Buy-to-let has come under pressure recently due to stamp duty changes and the Brexit vote but many still see property as an attractive investment at a time of low interest rates and uncertainty in the stock markets.
In light of recent political changes, it really pays to do your research and speak to some experts who will each have opinions on what will happen to the buy-to-let market in the coming months and years.
1. Research the market
Is buy-to-let definitely the best type of investment available at the moment? Interest rates may be very low at the moment but they have to come up eventually – what will happen to your investment then? Would it be better in a long-term investment fund?
You may feel that purchasing a property gives you more control over its capital gains due to being able to plan renovation work, however it is not an investment which you can quickly pull out of when times get a little tough.
Also consider which type of properties offer the most reliable return based on who your target audience is. For example, renting to young professionals means you may be better looking for newer properties as these are often preferred by this demographic. In fact, 2-bed new-builds were the most favoured property by Britain’s most famous landlords, Fergus and Judith Wilson.
2. Choose a promising area
You have to choose a property in an area with opportunity to gain a good rental income as well as the opportunity to increase the value. Look at ‘up-and-coming’ areas with lots of planned redevelopments to improve the area, such as the Hastings seafront regeneration project. Area’s with good transport links for commuters, student populations and top-performing schools are often in demand and provide a safer option for buy-to-let landlords.
You could even get a bit more scientific about this; browse the Office for National Statistics website to identify areas with the highest numbers of working-age people and compare these areas with low property prices and growing rents. Areas with growing rents indicates a decent demand; areas such as Swindon and Luton which are increasingly popular commuter hubs.
3. Know your numbers
You should have done your research and spoken to all of the banks but it still pays to get a good, independent broker when looking for a buy-to-let mortgage. Independent brokers look at the whole market and are not usually tied to particular lenders so can talk you through the best deals available for you and whether you should fix or track.
Buy-to-let lenders will typically want to see the rental income covering 125% of the mortgage repayments to avoid problems if rental prices drop, as well as expecting 25% or higher deposits. Make sure you know the rental values (and how these have fluctuated over time) before you approach a lender for a mortgage.
There are also costs to factor in to a buy-to-let property; building maintenance costs, wear-and-tear maintenance, arrangement fees for agencies, rental cover in case of the property sitting empty. Your funds should factor all of these expenses in, even if rates were to fall.
Whilst hard to predict, watching the markets and predictions for rate changes could save you a headache further down the line. Interest rates are currently very low, but what if they were to rise? What if rates rising prevented you from remortgaging when the fixed rate period ends?
4. Think of rental yield – not capital gains
Whilst tempting to think about capital gains on a property, rental yield should be the main focus, particularly for your first buy-to-let. Your yield will be the rental opportunity in one year over the sale price, e.g. £5,000 per year on a £200,000 house will be 2.5% yield. Some areas have been known to get up to 15% yield, such as a place called Washington in Tyne & Wear so it pays to research!
Most buy-to-let mortgages are interest-only, meaning you won’t pay any of your income back on the mortgage, so consider the costs of running the property and how much you will have stored in the fund at the end of the mortgage term – to either pay it back or invest further.
Don’t rely on property prices rising, Brexit has caused a huge amount of uncertainty in the property market and capital gains may not be an option, particularly during a time when it is very hard to predict what will happen to interest rates.
5. Negotiate for a good deal
Without being part of a chain, you are in a good position as a buy-to-let investor which gives you ammo to haggle over the price.
One negotiation tactic is to look at properties needing a bit of TLC – these properties can quickly boost your capital gains and can be negotiated on quite significantly! However, be prepared to put the time and investment in to renovating and increasing their value.
It pays to know your market and your seller! Areas where demand for property purchases are slower makes it easier to haggle as sellers usually want to keep a buyer once they find one. The seller’s situation may also help or hinder your negotiations, depending how much they need to get the best price for their house (upsizing or downsizing).
6. Know what you will do with your tenants
Once you have the property, you have to decide how you will manage it and how you will keep the property and tenants in the good books.
If you plan to use an agent, make sure you research a handful of them to compare rates and get the best service. It is crucial to keep a good relationship with your tenants so that they will look after your property for you.
You don’t always need to use agents and they will take about 10% of your annual income if you decide to. Most buy-to-let agents starting out will do the work themselves until they can afford to employ someone part-time to help out.
If you plan to manage the property yourself, do you have a reliable network of plumbers, electricians and other workers to call on? Do you have all of the documents you need such as tenancy agreements and deposit schemes?
Don’t cut costs when it comes to tenant checks, inventories and other risk-reducing measures. Your inventories are there to ensure that tenants can’t dispute valid reasons for deductions from their deposits.
7. Decorate for your target tenant
It is important to consider who your target tenant is before you go too far so you can make sure the property decor and furnishings are appropriate. If you are looking at students, you will probably need to supply furniture and assume that each bedroom will be single occupancy. Likewise, for a professional you will probably need to decorate the property nicely and provide a longer-time homely environment.
How to get help
There are two major organisations representing private landlord – the residential landlords association and the national landlords association – both offer information and services.