Wed 22 Jun 2016
The 7 Golden Rules of Buy to Let Investment
I think we can all safely say that Landlords and Buy to Let regulation are two topics hot on the Governments to-do list. When I say to-do list, I mean “let’s make it a little harder”. With increased tax restrictions, stamp duty changes and a catalogue of legislative changes that seems to change almost daily, now more than ever landlords need to be rigorous with their investment choices. The Chancellor has restricted mortgage interest tax relief and made it increasingly difficult to offset maintenance repairs against tax. Stamp duty also increased by 3% from April 2016, which in effect saw prices artificially rise as Investors across the land rushed to complete on their purchase before the deadline.
It's not all doom and gloom!
Well that’s the bad news out the way. The good news is that Buy to Let Investment still represents a sound financial decision. With good advice, planning and management, good rental yields and capital appreciation can still be found in what is still a growing and buoyant market. Make no mistake, the Private Rental Sector (PRS) is growing. Estimates suggest that the total assets of the PRS now totals 1.29 Trillion. The growing demand for rental property has seen a 28.3% increase in the number of homes rented, equivalent to 5.4 million. This very much goes against the historical grain in the UK where home ownership has always been much higher than other parts of Europe. According to analysis published by The Association of Residential Letting Agents that number is set to rise to 7.2 million by 2025.
So why is the PRS increasing at such a rate?
1)Changing attitudes towards home ownership.
In a climate where a generation have found it increasingly difficult to purchase a property, the indicator of success that was aligned to owning a property has declined. People are chasing careers and enjoy the flexibility that renting can afford.
2)Healthy future performance indicators
On average yields were up 3.8% last year with 5% seen in the competitive and sought after locations. This trend looks set to continue with RICS, forecasting a 25% increase in rental costs which will certainly outstrip house price growth in nearly all market conditions.
3)New emerging sub sectors along with more traditional Buy to Let markets.
New exciting Buy to Let markets are emerging as affluent tenants demand high quality accommodation. This combined with the average person’s 12 years in rental accommodation provides both a consistent and transient market growth.
Making the most from your Investment….
Sowerbys top tips……
1)Research the market
What do you really know about the market you plan to invest your hard earned cash into? What's planned for the future development? What are the demographics for the area? Could your money perform better elsewhere? These are the questions you should be asking a local expert. Property and in particular which property you buy are covered by two things; your heart and your head. Frankly that's how it should be and you most certainly should buy something you will enjoy. However as an investment choice we must buy with our head as well as our hearts. With rental yields looking very healthy it's very easy to get caught up, when actually capital growth may be vital to your future plans. Researching the market carefully should point you in the right direction. The more research you do and the more people you talk to the better.
2)Make sure the numbers add up!
There is no point rushing into things until you know what you’re working with. Sit down and work out the amount you’re looking to spend and get a good idea of the rental return you can expect to see. Lenders will typically look for the rent to cover 125% of the mortgage to allow for void periods. It's a really good idea to speak with a mortgage consultant or financial advisor and iron out exactly what you have to play with. You need to be clinical here, once you know the numbers you can really get going. Don't forget to allow for expenses, void periods and other variables associated with letting your property.
3)Shop around to ensure you get the best mortgage rates
While we are on the subject of money, make sure that you shop around. Rates vary drastically in some cases and much like you shop around to get the best deal on your holiday, buy to let lenders should be rigorously compared.
4)Make sure you know your target tenant
Right, we are back to using our head rather than our heart again! This is all about thinking like your target tenant. If you know your local area has the best school around then obviously it makes sense to target families. What do families need? typically three bedrooms and enough space to settle down. Chances are that they don't really want to move every year and that they will have their own furniture, so unfurnished is usually best. Young professionals will usually want to be near the centre of town and might be willing sacrifice space for a quality contemporary 1 bed. They are more likely to pay a premium for the privilege, but this must be weighed against the fact they are much more likely to move on after 1 to 2 years.
5)Use a local and professional letting agent
Although there isn't anything stopping you going it alone, unless you're vastly experienced it's usually best you don't. Residential lettings are a complicated and unpredictable world and the legislative issues surrounding it are changing faster than ever. However, landlords have literally thousands of choices when picking a Letting agent. At my last check I think it was around 28,000 in the UK and that number is growing daily. Lettings are relatively unregulated and people are pretty much free to do whatever they like. It's absolutely vital that you do your homework on the agent. Make sure that they know the local area and the localised market conditions. Make sure they are associated to one of the redress schemes such as the Property Ombudsman and regulatory bodies such as ARLA. Another really worthwhile thing to do is to look at reviews from previous clients. The Internet is a powerful tool and you should be able to learn a lot. Don't forget to have a look at their other listings on Rightmove. Letting agents and Estate agents are marketeers and sometimes I look at the quality of photography and descriptions and think that most agents have forgotten that key part of their business!
6)Don't forget to haggle
In much the same way as a first time buyer, an investment buyer isn't reliant on selling a property. This means that you are much less of a risk as you don't need to form a purchase chain. This should put you in a good position to negotiate a reduction in the asking price. Make sure you keep an eye on the market and choose the right time to offer on properties that may have been a bit slow on the market. Also keep a good eye on which properties have had a recent price reduction.
7)Purchase a property with happy tenants in place
This one really is as simple as it sounds. Every now and then a landlord will want to sell their property and they really don't want to displace their long standing tenants. This is a win-win situation. You can purchase your investment with tenants in place, meaning that you don't have to fork out on any agent fees or redecorating costs and all those issues that nearly always crop up at the start of a tenancy will have been well and truly ironed out. Simply collect the keys and off you go!
If you follow the above golden rules, buy to let investment continues to be a very healthy route. If you would like some more open, honest and reliable advice with no obligation please get in touch on 01362 693560 or email firstname.lastname@example.org
If you have decided to invest, we offer a completely free buy to let consultation service by appointment. This consultation is bespoke to you and gives you a sound platform as you begin your journey to becoming a landlord.
We hope to hear from you soon.
All the very best
"Thank you Emma and everyone else involved at Sowerbys for your help to achieve the sale. I am sorry it was such a long drawn out affair."