Profiting From Buy to Let - Finding the Right Property
Profiting From Buy to Let - Finding the Right Property
When it comes to profiting from rental property, the most important thing is to buy the RIGHT property at the RIGHT price.
However strong the local rental demand and general availability of good quality tenants, it will all be to little use if your investment property is poorly located or unattractive and/or of the wrong type for the local market. So time spent surfing the net, building relationships with good local agents and actually viewing properties yourself, will be time well spent!
For years, property investors have been concentrating on potential capital growth and being prepared to accept fairly unimpressive net yields of 3% or 4%. Obviously in a property market where there is little inflation, this will no longer do and investors must look at what sort of yield a property might realise, while still of course regarding the property as a long term capital investment.
The problem will be that you will need fairly serious amounts of capital to capitalise on this developing situation. There will still be mortgages available, but only to people who are regarded as a reasonably good credit risk. The days of the 90% and 100% mortgages are generally over for the foreseeable future, and in the end that will not be a bad thing.
When the current boom began back in the 'gold rush days of the late nineties it was relatively easy to profit from buy to let. Landlords with the right properties could achieve as much as 15% yield along with phenomenal capital growth and even a 'so-so' property could be profitable.
That is no longer the case. With the huge increase in property prices and the increasing competition between landlords for tenants, it's become hard to get more than a 5.5% Net Yield, so more than ever it's very important to buy the 'right' property.
I suppose these do's and don'ts are not really hard and fast 'rules', and there are always exceptions, but you would do well to follow these guidelines where practical in order to profit from your properties.
Don't buy an investment property just because you personally would like to live in it. Always look at it from potential tenants' points of view.
Also, try to avoid spending too much refurbishing the property. You may fall in love with a fantastic £20,000.00 kitchen and a £10,000.00 bathroom with taps costing over £200.00 each, but unless yours is an extremely up-market apartment, you will be wasting your money, as there tends to be a 'ceiling' rent for a given size flat or house in any given location.
Where and who are your potential tenants? Are there businesses and organisations locally with an ever changing workforce, such as hospitals, universities, even TV studios where people are usually employed on short-term contracts?
Flats and house conveniently located for these kind of places should usually let easily.
The old adage, 'Location, Location, Location' is paramount when it comes to suitable buy-to-let property. It is always helpful for the property to be no more than 15 minutes walk from a station if in a city like London, or at least close to other travel links such as motorways, bus routes etc. Also, look for handy shopping facilities, bars and restaurants, as these are always attractive to tenants.
If you're buying a leasehold property, always remember to factor in ALL the costs.
Here is a useful checklist:
If you are buying a flat, pay particular attention to the common parts, it's no use ending up with your very own 'palace' set in a 'slum'! This can often be an issue in converted property, where there can sometimes be no formal or at best an ill-defined responsibility for the maintenance and cleaning of common parts such as hallways, drives and gardens.
So what is the 'right' property? Although it may be blindingly obvious, first of all, the right property is one you pay the right price for! Successful buying to let is all about return on investment, whether that be capital appreciation over the long term or rental return. If you pay too much, no one is going to pay you more rent to compensate you.
This does not mean that you should always opt for the cheapest property. I once saw a two bedroomed terraced property in Manchester on the market for about £12000.00. I mentioned it to someone who knows that city very well and she asked me the name of the street. When I told her, she said the house was overpriced!
As a general rule, it's better to look for good buy-to-let property in urban or suburban areas, rather than rural ones, simply because there are likely to be far more people looking for rented accommodation in urban and suburban areas. The countryside and the shires are more attractive for people nesting, older people who are settling down or retiring - these folk usually choose to purchase rather than rent.
For example, someone I know used to rent a two bed-roomed property that was worth around £270,000.00 in a semi-rural location and was paying around £800.00 per month in rent. Many properties at that time that were costing less than this within inner London were returning over £1200.00 per month in rent.
Ex-local authority property, originally purchased under the right to buy scheme, can be a good investment, but you must do your homework, and a lot of legwork. A few council estates are run down, poorly managed and have significant problems of anti-social behaviour, but most are OK and have no more problems than other private inner city areas.
Check out the property, walk around the estate a bit. Is there much graffiti? Is the place generally litter-free? How does it feel? If it's a high rise block, what are the lifts like?
In general it's best to be a bit flexible. Offer the property furnished or part furnished and be prepared to accommodate the wishes of a tenant you feel is worth it.
Be careful when buying brand new. Bright shiny city centre apartments are so seductive, with their designer kitchens and bathrooms, but they are not always good value for money. Very often the developer will have set a price that is not really a true market price.
City centre developments are also favourite of 'Property Clubs', who profess to negotiate bulk deals with developers and pass on a so-called discount to their members. No doubt there are bargains to be had occasionally by buying in this way but I personally would avoid them like the plague!
If you must buy new, it's sometimes best to buy the last flat in the block as the developer wants to move on to the next project and may be open to lower offers.
As I have already said, for the best rental yield and minimum void periods it's usually best to purchase in urban areas, cities, places with universities, hospitals, good employment opportunities etc.
But should you consider buying a property a long way away, in another part of the UK. It is certainly true that some cities and areas of the UK are better than others when it comes to renting out property.
For various historical, cultural and employment security reasons, apart from London, many northern and midlands cities offer good opportunities for rental investment, with very healthy rental yields.
