Searching for a buy to let property investment generally creates a balance of excitement and trepidation initially, followed by an overwhelming avalanche of choice.
You start with great belief in bricks and mortar, you’ve read your Rich Dad, Poor Dad book and have decided on passive income, compared to investment rates and dreamed of a property empire like Fred Trumps, but would be more than happy with a couple of income generators allowing you to retire.
This feeling of determination can quickly be eradicated with the sheer volume of choice, should you get a buy-to-let investment near your home, or in a better performing area, how long will that perform better? 1 or 2 bed property investment or should we look at a house for a buy-to-let – we live in a house so maybe this is bets.
Then you look at freeholds and leaseholds, start receiving a flurry of emails from annoying property brokers who have heard that you want to pay a maximum of £150,000 in the south, and try and tell you to buy a 2-bed flat in Bradford as this will give them the most commission.
So, who can you trust, and what should you look for in a buy-to-let UK property investment? It should be simple and means going back to basics.
1. Market research on buy-to-let investments
It really starts with you and what returns you are getting at the moment. You have say £50,000 to invest in the next property, but what is that achieving now, and what could it achieve in another safe investment type?
While at time of writing interest rates are down in the UK there may be another viable option you can look at, and as a worst case can be used as a benchmark of what you need/ want your property investment to achieve.
Investing in buy to let will commit your funds and should be looked at over a 5 year period as an ideal minimum of time. If you will be relying on a rental income to live from understanding your investment is key. To live off your rent you may want to look at a higher yielding, lower cost investment property in a smaller town or outskirts of a city which is already completed and has proof of rental income over the last few years.
Most investors are looking to grow a portfolio over the next 5 or so years so that they can retire. But what number do you need per month and how can this be achieved. Have this written down to understand how many properties you would require achieving this.
2. Do the maths
Property investment in the UK is not just about the purchase price of the apartment itself. Think about a buy-to-let mortgage for example. You are likely to require a minimum of 25% of your own cash, with the remaining the bank lending, if your new to this, think of 30% plus to start of with.
In addition, what will your buy-to-let mortgage rate be when you come to get the property? If you are a foreign investor expect this to be higher at 3% or 3.5% with a UK national potentially at 2%.
Have a look at mortgage calculators or speak to a trusted broker and get to grips with what this mortgage rate will be and add it into your calculations. If a 1% difference makes the investment unviable decide whether the property you are thinking of makes sense.
At Baron & Cabot we would always suggest having a quick calculator made before you even look at a property. Do it yourself or with help of an advisor with a basic how much you can afford, what your mortgage lending will give you, the ball park mortgage rate will be. Take out expected stamp duty from your cash available and we have a position on what type of property is achievable.
With this buy-to-let property calculation you are now in a position to do the maths on income. Have a look at this article on service charges, or this one on ground rent, but assume an average 1 bed of 450 square foot with £2 service charge per annum and £250 per annum ground rent, 8% management fees and you can estimate what rental return you would need.
3. Choose a promising area to invest
While it is always emotionally easier to part with money on an investment which is in an established area this will not always delver the returns you are looking for.
Consider core city centre investments and their yields. While investing in London property may deliver 4% gross (rental before costs above), a Manchester or Birmingham property investment may deliver 5% or 6% gross rental yield. Now look at the outer growth areas of these cities and you may see a higher yield and growth and a lower cost of entry.
When we look at areas don’t invest because its cheap, invest because it delivers value. Key things you want to see are future changes to that area. Is there significant government or independent investment happening over the next 5 years? Is there a new tram line or train line going there, or a new road which will increase values?
Buying an investment property in the UK means that it will on occasion not be a place where you would live now but should be one you may do in 5 years’ time. If you invest in a property where the growth has already happened it is likely to have lower returns.
Conversely look at area’s not to invest in, where there have been long periods of under investment. While some area’s in the North East deliver high yields and cheap purchase prices, some are seeing growth slower than inflation meaning you may not get the returns people have seen in other places.
Promising areas should not only have an air tight logical case for growth but also have a demographic which shows it can support rental and capital growth.
Consider the comparison of Reading and Luton. Both are commuting distance to London and both had significant investment in 2014-2017 based on the improved rail links. Reading saw huge capital growth and rental growth as it was not only commuting distance, its young population was wealthy enough from the jobs in the city to support higher growth than those in Luton.
4. Use leverage on a buy-to-let mortgage
Often leveraging is the best method of getting the most out of your investment. Think of it this way; if you buy an investment property using 100% of your cash and the property grows 25% in value over 5 years you will see a 25% growth in your cash investment. If however you use 30% of your cash and the remaining mortgage the same property will see you return 83% on your cash invested.
While you need to understand the risks of having a mortgage if you can afford a month without rent leveraging should be considered in building a portfolio. Most will use an interest only mortgage and use the flexibility this delivers. Buying correctly and for a long term will manage any risks associated with a short-term drop in property prices during a cycle.
5. Don’t be greedy in property investment
Greed in a buy-to-let investment can often be the downfall of an investor. Look at long term minimum 5-year return on your investments and properties which are safe investments. Whether it is off plan or completed there is a small number of properties advertised which show returns which the more mature investor will understand are not deliverable.
Do not look for guaranteed rents, rental yields over 7% or buy backs if you are new to investment. While they look appealing, they will often not be able to deliver on your expectations and can cause long term stress.
Look for 5, 7 and 10 years of an investment and the yield and growth that should deliver. Look for property investments which are solid, from a firm who has done the research and can share all of this information with you. If you get 7% growth on your investment per annum through a mix of property appreciation and rental income you are beating most other investment types. We often have investors suggesting a minimum of 10% return on rent which we have to explain will generally come at very high-risk properties.
No one will sell a property at so much below market value that you can generate a really high yield, without it meaning that they want to get rid of the property for one reason or another. This is generally that it is high risk, or the seller has had financial problems.
6. Consider how hand on you want to be as an investor.
When looking at a property to rent out a would-be property investor should consider how hands on they want to be with the property investment.
Owning a freehold semi-detached property somewhere may initially be your thought process however this will only benefit you if you want to be responsible for maintenance and upkeep.
You may want to use a management company which will likely cost between 6% and 10% of your rental income. You can do this yourself, however may come at a risk of having the property untenanted or having poor tenants.
Generally, investors want a hands-off property investment, working off the principles of passive income streams. While this could carve away at potential profits, in the long term it can often mean an easier investment where you will not have to live near to the property. In many cases having professionals dealing with your property will actually leave you in a better financial position with less void periods in your rental cycles.
In addition, having the property managed with fair and reasonable service charges should mean that there are no nasty surprises with bills and the common areas are kept to a high standard. A leasehold apartment is most suitable to this type of hands-off investment where the focus is based on best areas to invest regardless of distance to your own home, and long term quality tenants.
7. Give yourself a financial buffer
Property investments have been a wonderful lucrative market for our own clients and thousands of others both in the UK and abroad. It can come with pitfalls for an investor who is flying to close to the wind with an investment.
As with any investment, whether it is a car or a handbag or your own home it is important to invest what you can afford and have a mortgage which you could afford if there was a vacant month or so in the tenancy.
While the average tenant will stay for 18months or so, you should be comfortable that you are not invested so close that this could cause financial hardship.
Be sensible when investing and look at the investment as a 5 year minimum investment to really get the value from a property investment. There really is nothing like owning property, from having a solid investment that you can touch, to having tenants pay off your rent and using each property to eventually fund more purchases. That said to do so you must be sensible as a property landlord to be able to see this growth on your investment.
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