Making the decision to become a buy-to-let investor is an exciting but nerve-wracking one. Do you know everything you need to?
Are you fully prepared for all the possibilities?
Here are Rentguard’s ten tips to help you get started…
1. Is property investment right for you?
If you are a buy-to-let novice, it is important to do your homework so that your decision to invest in property is an educated one.
Buy-to-let property can offer a good investment opportunity but it isn’t right for everyone. Prospective landlords should always carefully consider alternative investment vehicles which might suit their income, lifestyle, financial goals and attitude to risk better.
Read online forums and blogs to learn more about the day to day issues faced by landlords and if you know someone who is already a landlord, ask them about their experiences.
2. Do your sums
Before starting your investment property search in earnest, it is crucial to do the sums to ensure that you are fully aware of all of the financial implications of your purchase and understand exactly how much you can afford to pay for the property.
Make sure you include buying fees, a realistic cost for refurbishments and letting agent fees to your calculations. With a variable mortgage rate such as a tracker – make sure you have made provision for increased monthly payments if interest rates increase.
Buy-to-let mortgages work differently to straightforward owner-occupier ones. Lenders usually expect rent to cover 125% of the mortgage repayments and require a deposit of at least 25%. Buy-to-let mortgages can also carry large arrangement fees.
3. Shop around for the best mortgage
The internet makes researching mortgage rates very easy, websites such as Money Supermarket, Compare the Market and Money Facts have already done the hard work for you so take full advantage of the information already out there.
Speak to your existing bank or mortgage lender by all means but remember that they will only offer their own products which may not be the most competitive.
If you need help making a decision, speak to an independent mortgage adviser/broker who offers advice across the whole of the market. But remember that asking them to advise you does not mean you have an obligation to use them for your eventual purchase.
4. Location, location, location
Once you have decided to move forward with your investment purchase and have a budget in mind, the next step is to identify the right location. It is important to look at a range of factors when choosing a location and not just focus on the price of properties.
Factors to consider include the proximity to local transport links and schools / universities as well as the general desirability of the area for tenants which, depending on the type of tenant you want to attract, can mean being close to things such as local bars, restaurants, gyms, parks and other community amenities.
Letting agents will often be an invaluable source of information as they will understand where the demand among existing tenants is highest and the most sought after property types and sizes.
Check with the local council to see if there are any initiatives in the pipeline which could boost demand in a certain area or change the profile of local residents – for example Crossrail in London is predicted to tempt high-spending commuters to areas they have previously shunned.
Now you have narrowed down your location, you need to decide which type of tenant you want to attract. Students, families, young professionals and older tenants all have different priorities; so you need to ensure that every decision you make from now on reflects your target tenant.
5. Understand yields
The rental yield is how landlords compare different investments – average yields vary across the UK but typically anything above 5% is reasonable in the South East/London whereas in many other areas, yields of 8%+ are common.
To calculate your rental yield you first have to work out your annual NET rent. Net rent is the amount your tenants will pay you in a year minus the costs of running/maintaining the property such as service charges, insurance premiums, letting agent fees, ground rent, replacing fixtures and fittings and a realistic maintenance budget. It is also good practice to base this figure on 11 months rent to take into account a short void period every year.
Once you have a net rent, you simply divide this into the value of the property and multiply by 100.
So for example if net rent is £12,000 and the property cost £190,000, the yield is 12,000 / 190,000 = 0.063 x 100 = 6.3% yield.
The other way that landlords can generate income is by the increase in value of the property – known as capital growth. With a first investment it is important not to focus on capital growth and go for a property with a high potential yield to maximise your income.
6. Get value for money
When you are a buy-to-let investor, you are at least as attractive to a seller as a first-time buyer and therefore in a potentially strong negotiating position. Because you do not have to sell a property in order to buy this one, you are “chain-free” and there is less of a risk of the transaction falling through.
Educate yourself on prices in your local market. Websites such as Rightmove and Zoopla have access to the land registry data which records the SOLD price of all properties in the UK – these are often very different to asking prices – which will help you to establish whether the property represents good value for money.
It is also important in a price negotiation to know the position of the seller, how long the property has been on the market, the value of any other offers and how much it is likely to cost to make any necessary changes/renovations/updates to the property.
Knowing all of this will allow you to make an educated guess on how eager the owners are to sell and how much scope there is to negotiate on the price.
7. Join a landlord association
Membership is also a great way of keeping up to date with any changes to legislation and the current hot topics affecting landlords.
8. Think about how proactive you’re going to be
Once you have purchased your investment property, you need to decide whether you are going to rent and manage it yourself or employ the services of a letting agent to do some or all of it for you.
Letting agents offer a range of services from simply advertising the property and finding a tenant to completely managing the property on your behalf.
Get quotes from some local agents and decide how much or little you are prepared to take on personally. Remember that whilst the fees for complete management may seem expensive, the reality of being on call to your tenants 24/7 can be both time-consuming and stressful.
If you choose to go down the letting agent route, do some research before selecting the agent – sites such as Review Centre and All Agents include reviews from tenants and landlords and should give you a decent insight on what to expect.
9. Protect your investment
Standard home insurance will not cover the increased risks involved in renting a property so you need to purchase landlord insurance from a supplier such as Rentguard.
Rent Guarantee and Legal Expenses cover is also well worth considering as, for a minimal outlay, it will ensure that you are not left out of pocket if your tenant stops paying their rent for any reason.
Rent Guarantee insurance is usually only available to landlords who have had their prospective tenants fully referenced by a professional referencing supplier. Even if you decide against Rent Guarantee insurance, we would strongly recommend referencing all tenants to ensure they are who they say they are and have sufficient income to pay the rent.
10. Keep on top of your tax affairs
As a landlord, you’ll have to declare your income and costs – whether you make a profit or not – and keep all records, invoices, receipts and statements for up to six years.
You’ll find that the taxman is actually quite generous in allowing you to offset a large number of running costs including the interest payments on your mortgage and the arrangement fee on the mortgage too.
Where you make a loss on your buy-to-let property, you can carry forward and set it off against rental profits in future tax years.