Buy to Let

If you’ve decided that buying a property to let out would be a good investment then you’re right. When you look at the potential earnings compared to having your money in the bank, which currently offers extremely low interest rates, it’s a no-brainer. However, usually you can only do this if you can afford the large deposit normally associated with a buy-to-let mortgage unless, of course, you have the money to buy a property outright without a mortgage.

What to look for when buying a property to let is the most crucial step to being successful. In this article we will be going through some of the main points you need to consider when buying a suitable buy-to-let property (as they are referred to).

Before going any further make sure your finances are in order and that you can afford to buy a property. Work on the worst-case scenario in terms of income you’ll receive. If you need a mortgage to buy a property, make sure you are eligible to get one. Also don’t forget to do your research! Do you know all the risks involved as well as the obvious benefits? It would be worth having a look at our landlord guide too so you are aware of all the responsibilities you will have as the property owner. Below are some of the main points to consider.

Can you get a buy-to-let mortgage? Most buy-to-let mortgages require a large deposit and can involve substantial arrangement fees. As an example, Barclays Bank, who are offering a 2-year fixed at 2.47% interest mortgage requires a 40% deposit along with a £1,999 arrangement fee. Many lenders can have strict terms too; Halifax wants you to own another property and be aged between 25 and 75.”

Net Yield

Net Yield is the main thing to look for when buying a property to let out; the higher the net yield the greater the return on your investment. For example, if you’re buying a property for £200,000 and it brings in £10,000 in rent that’s a 5% gross yield. You then work out your net yield which is after all your fees and costs, which can include managing agent’s fees, maintenance costs, etc. have been deducted. So if costs are £2,000 per year that would provide a net income of £8,000 which would work out at a 4.00% net yield.

Going back to the point earlier, which was to work on the worst case scenario, we’d recommend working on having the property rented for 10 out of the 12 months. So points to remember, work on Net Yield based on 10 months’ rental income.

Location

Location plays a massive part if you’re going to succeed in letting out your property. This point also ties in perfectly with the subsequent point, the prospective tenant. You should look to buy a property in a location that will be attractive to prospective tenants, and by this we mean:

  • Close to the town centre
  • Easy access to train & bus stations
  • Handy for supermarkets
  • Conveniently located for schools / universities

These facilities are what most tenants would look to be conveniently located for. So, if you wanted to invest in a property near where you live, yet that area doesn’t really have many facilities, it may be worth considering looking further afield. Make sure the local crime rate is low and that the overall area is a nice place to live, you’ll need to use your common sense.

Prospective Tenant

When looking at buying a property you also need to look at who your potential tenants will be. If you buy your property in one of the cheapest areas around it may mean that you could have unreliable tenants. You need to think about who they are, what they do and what they need. If you’re buying a house near a school, then a family may be interested so you may need more than two bedrooms and a good-sized garden. If you’re looking at flats near universities in order to target students as tenants, you’ll need furnish it inexpensively and for it to be easy to clean. You can always tell what kind of people will be interested in renting your property by looking at the area and seeing who else rents property there. Have a chat with a local estate agent and ask what renting is like in the area, what kind of people are renting, and if there are many issues with tenants. It is important that you get good references for tenants and ask for a security deposit in advance so that you are protected against a default in rental payment or damage done to the property.

Maintenance

Maintenance is another great point and ties in with the previous one about tenants. You need to look at your property and establish what annual maintenance costs are likely to be. A property of substantial proportions and with a large garden is going to require more maintenance than an apartment. If you’re looking at a few different properties this needs to be considered as it may be worth deciding to go for a property that brings in a little less rent but where maintenance costs are low.

A new-build property is always a good choice to consider as not only is there normally no immediate maintenance required, but people love to rent a new house, so it could be let out quicker.

Price

Price again refers back to the first point of Net Yield and also the prospective tenant. If you’re buying a house at £140,000 you’re going to get a different kind of tenant than one renting a house that you’ve bought for £500,000, it’s a fact of life. In terms of referring to net yield, make sure that the yields are the same whatever the price of the property is. For example, if you buy a property for £250,000 which returns 5% and a property half the price returns a 6.5% yield, you may want to consider buying two cheaper properties.

Haggle! Unless you’re in a rush then make sure to haggle on the purchase price. We’ve known many entrepreneurs offer totally unrealistic offers and told us that they felt embarrassed making such low offers, yet like they said, the worst that can happen is a vendor just says “No”. When we refer to yield, this will be affected by the price you pay for a property, so negotiating hard to get as low a price as possible will increase your likely yield.

Time

How long will it take to rent out? This is a question that is going to be difficult to answer and if you talk to most estate agents they are unlikely to give you a straight answer. The following should be taken into consideration when looking to invest in a buy-to-let property that will let successfully and swiftly:

  • Do your research on location. The better the location, the greater the chance of finding a tenant
  • Check rental values in the area – see what other landlords are charging. Overcharge on rent and you may find a tenant, but it might take you four months to find one, which is four months’ rent lost, or 33% of that year’s income. Better to be competitive to ensure you get a tenant straight away.
  • Market the property to rent the moment you have exchanged contracts, don’t wait until you complete on the purchase. Set the date for tenants to move in as one week after you have bought the property to allow time to clean it and do any minor repairs. The owners of the property will allow your prospective tenants access if you ask politely. Remember, one week’s rent is 2% of your annual income.
  • See what property values in any area have done over the last five years. Those which have risen the most will confirm you are buying in a good area and are likely to continue to increase in value.
  • Check on availability of similar properties to rent. If there are 20 similar properties that are available to rent, you will struggle to find a tenant and also command a full rent. Establish, by talking to local letting agents, which sector of the rental market has a shortage of property to rent, and target those properties to buy.

Buy-to-let has been such a popular investment tool because it not only provides you with an immediate income, or return on your investment, through rent paid, but while the property market remains buoyant, you will also benefit from a rise in the value of the property. Recent government legislation is such that stamp duty has increased on any property you buy that is not your primary residence, and for higher rate tax payers, the tax relief on a buy-to-let mortgage has dropped to the base rate of 20%. However, you could always set up a company that makes renting out your property a business, and therefore you can take advantage of different and more beneficial tax legislation.