate Agent and thanks again for joining me and downloading this episode.
Today’s episode is an introduction to buy-to-let and what to initially consider when investing in property.
Now in future episodes we will be going into much more detail on various aspects of investing, different models and strategies you can try but for this initial episode I want to give an introduction to buy-to-let and the basic things you should be considering and researching before making that first investment.
So let’s jump straight in and start with number 1
- Research the market. Bit obvious I hear you cry but this is often overlooked or not done in enough detail so here’s what to consider. 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. Mortgage rates are lower now , but investing in buy-to-let means tying up capital in a property that may fall in value. Make sure you speak to a specialist Letting Agent who has experience in your area who can give you the best advice on achievable rental values and type of tenants you can expect. If you know someone who has entered the buy-to-let market, ask them about their experiences.
- Choose a promising area. Promising does not mean expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons. Where in your town has a special appeal? If you are in a commuter belt, where has good transport links? Where are the good schools for young families? Where do the students want to live? How far away are local amenities?
- Know your figures. Before you think about looking around properties sit down with a pen and paper and write down the cost of properties you are looking at and the rent you are likely to get. Traditionally buy-to-let lenders want rent to cover 125% of the mortgage repayments. Most also look for a 15% to 25% deposit, or even larger, for rates that are considerably above residential mortgage deals. All these measures are to protect against falling prices. The best rate buy-to-let mortgages often come with large arrangement fees so these also need to be considered. As well as mortgage affordability you should also calculate the investment yield of the property. The yield of a property tells you how much of an annual return you are likely to get on your investment. It is calculated by expressing a years rental income as a percentage of how much the property cost. So you take the annual rental income and divide by the property purchase cost. Then multiply this by 100 to give you the gross yield percentage.
Bear in mind that this is the gross yield so doesn’t take into account any expenditures or cost or maintaining the investment such as management fees, maintenance costs, allowance for voids.
This is calculated by taking the annual rent minus the annual costs which equals your annual profit. You then divide this figure by the purchase price and multiple by 100 to give you your net yield as a percentage.
As a guide you can compare this against other forms of investment such as interest rate received on your savings. Interest received from investing in shares etc.
As a guide UK residential properties typically achieve a gross yield of between 3-7% depending upon the area of the UK the property is located.
- Shop the mortgage market. Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make millions in profit. If you are looking for advice consider using a specialist buy-to-let mortgage broker. Looking for an independent broker that can access as much of the market as possible will ensure you have the best choice of mortgages to choose from.
- Know your target tenant. Instead of imagining 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 and possibly a garage.
- Consider looking further afield. Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. 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 should do that for you. Cast your net wider and look at towns with good commuter links, that are popular with families or have sizeable employers.
- Don’t be over ambitious. We have all read the stories about buy-to-let millionaires and their huge portfolios. But the days of double-digit house price rises are gone, so now it’s invest for income rather than short-term capital growth.
Rent should be the key return for buy-to-let. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time. If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.
Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term. This means you will have benefited from the income from rent, paid off the mortgage and hold the property’s full capital value.
- Haggle over 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 sizeable asset when negotiating a discount.
- Be aware of the risks. Before you make any investment you should always investigate the negative aspects as well as the positive. House prices can fall as well as rise so plan for all eventualities. Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year – this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.
- 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 it for you? 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. The question will come down to how much you value your time.
So that’s all ten points to get you started on your journey as a Landlord. In future episodes we will be going into much more detail on various sides of investing and managing property but in the meantime if you have any questions at all that you would like answering at this stage of your journey then please do get in touch with us.
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So that leaves me to just say thank you very much for listening to this episode of the Podcast and if you enjoyed the show please don’t forget to subscribe and rate us on itunes, stitcher or wherever you are listening and until next time on Ask the Estate Agent it’s goodbye for now!