Property for profit: buy-to-let for beginners
The UK rental market is booming. Rightmove data shows that average rents across the UK rose by 13.6% between 2009 and 2012. In 2013, they rose again by 2%. And they’re predicted to rise by another 2% in 2014. With demand still far outstripping supply, buy-to-let is certainly an attractive investment. Like most investments, it requires careful thought and time to ensure that your risks are minimised and profits maximised.
This guide will cover
At a glance
Property in the UK can be a great investment. For some, it’s a full-time job. For others, it’s a side-earner to help save for retirement. And increasingly, many who were once ‘accidental landlords’ are now looking to expand their portfolio by buying a second property. Whatever bracket you fall into though, the core principles of buy-to-let are the same.
This is intended to be used as a guide only. Where sources were used to provide information – we have provided a link. Not that we’d ever give you false or unreliable information – that’s not our style.
Financing your purchase
First we turn to the books. There’s four main things you need to think about when it comes to financing a property.
The costs you’ll incur
- You’ll probably have to spend in the region of £1,500 to £2,500 in fees for lawyers and mortgage lenders when you purchase the property
- You’ll have to pay Stamp Duty if the property is worth over £125,000 (the tax rate varies from 1%-7% of the property’s value. For full rates, see the HMRC table)
- You should also set aside some funds for decorating the property, and generally getting it ready for tenants. (Naturally, the amount you’ll spend here depends on the size of the property and the amount of work which needs doing)
- You’ll also have to spend a couple of hundred pounds on fulfilling your legal obligations. For more on this, read our guide: What are my legal obligations as a landlord? In a nutshell though:
- You need to have a registered electrician and a Gas Safe registered engineer round to check that all the fixed installations and appliances are safe
- You will also have to provide tenants with an Energy Performance Certificate before they move into the property
- Oh, and if you use a traditional estate agent to help you let your property – you’ll also have to fork over a couple of grand or so for their services. Or…. you could use easyProperty and pick only the services you actually need, and pay less for them too. Your call….
Will I qualify for a buy-to-let mortgage?
Conditions differ from provider to provider. Generally speaking though, to be accepted:
- You’ll need the rent to cover 125% of the repayments
- You’d be needing to borrow no more than 60-75% of the property’s value
- And you’ll need to be able to stump up a deposit in the region of 25%
It’s a good idea to visit a specialist buy-to-let mortgage broker. It doesn’t tie you in to anything, but talking it through with them will give you some really good insights into what you can realistically afford.
Finding the right mortgage
- Unless you’re Roman Abramovich (he’s always reading our landlord guides), you may well need a mortgage. In particular, a buy-to-let mortgage. These are similar to standard owner-occupier mortgages (and can also come with a fixed rate or a tracker) but they have three main differences:
- Your provider will take forecasted rental income into account, as well as any other income. This will help determine how much they’re prepared to lend
- They tend to be more expensive, as they are a higher risk. This typically means you’ll have to put up a larger deposit too, and possibly pay higher arrangement fees as well
- They are usually lent on an interest-only basis i.e. your repayments only cover the interest on the loan (plus side: manageable repayments. Down side: you need to save up to pay off the loan if you want to end up owning it and reaping the benefits of its capital growth)
Many local authorities require private sector landlords to be registered. Check whether that’s the case where you are, and how much it will cost you.
How do I get the cheapest possible mortgage?
Like most things, shopping around is your best bet. The rate of interest, size of deposit, and arrangement fee that you’ll pay will vary between providers – so it’s definitely worth comparing.
Which? has some free calculation tools, and other useful information on buy-to-let mortgage providers.
At a glance though:
- A reasonable interest rate would be around 3.3% to 3.5%
- Typical deposits are around 25%
- Arrangement fees usually go from around £1,400 up to £2,000
While your provider’s valuation fees will have an upfront cost, you can usually negotiate bringing other fees (e.g. arrangement fees) into the loan.
Choosing the right property
To decide on the right property for you, you first need to look into three things. We’ll cover these in turn.
- What you want to get out of your investment
- What type of tenants will fit your desired outcome best
- And finally, where and what to buy
The rental yield vs. capital growth dilemma
Your first consideration is whether you want your investment to be paying you a high annual yield, or to have a high capital growth i.e. are you after a short-to-medium term or a long term investment?
A property’s capital growth is how much that property increases in value over the years.
Remember, when you eventually sell up, you’ll have pay capital gains tax on the profit i.e. the difference between what you bought it for and what you sold it for. However, to allow for inflation you first deduct what’s called an indexation allowance
Your (net) yield is the annual income you receive from letting your property divided by all the associated costs per year. Remember to factor in mortgage repayments, insurance, repairs, tax, agency fees etc.
When you calculate your yield, we recommend that you account for 1 to 2 months of ‘void periods’ a year (i.e. times where the property is without tenant).
Why can’t I find a property with high potential for both?
While many landlords do (and should) look for a property which offers a bit of both – the type of property that produces highest capital growth, will not produce the highest yield.
This is because properties with high capital growth potential will be more desirable homes in sought-after areas. This is what home-buyers look for in their ‘dream home’.
Naturally, these properties are therefore more expensive to buy in the first place, with higher mortgage repayments, insurance, and so on. All of these things will cut into your yield.
