22-07-2008
Getting started in buy-to-let
by Gee Sahota
Property has always been a popular and reliable method to achieve healthy financial returns for securing your future. And even though 2008 speculations point to an uncertain period and possible downturn, the buy-to-let market should still remain strong. Rental demand remained incredibly strong last year, with the same predicted for 2008.
Buy-to-let literally means buying a property and letting it out in return for a sum of money. Historically, property has performed well as an investment opportunity. Every 10-15 years, property prices in the UK have doubled suggesting this trend is likely to continue.
So whether in a rising or falling market, there is the prospect for an investor to achieve gains. For instance, in a rising market, the investor will realise that first time home buyers would be priced out of their affordability range, indicating that rental demand will be high. With the market in decline, a landlord would look at long term prospects, realising that if they pick up a cheap bargain it should at some point rise in price based on past trends.
So what does it take to be a successful buy to let investor?
Buying-to-let needs to be considered as a long term investment, and the type of portfolio you have will depend on whether you are in it for future appreciation (that you will get a good profit in the long term) or passive income (that you can supplement your earned income and enjoy more freedom from the hours you would normally work). For some, buy-to-lets can generate a full time income, and the task of managing more than one or two properties can become a job in itself.
Although the outlook for house prices may change this year, generally speaking it has been harder to achieve higher rental yields while the market was at its peak. The high cost of mortgages has in many cases required some contribution from the landlord towards covering the mortgage. However, if you are in it for the long term and have picked out a prime location with good rental demand, you will benefit in the long run.
Some basics to help you get started:
Buy-to-let Mortgages
Firstly, you need to find a buy-to-let mortgage. Typically the rates are higher than for a residential mortgage and due to the credit crunch, Loan to Value rates may be lower than in previous years. This means you’ll probably need to put down a 20% deposit, as most lenders limit the loan amount or loan to value (LTV) at 80%.
Many lenders will offer mortgages based on the anticipated rental income, so you don’t need to be earning a large salary to jump on to the property wagon. Once you’re in motion, some lender schemes will allow you to release equity from one rental property to raise money for your next project.
Location, location, location
The key to maximising your rent potential is to research the area you wish to buy in, focusing on areas where rental demand is high and the property you purchase matches the type of tenant you are looking for. It’s important to keep a close eye on the market and liaise closely with the local letting agents to gauge how the market is performing in that area.
Landlords Insurance
One of the first things you should do after buying a property is obtain landlord insurance. There are specialist landlord policies available which cover almost every conceivable eventuality; from the building itself, the contents, emergency legal costs, loss of rent if tenant doesn’t pay and public and occupier liabilities. You can compare quotes with Simply Business and instantly buy the best policy for your needs.
Decor and contents
Once you have the keys to your property investment, you must make sure it is decorated to a good standard, using hard-wearing carpets, paint and furniture, and that you have considered the needs of your intended tenants, whether students, young professionals or a family.
Property Management
If you are considering managing the property yourself, run adverts online and in the local newspaper. Examine prospective tenants carefully and check references before contracts are given and signed. If taking a deposit from the tenant, landlords are legally obliged to place it in one of the three government-authorised tenancy deposit schemes which help resolve any potential disputes when the tenancy comes to an end.
When considering on-going maintenance of the property, it’s a good idea to create a separate pot of cash to deal with potential costs of repairs and necessary checks. This will help you keep track of your outgoings for tax purposes. A yearly maintenance requirement is that you have a Corgi registered gas or electricity engineer provide you a safety certificate on all gas and electricity appliances.
You could create an annual plan and budget which will help you organize maintenance works effectively, allowing you to inform tenants about any upcoming work.
By joining the Landlords Association you can get lots of advice on many issues including legislation at www.rla.org.uk.
If you don’t have the time to manage the property yourself, hire a letting agent. Letting agents offer different levels of service, from managing every aspect of the property to simply finding a tenant. It’s an option worth considering if your investment is far away from you or your job is quite demanding. They can ease the pressure created from letting and managing a property, taking on tasks such as drawing up the tenancy agreement, maintenance and dealing with the tenants for a fee of around 10 – 15% of the rental yield.
And finally, if you have taken care of all of the above, the key to gaining the maximum rent potential for your property is to look after your tenants. If they are happy they will respect your property, stick around for longer and may refer other potential tenants upon checking out.
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