Investing in property has become a popular pre-occupation with many people over the past few years. Most people do this in their spare time. They see property as a safe haven for their savings in an era when financial scandals have undermined their confidence in the financial services industry: pensions are often unpredictable, interest rates on savings have been rock bottom and the stock market is highly volatile.
Renting is a growing market. More and more Britons are renting in a phenomenon now referred to as ‘generation rent’. But a more fundamental shift is happening that will have an impact beyond a single generation and this will change the nature of our traditional English nation of home owners.
The number of households now renting privately rose by 42% from 2008 to 2013, to an estimated 4.8 million. Savills the property agents estimate that this figure could reach 5.6 million by 2016, and will then represent 20% of all UK households. It could even reach 25% by 2020.
This seismic shift to private renting has accelerated since the credit crunch, due to escalating house prices, constrained mortgage availability and the need for significant deposits, big hurdles for would-be home buyers. The initial impetus for buy-to-let came from the introduction of the Assured Shorthold Tenancy (AST), which gave landlords the surety of regaining possession if things go wrong, and the buy-to-let mortgage, a competitive interest loan scheme for lettings at near home owner mortgage rates.
Savills have estimated that £200 billion of investment will be needed over the next five years to satisfy the increasing demand from private renters.
There are risks with property investment, like any other form of investment which gives a good return, but there are also opportunities for those who are willing to put in the effort required to run their own rentals business successfully.
Buy-to-Let is one of the few remaining “cottage industries” where the small man, the investor with one or two rental properties, can compete on equal terms with the big guys. What’s more you can do it as a side-line to your existing job. Over time if you so desire you can build up a substantial asset base of properties and get your tenants to pay the mortgages and buy them for you!
So, is Buy to Let really a good investment?
If you are considering buy to let as a serious investment, then you’ll probably want to know one thing: can I make real money in property and will it be worth the effort.
The simple and quick answer is, yes you can and yes it is. But it’s not the piece of cake some would have you believe. You must put in time and effort, do your homework and hone your landlording skills.
Providing you go about it the right way you can manage several rental properties in you spare time, and still hold down a demanding job. It’s not rocket science, but it does call for a methodical approach and the ability to handle people. Paperwork and legal bureaucracy can test the patience of a saint, and tenants can be the bane of your life if you don’t learn to manage them and get it right.
There are plenty of landords who have started off with one property and built up to portfolios worth millions. On the other hand most are content with one or two properties which, over time, when the mortgages are paid off, produce a fantastic extra income stream while retaining substantial and growing investment value.
Most people that make money in buy to let hold on for a long time; often this means running the properties for 15 to 20 years or more. By this time both the capital value and the rental incomes will have grown substantially.
Property investment is one of the few types of investment where you can start off with a small amount of capital and safely borrow the rest. You borrow against the intrinsic value of the bricks and mortar, something that’s tangible and immovable. Try doing this in the stock market and you are likely to lose your shirt, unless you are very fortunate or highly skilled.
Property is also one of the few investments where you are in control: you can buy exceptional value, manage your own tenants; you can add value with improvements, splitting or extending and adding rooms, you can save a lot of money by doing all your own lettings, repairs and decorations. You decide whether you want a high income return or just long-term capital growth by adding to, or removing equity, by the amount of money you borrow.
Risk and Reward
Risk is always commensurate with the reward or return you get on any investment. Property investment is relatively low risk compared to some other types of investment so yields can be as low as 3 to 4%, or 5 to 6% if you do a lot of management yourself. If you are really feeling energetic you can make 12 to 15% returns on multi-occupied houses, what are known as houses in multiple occupation (HMOs). These, along with holiday lets, take a lot more management time and effort, but the returns are usually significantly higher.
Bear in mind the more highly geared your investment (the more you borrow) the less profit you will come out with initially, if you have any profit at all. But the value of your investment will increase over time and you should gradually pay down the loan (mortgage).
For example, if you can achieve something like a 5% yield, but with a large loan of perhaps 75% of the value of the property (loan-to-value), you are likely to just about break even at first. To secure a good income you will need to put in more of your own money or wait until you pay off more of your loan, at which stage you will start to see higher income, a positive free cash flow.
Get Your Market Timing Right
Property markets like all financial markets go in cycles, often in 10 to 20 year cycles. The most successful investors buy when prices are low and ideally sell when they are high. Most people though do just the opposite. They get excited about property when they see all their friends making money, when the papers are full of success stories and when prices are high, near their peak and perhaps heading for a fall?
Those who get into the market at the right time, or manage to pick up bargains, are the ones that make the real money. Those that bought at the peak of the last housing boom, some buying over valued city centre apartments, sometimes off-plan, in 2005 to 2007 saw their values drop by as much as 50%. Many of those investors found they had bought in the wrong place at the wrong time; they could not attract tenants, or in desperation they attracted the wrong type of tenants, because the demand was just not there, and consequently, some lost everything.
You Make Money When You buy, not when you sell.
