Ever wondered how some property investors just seem to shrug at the raft of financial and legal changes affecting the buy-to-let market. If you’re asking what they know, the answer is these ten tried and tested property investment rules to help stay balanced amid times of change.
Focus on buying in up-and-coming areas with great letting potential and lower property sale prices. Often, neglected areas that are ripe for regeneration suddenly become popular and if that happens, not only does the property’s value rise but so too does the demand from tenants. Just look at the success story of the regeneration of Battersea Power Station and the Nine Elms area. Things to consider are: good transport links for professionals, good schools for families, good social and entertainment links those without families, any planned regeneration investment, good universities or colleges nearby and even if the area has a burgeoning arts or music scene. Skilled property investors have become adept at spotting this kind of potential in unloved areas and investing before others do.
In doing the research for unloved areas with potential, it is important to bear in mind the types of tenants you are after. Areas with a world-renowned university or college nearby will mean an endless demand from students; a quieter area with larger properties and good schools will attract families; while an area with a good cafe and arts culture will attract trend-seeking young professionals. The area dictates the tenants, but you’ll first have to decide what kind of tenants you want to specialise in and this will be dictated by your financial plan.
Leave nothing to chance, work out the costs, ALL the costs. Calculate the cost of specialist buy-to-let mortgage options: fixed-term, interest-only and variable rate – what does the interest on each work out to be? What are the arrangement costs? If the interest rate rises, how will that affect the costs? Does being a limited company bring any tax benefits? (remember by 2020, your mortgage is only offset by 20% on your tax bill). Don’t forget to factor in maintenance charges, management costs and the possibility of void periods. Work out what rent you will need to charge to cover all this and make a profit, and then work out if this amount is feasible in light of the tenants you are hoping to specialise in. The successful investors are the ones that have pored over these calculations in detail and been honest with themselves.
Use an independant, specialist buy-to-let mortgage broker. Many new options have recently come to market (especially due to tax changes) and unless you know what you are doing it’s difficult to know what will be best, long term, for your portfolio. A typical expectation is that the rent will cover 125% to 150% of the mortgage repayments and that you have at least a 25% deposit – your detailed financial plan will have covered this though. Be warned that mortgages that are the best deals will also likely have a large arrangement fee – at least the costs are upfront.
As an investor you probably aren’t part of a chain so you are a better bet for someone selling a property – no waiting for others in the chain to move, no unnecessary hold-ups or sales falling through. This puts you in a better negotiating position and the savvy investors know it. Getting the property for the lowest amount possible is the cornerstone of a good investment.
Property price rises are likely to outmatch monetary investments which is why the buy-to-let market remains popular – that and the potential for a good income until the property’s value surpasses its mortgage debt. Those with a successful portfolio know this and know how to add value to the property, especially if it was unloved to begin with. A good rule of thumb is the final value should be the purchase price, plus the cost of the refurbishment, plus 20%.
That said, the rent should be the key return for buy-to-let. Previously interest-only mortgages could be offset, or even covered completely in the tax bill but by 2020 the mortage interest tax relief will have been phased out and a 20% tax credit system introduced. If rental returns exceed mortgage repayments then you will be in profit. Simples.
Once you’ve decided on the type of tenant that best fits your investment needs, you’ll need to tailor the property to theirs. For example, young professionals will want good storage and on-trend decor whereas students will want somewhere that is clean and comfortable. It’s a good idea to allow the tenant some degree of personalisation too – letting them decorate (within reason), put up their own pictures and moving out any furniture that they no longer need because they have bought their own, are all nice touches that mean they are likely to stay for longer.
Happy tenants are key. Not only will they stay for longer – so fewer void periods and doing reference checks on new tenants – but they will also look after your property as if it were their own. To keep a good tenant happy make sure the property is well maintained and any issues are dealt with quickly, make sure all tenancy terms are clear and that you are polite and friendly. Even better, enlist the help of a good, accredited agent who will do this on your behalf.
Successful property investors use trusted, established lettings agents, because they don’t want to spend all their time dealing with any issues or problems. Providing clear, legally up-to-date paperwork; finding good tenants, carrying out detailed reference checks, ensuring the health and safety regulations are adhered to and having a list of reliable plumbers, electricians, roofers etc are all in a day’s work for good agents. For a management fee, an agent can keep everything ticking over nicely; a good agent can keep tenants happy and landlords stress free.
Investors that weather the vagaries of the buy-to-let regulation changes and market shifts with ease are the ones that have laid firm foundations. They have made sure that profits are reinvested in the mortgage so they own the capital value of their properties – especially if they are interest-only. They have researched and planned well. It’s time to relook at your portfolio and make sure it follows these ten investment rules so wobbles in the market won’t worry you either.
If you would like further property lettings advice, then please contact a member of the team, who will be happy to help.
View all posts by Marc von Grundherr