IS BUY TO LET INVESTMENT WORTHWHILE?
In a guest post, this article considers whether buy to let is a worthwhile investment project.
- Is buy to let a worthwhile project
- Risks and returns to expect
- Where to start with buy to let
Is buy to let investment a worthwhile project?
I often come across people who have inherited some money and are considering how to invest it. One option is to buy a property to let.
Can I get a reasonable return?
You can get a reasonable return with buy to let if you put time and effort into research. Finding the right property in the right location is essential. Set your objectives early and know all of the implications of buying and renting a property. It’s important to understand that buying a property is generally not a quick money-making exercise and any real return can take a number of years (ideally 10+ years). Returns will come by two means: the rental yield and capital appreciation.
What are the risks of buy to let investment?
There are risks with buy to let investment, and these need to be carefully considered. As with any investment you need to go into this with your eyes open.
Things to be considered:
- Void periods
- Bad tenants
- Rent arrears
- Property damage
- Interest rates going up (if you have a mortgage)
These are a few of the risks, but not all. Any investment comes with a risk but if you take the right steps you can greatly reduce these risks and make buying a property to let work. Letting a property is a specialised field and that there is a raft of legislation that needs to be taken into consideration, if you haven’t done it before you would be advised to employ a letting agent to help you.
Where do you start with buy to let?
Your first step would be to work out what you can afford. Are you going to buy the property outright or use a buy to let mortgage? If you are going to use a buy to let mortgage you will need professional advice from a financial adviser who can research the buy to let mortgage market and find you a suitable deal. If you can afford it, advice would always be to look at multiple properties and use buy to let finance. This is generally the most tax efficient way to invest and also allows you to spread the risk across multiple properties. In my experience most investors look to long-term capital appreciation. By having multiple properties this could increase the return.
Example of capital appreciation
The average house price in Essex in April 2000 was £94,105. In April 2015 the average price was £217,174. That’s a gain of £123,069 in 15 years (Figures supplied by land registry). Generally, a buy to let mortgage will require at least a 25% deposit as a minimum and the rental will need to cover 125% of the monthly mortgage payment. Mortgage criteria vary so it is wise to take professional advice. It is worth considering how long you want to tie your money up for and what your exit strategy might be. Taking the right steps to start with will ensure your investment is as tax-efficient as possible. You need to consider your immediate income tax liability along with the long-term tax implications of capital gains tax and inheritance tax. Taking professional advice at this stage would be a good idea.
The key to making money out of buy to let is buying the right property in the first place. If you get this right, you immediately start on the right path. Once you understand how much money you can afford you need to go and research your chosen geographical areas to see what tenant demand is like. I would advise contacting local letting agents and finding out what properties are in demand. Generally they will be more than happy to help out in the hope that you might use their services in the future. Once you have a clear idea of what is in demand you can commence the search for the right property. Websites like Rightmove.co.uk are a great starting point – just punch in your criteria and get scrolling through the pages.
Tip – if you are prepared to do work to a property (i.e. buy a property that needs doing up), then you can expect much greater returns if the property can be purchased at below market value (providing you take into account what needs spending on the property). Please note these properties can be hard to come by at the right price and be careful not to over commit to too much work if this is beyond your skills. A renovation project is not for everyone, but regardless of that you will need to look at what you can best buy for your money against what the rental amount will be (otherwise know as yield) remembering to take into account what is in demand by tenants. Buying a property to let should not be a emotional decision; it is a business so do not look at properties with your own tastes in mind. You simply want to know how much you can buy it for, is there demand for it, how much rent will you get and will it be sellable in the future.
What is a rental yield?
Rental yield is the amount of money a landlord receives in rent over one year, shown as a percentage of the amount of money invested in the property. The higher the rental yield the better. The most common formula for calculating yield is as follows : Yield = monthly rental x 12/property investment x 100 (Please note this doesn’t take into account any expenses, so in order to get a true percentage return on investment you would need to take these into account). I would suggest shortlisting at least five potential properties that suit your investment criteria (based on your research).
Other costs of buy to let investment
It would also be good preparation to get a rough idea for other costs associated with letting a property. These would include, tax, stamp duty, insurances, safety checking and letting agents costs. Also remember if you buy a leasehold property there is likely to be a service charge that you will need to take into account in your figures. You do not need to worry about utility costs, as the tenants will pay these (unless if there is a void period, which is when you cannot find a tenant). You will need to research your insurance requirements. Building and contents insurance for the purpose of letting a property is a specialised insurance. As normal, shopping around is essential. It is also important to understand what it is to be a landlord before you buy a property. Research what is required prior to letting a property, for example Gas and electrical safety, smoke detectors, CO detectors, furnishings, EPCs and a Legionella assessments. As a landlord you will be responsible for maintaining your property on an ongoing basis so you need to budget for this. Once you have done this you are ready for the next stage.
Making an offer
Your target is to try and secure a property in the region of 10% below market value (remembering that market value in most cases is not the asking price!). I have suggested shortlisting a number of properties to ensure you can get best value for your money. The chances are one of your shortlisted properties will accept a lower offer. Most sellers do not accept the first offer (unless its asking price), but going in too low can also affect your chances if you alienate the seller. So your offer needs to be reasonable based on your market research. If you are offering through an estate agent, remember that they work for the seller and are tasked with getting the best price possible. Once your offer is accepted you will need a solicitor to act for you in the purchase of the property. If you are going to use a buy to let mortgage then now would be the time you get your application under way.
Using an agent
If your purchase is progressing nicely, now is the time to make some key decisions. Are you going to let and manage the property yourself or use a letting agent? My recommendation is that if you have never dealt with letting before, to use a professional. There is so much legislation now that one mistake could cost you dearly. A good agent will more than pay for themselves and of course their costs are tax deductible. Just to re-enforce this, if you choose the wrong tenant and they fall into arrears you cannot evict them until they are two months in arrears. Once this happens you have to get a court order that could cost you more than £800 in legal costs, and it might take you another three months to get to court. If you decide to use an agent, then how do you select a good one? Not all agents are the same. Your decision should not be based on fee alone Remember cheap is not always value for money. My advice is to research the local area look for agents with a long history and professional accreditations like The Property Ombudsman, ARLA, NALS or UKALA. Find out what guarantees the agent can offer you should things go wrong, and remember always read the small print so you are fully aware of their terms.
Once you have selected your agent now all you need to do is wait for your purchase to complete. Once you have your keys you are ready to go. If you instruct your agent early enough they should be able to set up viewings in advance to get your property let quickly.
About the author
This article was written by Dean Phillips, Managing Director at More Estate Agents. If you require any help in finding your next buy to let property, please do not hesitate to contact him.
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Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.