The real trick to success in property investment is to get your market timing right, and to buy real value. People talk about below market value (BMV) purchases and it is always possible to pick up bargains in property if you are patient. Seasoned investors will take months to research and find value, and will do very few deals.
Buying property where you can add value is a great way to make money fast. Tackling problem buildings, reconfiguring and refurbishing, buying in up-and-coming areas, converting uses, are all ways you can win, but some of these will be tricky to get finance. You may need to put in a higher stake yourself if you want to do it this way.
Buying at auction or repossessions is a good way to make money when you buy, but auction purchases are risky; you need to have the finance in place first and you need some skill in assessing what you are getting for your money.
If you don’t want the hassle of all this renovation work, try to spot new builds or modernised properties at the right prices. You need to be constantly comparing prices on websites like Rightmove and Zoopla, looking at the local press and in estate agents windows. Get to know the local agents and their markets and get yourself on their books as a potential buyer.
When you have the money available at short notice, when you can move fast on a deal, that’s when you can strike some real bargains. Don’t be too mercenary, but the three Ds are great buying opportunities, times when people are desperate to sell or when they are not looking to make the highest price. Death, Divorce and Destitution are the three Ds that are always present, and they are real opportunities in the savvy investor’s buying toolkit.
Make sure you research the local market well: tenant demand is key. You must purchase rental properties where there are plenty of tenants looking to rent. Usually these are areas where there are good transport links, commuting to high density towns and cities where jobs are plentiful. Speak to all the local letting agents and get their views on tenant demand and market rent levels.
Based in the information you find in your research mode, do the sums. Work out the returns you are likely to get given the amount you anticipate spending and the running costs of the operation. You might like to use our Buy-to-Let Calculators here:
Go for the right type of Rental Property
It’s a good idea to start off near home in a property market you know well and hopefully understand. Your initial research should have told you the type of tenant you should be targeting: singles and couples, working and professional, families, students, bed-sit tenants or those paid for on government benefits.
Unless you are in an area where prices are growing fast, you are not likely to make much money from the growth in value of your investment, so you should be looking to make your money initially from rental income, the surplus of rental income after paying all your costs.
Make the Numbers Count
Don’t fall in love with your properties; buy them because the number stack up, be sure they will be profitable before you buy by producing a good solid business plan which includes your appraisal budget and cash flow forecast.
A property with a nice garden might appeal to your own tastes but most tenants just won’t want the hassle. Far better to make sure it’s near shops and a railway station, or where there are lots of big employers.
Flats and apartments are usually leaseholds and these can represent frustration and a real challenge for landlords. Getting permission from the freeholder to carry out refurbishment and alterations, and approval to rent out can be real issues. High service charges and disputes can easily take all of your profit, and hidden charges or overdue maintenance work for which there is no reserve fund can come as a total surprise.
If you are considering buying leaseholds get an experienced legal professional, one with real knowledge of leaseholds, to go over the lease with a fine tooth comb. It’s too late once you’ve signed on the dotted line.
Managing your Tenancies
Management of the tenancies and tenants is often overlooked by buy-to-let investors. Buy-to-let is not a passive investment, whatever you may have been told, and this is usually the case even if you pay someone to manage it for you.
Yes, you can pay an agent to do it for you, but not all agents will do it with the care you would wish to do it for yourself. What’s more they charge you up to 15% of the rental income to do it for you. That’s a large amount of your income and can mean the difference between a profit and a loss.
If you want to be a real landlord you need to develop the expertise to find, screen and manage your own tenants. Get yourself organised and with a bit of method and experience you can do a fine job of this with the minimum amount of management time.
There’s quite a bit of homework to be done, particularly on the legal aspects of running property. There are at least 100 different pieces of legislation relating to buy to let which are constantly being changed, updated and renewed, with new legislation coming on the scene all the time. You have just got to develop an interest if you are to keep on top of things.
There’s a lot to be said for saving money by managing the property yourself but you must be up to speed with your obligations as a landlord and do a professional job, otherwise you can face some pretty stiff legal penalties. Get it seriously wrong and you can even end up in jail if there is an accident and it can be shown you were negligent.
There are many other issues cropping up all the time when it comes to buy-to-let investments. On the one hand it’s what makes it interesting, but on the other the onus in on you to keep yourself up-to-date. Visiting a website like LandlordZONE® regularly and reading our regular communications and up-dates will do this for you. You will find our Forums will quickly answer any questions you may have on lettings and property investment.
The Nitty Gritty of Running Buy to Let
At this time the market is skewed towards landlords, people think landlords are making a killing, but this doesn’t mean you’re in for an easy ride; conditions may not always be as favourable, and you are bound to come up against problems which need to be solved, like in any other business. If you are in it for the long term, to make real money over time, you need some careful business planning and a dedicated budget for all the likely problems you will encounter.
Running a buy to let involves contacts with many people: you may use a letting agent, you will need to pay a solicitor, a mortgage broker and an insurance company, you may use an inventory clerk, and you need to establish good contacts with tradespeople to carry out repairs quickly when you need them.
