Buy to let

Buy-to-let investment explained

Buy-to-let investment has grown substantially over the last 20 years as it has become the choice of many to secure their retirement income. There are many factors to take into consideration when looking at buy-to-let investments.

How to choose a location for your first buy-to-let property

The reason they say “location, location, location” 3 times is because it is the first (and possibly most important) factor to consider when looking to buy your next buy-to-let property investment. When narrowing down the perfect location, take the following points into consideration.

• Ask a minimum of three local estate agents for their expert opinion the local market and potential rental income of any property you are considering. Do they think there is a high or increasing demand for rental property? What type of tenant is that demand coming from? Young professionals, students, families?
• Don’t forget to ask about property prices. Whilst you should always base a Buy-to-let purchase decision on cash flow and rental yield, capital growth over time is an added bonus so a thorough understanding of local property prices is vital. Has the local area seen an increase in property prices overseas the last 3-5 years?
• Keep an eye on local news to gauge whether businesses are moving into the area and employment opportunities are on the increase. Is there any local housing development going on? Big developers will have researched locations very thoroughly, so it is likely there will be a good demand for rental property in there areas too.
• Approach local higher education facilities to gauge demand for student accommodation (perfect for HMOs, which will cover later)
• Visit the area in the daytime and at night to get an idea of sociable and unsociable activity. It is also worth visiting in rush hour times to check how busy the road is (and neighbouring roads) and to look at the on-road parking situation in an evening when most people are home from work.

When considering a buy-to-let investment, resist the temptation to go for expensive properties which “look good”. Consider low value properties with relatively high rental yields and work within local rental value ceilings. Don’t fall into the trap of viewing properties through the eyes of a homeowner… you are not looking to move into the property yourself, you are looking for a very different ‘tick list’ of criteria that will meet your tenants needs, not your own. Don’t invest locally just because you live there. You might be able to get a much better yield for a lower purchase price 30 miles down the road. Research is key wherever you live.

Tips on how to source and negotiate buy-to-let investments

There is an art to sourcing and negotiating buy-to-let investments. Strip emotion out of your decisions, look at the cold hard figures and do not veer from your budget. Every pound you save on the purchase price will reduce your finance costs and increase your rental yield.

• Building good relationships are key for future opportunities. Speak to local estate agents and dangle the carrot of repeat business for access to new properties for sale before they hit the open market.
• Monitor new local property developments and negotiate a significant discount on homes not selling – renting property is easier than an outright sale at full price.
• When negotiating a buy-to-let investment, always include a deadline to focus the mind of the seller
• Securing a provisional buy-to-let mortgage puts you in an extremely strong position when negotiating with a property seller
• When looking at property, calculate the fair value in your mind based on rental yield and do not overpay

Sourcing and negotiating the purchase of buy-to-let property can be tiresome work. It is essential that the figures stack up; you do not overstretch your finances and leave yourself some headroom in the event of unforeseen expenses.

How to find great tenants

The key to success in the buy-to-let market is securing long-term tenants with reliable cash flow. Each change of tenant will result in additional advertising costs and lost income thereby you have to be flexible.

• Ask for more than one reference from potential tenants and check their credit history and identity using online services
• Be proactive when searching for tenants by contacting those advertising for accommodation in local newspapers/websites
• If you take at least one month’s rent as a deposit, in advance, this will cover any potential property damage and test to see whether the tenant is serious
• Be creative when advertising your property to widen the potential pool of tenants – consider approach local businesses and education facilities
• Consider appointing a letting agency if you have insufficient time to be hands-on, they will also have a pool of potential tenants for your property

While the Internet has stripped away many personal relationships in business, it is vital that you meet any potential tenants. You will get a much better impression of the potential tenants with just a 10 minute face-to-face meeting.

How to calculate yield

Buy-to-let investment is all about the figures, if they don’t stack up then walk away from any potential investment. Rental yield is a vital element of these figures and there can be a large difference between gross and net rental yields.

• To calculate gross rental yield simply divide the annual rental income by the cost of the property and multiply by 100 to give the percentage
• When calculating net rental yield subtract ongoing costs and periods of vacancy from rental income, divide by the cost of the property and multiply by 100
• As the value of your property increases, consider increasing annual rent to maintain your rental yield
• You should place an annual inflationary increase in rent in the tenancy agreement – this maintains the real value of your rental income
• Monitor local rental yields, if property prices increase but rental yields hit the local ceiling then consider selling
• A minimum rental yield of 8% should cover all costs associated with a buy-to-let investment – however, review your expenses and rental yield each year

When comparing and contrasting rental yields, remember everything is relative. Interest rates, inflation and the cost of property finance will vary over time.

Your legal obligations as a landlord

In recent times we have seen an expansion of the legal obligation landlords have when renting to a tenant. As a consequence, landlords need to abide by the letter of the law to avoid possible prosecution and fines.

• All property should be safe and free from hazards – injuries caused as a consequence of negligence could result in personal injury claims
• Ensure that all gas and electrical equipment is installed by qualified personnel, well-maintained and checked annually
• An energy performance certificate is a legal requirement – approach an accredited assessor to get your certificate
• Tenant deposits should now be protected via government approved schemes
• It is the landlord’s legal obligation to ensure a prospective tenant is eligible to rent property in the UK
• Forward a copy of the government’s “How to Rent” checklist which covers tenant and landlord obligations and protection

The protection and obligations associated with tenants and landlords tend to change on a regular basis. Failure to follow procedures detailed in a modern day lease can result in legal action and significant complications.

Typical costs involved in a buy-to-let

In recent times the government has introduced various taxes and removed concessions for private landlords. While there are obvious costs associated with a buy-to-let investment, there are others you may not be aware of.

• The average letting agent fee is around 10% per annum, if you have the time and experience you could save this fee
• Consider creating a limited company as your buy-to-let portfolio grows – corporation tax starts at 19% while personal income tax can be as high as 45%
• Insurance premiums will depend upon the property and location – negotiate insurance rate discounts for multiple properties
• Future mortgage interest relief will be capped at basic rate tax levels – higher rate taxpayers should review their options
• An additional stamp duty charge of 3% (or Land and Building Transaction Tax in Scotland) is charged on all second homes and buy-to-let investments
• Save money on refurbishment and redecorating costs (average £392 a year) by doing as much work as possible yourself
• General repairs can set you back around £376
• Advertising costs can work out at up to £200 per annum with a regular turnover of tenants

There are many costs and obligations which you can incorporate into a lease agreement which places the onus on tenants. In some circumstances you may be able to bill the tenant separately for costs directly associated with their behaviour and actions.