Typical yields for different tenant & property types Different tenant and property types within the rental market produce different levels of yield. Once you know what sort of rental yield to capital growth weighting you’re after, you can begin to think about which tenant and property type will best fit your plans. Once you know that, you will know what sort of property you’re after, and think about where to get it. The figures Take a look at the figures on rental yields for each tenant and property type below, based on research by the NLA (National Landlords Association)
As you can see, the general trend is that the higher the yield – the cheaper and less desirable the property (therefore, the less potential it has for high capital growth).
But, while a flat in central London might not produce the best yield, it may well be worth a pretty penny when it comes to selling up. Like we said, it’s a trade-off. Only you can decide where to strike the balance, and what risks and returns are right for you.
Remember: while your yield is important, it’s not the only thing to consider. Different tenant types behave quite differently in a number of ways.
For example: While students might have a high yield – the y have been known to be a little antisocial at times, which could end up causing you grief. And, they don’t tend to stay in the same property for more than one year – which means finding new tenants every year. On the other hand, there’s always a steady flow, so, it swings in roundabouts really.
Property type and location
Once you have decided on a group to target, you need to think about the type of property and location that will most appeal to that particular tenant type (and where you can afford to buy it).
- If you’re after students, you need to look in areas nearby Universities. In particular, areas which are well known to be ‘studenty’. (Most students are creatures of tradition, who like to live by other students)
- If you’re going for young white collar professionals, then you’re going to be looking at a property that is low-maintenance, in an area with particularly good transport links and nightlife
- Whereas, if you’re looking to let to families, then you can focus less on the nightlife, and worry more about how big the garden is and whether the nearby schools are in high demand
We can’t stress enough how important it is to get into the mind-set of your target market. Once you know what they want – you’re cooking on gas.
Should my buy-to-let property be near where I live?
There’s no easy answer to that question. While it can be helpful to be nearby (particularly if you’re new to letting) it does reduce your options for buying.
What we can tell you, is that over 50% of landlords live within 10 miles of their property.
Really, it just depends. Here are a few questions to ask yourself to help you decide:
- Firstly, could you afford to buy nearby?
- Are there properties near you that fit with your chosen capital growth vs. rental yield weighting?
- Do you plan on being a hands on landlord? (If you plan on managing most aspects of your let yourself, it helps to be nearby. Otherwise, it’s less important)
Do your market research
The very first question to ask yourself about buying in any area is whether it’s financially viable.
- Can you afford to buy the type of property you need in that area?
- What’s the competition and demand in the area like?
- Are the average rents in that area (on similar properties) high enough to produce an acceptable yield?
Once you’ve cleared the finances on paper, you should dig down into some detailed market research.
Let’s say you decided you want to let to students: you should start by drawing up a list of places with heavily student populated areas. Then cut any areas where property is out of your budget restrictions. Then with what you have left, find out which properties let the quickest and study them.
Were they mostly houses with several rooms, or smaller houses or flats?
Is there a particular street or area which let quicker than the rest? Is it obvious why?
Did the quickest letting properties share anything else in common? E.g. a large garden, or drives with off-street parking?
Talk to your targets! If you think hard enough, you’ll probably know someone – at least a loose connection – who falls into your target market. Find out what they think is most important in a rental property.
Picking up a bargain
There’s two main ways to pick up a bargain in the property game:
Right location. Right time
The best way to pick up a bargain, is to buy in an area which is currently inexpensive but will soon become more expensive. Easier said than done – we know!
A few things to look out for though:
- A currently inexpensive area which is bordering an expensive area: in London, just look what happened to Clapham, then Brixton, and now (watch this space) Croydon
- Large public spending in the area, like major redevelopment of public facilities
- New retail parks or other large employment stimulators which will increase demand in housing
Always have your property hat on. Keep your eyes open for any major developments in transport and infrastructure. It doesn’t matter if it’s London property or Michael Buble, wherever the supply is fixed and the demand increases – the prices go up.
Under the hammer
Whether its banks selling repossessed properties, or property entrepreneurs looking to offload an asset swiftly – those who want to sell quickly will often put properties up for auction.
It is true, that you can sometimes pick up a great deal. For example – according to MoneySavingExpert – it’s possible to pick up repossessed or distressed properties at up to 30% off their market price!
But remember, there’s no guarantee that buying under the hammer will be any cheaper than buying through an estate agent shop window. Sometimes it is. Sometimes it isn’t. It just depends who’s in the room with you, and what they’re willing to pay. This is just the nature of the beast.
Auctions are quick and simple affairs (hence the appeal to vendors) and they work like this:
- If you’ve put in the highest bid when the hammer comes down. It’s yours. As is the legal obligation to pay the agreed price
- You’ll have to pay 10% of the full cost before you leave and the remainder within 28 days. (So have all your funds available before you buy!)
Auctions are ‘buyer beware’ affairs (which is legal talk for ‘you bought it how you saw it’). So you should always take a look round the properties which interest you before you go. If you’re still interested after you’ve had a look, then get a Chartered Surveyor in to carry out a homebuyers’ report.
Auctions are free to attend, whether you’re serious about buying or not. So it’s a good idea to get your bearings before you go cash in hand.
If you want to look into auctions a bit more, you should give Auction House a visit. You can ask to be put on their mailing list to find out when auctions in your area are coming up. Best of luck!
How we can help
easyProperty is here to help landlords save money on letting properties, making your buy to let investment more profitable. We can find tenants, manage the property and deal with all the paperwork efficiently, saving you thousands compared with the charges you’d rack up with a traditional high street agent.