You will certainly need to address health & safety issues: Energy Performance Certificates (EPCs), gas certificates, possibly fire safety and electric system tests including appliances with Portable Appliance Tests (PAT), plus now Legionella risk assessments.
Stamp duty is payable on all land purchases, currently starting at 1 per cent for property worth between £125,001 and £250,000. You should check the current rates regularly as these may change.
As a landlord you have obligations and responsibilities to your tenants by ensuring that your property is safe. Under common law, statutory rules and regulations, and under your contract (the letting agreement) you must be accountable. Make sure your property meets and maintains appropriate standards with all services, plumbing and electrics in particular, and where necessary tested and approved by qualified tradespeople.
Rental deposits must be protected under a government approved protection scheme. If you take a deposit, which most landlords do, you have 30 days to protect it and serve notice of this on your tenant. Failing which you will be subject to fines, and you will be unable to use the 1988 Housing Act Section 21 eviction process.
A good letting agent can take make life a lot easier for you. If you do decide to use one (or you might use an agent initially until you get some experience yourself) always make sure they are members of one of the recognised professional associations. This means they are backed by strong codes of conduct and they carry the necessary insurance to protect your money and your interests.
You can expect to pay around 10 per cent of the annual rental income for a “let-only” service which includes advertising the property, finding and screening tenants and collecting the rent on your behalf. Some agents will agree a find only fee where they purely introduce a tenant to you and you do the rest.
A Fully managed service will usually work out at around 15 per cent of the annual rent. This includes the day-to-day running of the business, arranging repairs and maintenance, collecting rent, dealing with all manner of tenancy problems including rent arrears, and ultimately evicting tenants if it comes to that.
Agents are not always up front and transparent with fees and there may be additional charges they don’t mention. Always ask for a full breakdown of any charges. You need to scrutinise their agency contract to make absolutely sure there are no ominous clauses and excessive renewal fees. The contract should have a clear termination clause and you should avoid anything which says they receive a commission if you sell the property.
When you have had a professional valuation of the property the lenders will usually want to take your earned income into account and insist that the potential rental income from the property is a minimum of 125 per cent of an interest-only mortgage repayment.
A current example may be in this region: A two-year fixed rate at 3 per cent to 65 per cent loan to value (LTV) with a 2 per cent set-up fee. The rental calculation based on a 6 per cent yield would mean you could borrow £150,000, so the property needs to earn you around £900 per month.
You need to allow for troubled times: unexpected repairs, rent arrears and void periods are a very important consideration. You must keep or build-up a contingency fund to cover these types of irregular and unforeseen circumstances. This will prevent you from losing your property should you fall behind with mortgage payments – always put aside some of you earnings as protection.
One of the keys to success, as any experienced and successful landlord will tell you, is avoiding problem tenants. The screening and selection process is vital and one to which you should give your whole attention. See www.TenantVERIFY.co.uk
Investing in property does have risks. Unlike the stock market, where you can sell at an instant and walk away, you can’t do this with a building. Selling up is a long drawn out process so if prices were to fall and you cannot find tenants, or if you are stuck with problem tenants, you could be lumbered with an asset that turned into a liability which you can’t sell.
Rental income and cash flow is key: buy-to-let mortgages are often interest-only which means your loan is not being paid off over time. Inflation will gradually reduce its value but it will still need to be paid off eventually.
The Buy to let checklist
Market Research – walk the walk and talk the talk with local people, estate agents and letting agents, local people and employers, read the local press and search Rightmove and Zoopla for values. See:
Do a Business Plan, including a detailed cash flow forecast: – a good discipline which clarifies your own ideas, aims and objectives and helps you communicate these in a realistic manner to interested parties like lenders.
Arrange the Finance – a really good broker can advise you and find you the best deals in the market – www.landlordmoney.co.uk
Negotiate the Purchase – learn to negotiate and strike a hard bargain.
Get the Property ready for Letting – properties let best when they are in good clean condition with all modern facilities.
Get the Documentation Together – www.landlordzone.co.uk/documents
Market your Letting – Use the Internet, local press, to-let boards and notice boards to let your property. Agents will often have renters on their books if all else fails with your DIY.
Screen and Verify Prospective Tenants – www.tenantverify.co.uk
Sign up the Tenancy – get the paperwork right, pay meticulous attention to detail.
Manage Your Tenants – learn how to manage your tenants well, it’s all about your people skills.
End the Tenancy Properly – use the correct documentation – www.landlordzone.co.uk/documents
Learn to Deal with Problems – become a problem solver and learn lessons from every landlording experience – this is long-term learning curve.
Learn how to Evict – hopefully you won’t need it but DIY eviction is not rocket science and you can save a fortune in legal fees.
By Tom Entwistle, LandlordZONE®
If you have any questions about any of the issues here, post your question to the LandlordZONE® Forums – these are the busiest Rental Property Forums in the UK – you will have an answer in no time at all.
©LandlordZONE All Rights Reserved – never rely totally on these general guidelines which apply primarily to England and Wales. They are not definitive statements of the law. Before taking action or not, always do your own research and/or seek professional advice with the full facts of your case and all documents to hand.