If you already live in or near a good investment area it is in my opinion, best to research your local area first because you know it best. Also, you can easily go back several times to check that you are making the right decision, whereas this is often very difficult if you're faced with a long journey to go back and forth to make these necessary checks. Again, investing locally was the policy followed by Judith and Fergus Wilson when building their buy to let empire around Ashford in Kent.
Most people tend to buy property in the traditional way. They see a suitable property put in an offer subject to contract (in England & Wales), once accepted they proceed to arrange a mortgage and employ a solicitor, surveyor etc to deal with conveyancing and surveys that may be required. This process can take up to three months and purchasing leasehold property is a particularly drawn-out process.
But there is a quicker way. Buy at auction. You can usually buy property at auction for less than in the traditional way, but there are some very important limitations to bear in mind. Your bid is NOT 'subject to contract', as the hammer falls you have to pay the 10% deposit plus any auctioneer's fees, and within 28 days you must complete the purchase.
So, auctions are really for people with available funds, and you are also strongly advised to have checked through the legal pack and carried out a survey before bidding - so you really need to know what you're doing. In times of high property demand, auctions are usually best left to professional developers and builders as they have the available funds and know pretty clearly how much they will have to spend refurbishing the property. And in the case of builders of course the refurbishments are an internal cost.
Also, please bear in mind that even Scotland's property law is quite different from England's. In England and Wales a purchaser's offer is always 'subject to contract', which means that either party can withdraw at any time without penalty right up to Exchange of Contracts. In Scotland, people are usually required to put in sealed bids, based on 'offers over' a given price. Confusingly, these offers can sometimes be up to 20% over the 'asking price'.
Once your sealed bid is formally accepted by the vendor you are locked into a contract and both parties risk substantial penalties for withdrawal. So...it's important to do necessary legal searches and surveys before putting in the offer.
Although the English system does have the problem of gazumping and gazundering and people just withdrawing, I still think that the Scottish system is a bit too rigid and 'clunky'. Personally, I believe that the English system could easily be improved by each party placing say £1000.00 not returnable deposit with a stakeholder once a purchaser's offer is formally accepted.
Over the past few years many people have believed that all they need to do in order to invest in property was to browse a few websites, maybe join a property club and let the club select properties from which they then select.
When it comes to successful property investment, whether you're buying to let or looking to develop, there is no alternative to 'getting your hands dirty'. You have to actually view property yourself - no one is going to be as careful with your money as you. It can be pretty hard and tedious work but unfortunately, as in slimming where the only thing that really works is eating less and exercising more...there is no simple substitute.
A very important consideration when buying any investment property is to decide what is more important to you, YIELD or CAPITAL GROWTH, or a good combination of the two?
The way to work out the yield on a property is to take the annual gross rent, subtract ALL costs (ie service charges, ground rent, buildings insurance, repairs and renewals) and divide it into the TOTAL cost price and multiply by 100 - this will give you the Gross Yield in percent. In order to determine the all important Net Yield you must subtract any letting agent commission.
Here is an example:
*agent's commission
Remember that this is the TRUE way to work out whether a property offers a good yield. Don't just add up all your costs, including the mortgage repayments, subtract them from the rent and say, 'that's how much I'm making'. Of course this calculation is essential, but only for your own personal circumstances. In other words, can YOU afford it, can you pay the mortgage, service charges etc during void periods, but it will not tell you the actual investment potential.
Barring major disasters, I would say that good property well located in the UK will usually be a superb long-term and probably medium term investment. But, assuming you are not concerned with capital growth, or believe there will be none in the short term and need to know whether you should buy to let or simply stuff it all in the bank then, as the Americans say, 'just do the math'. Work out the Net Yield and see how it compares with current savings rates.
When it comes to buy to let properties, yield or capital growth, you can't have everything
Generally speaking, there is usually a trade-off between yield and capital growth - you may get a good yield, but you usually have to sacrifice some capital growth. Often very up-market properties tend not to give such a good yield but do return good capital growth.
I personally believe that unless you are very wealthy or desperately in need of the rent as income, it's best to settle for a good balance - average yield with average capital growth.
As long as you purchase within a major city like London, you will usually get a far better rate of rental return from a council property, although you will not get quite the same amount of capital appreciation. But of course, in the unlikely event that the market goes down (shock horror!) then you will get correspondingly less capital depreciation! In this respect, the purchase of a good ex-local authority property is actually a lower risk option than buying a more up-market one.
Of course, unless you are a cash rich investor, it all finally comes down to getting a mortgage, which these days is not as easy. Remember that many lenders will not lend on blocks of more than six stories, so always check with your broker or mortgage provider first before proceeding too far with your purchase.
When it comes to profiting from rental property, the most important thing is to buy the RIGHT property at the RIGHT price.
However strong the local rental demand and general availability of good quality tenants, it will all be to little use if your investment property is poorly located or unattractive and/or of the wrong type for the local market. So time spent surfing the net, building relationships with good local agents and actually viewing properties yourself, will be time well spent!
Concentrating on yield
For years, property investors have been concentrating on potential capital growth and being prepared to accept fairly unimpressive net yields of 3% or 4%. Obviously in a property market where there is little inflation, this will no longer do and investors must look at what sort of yield a property might realise, while still of course regarding the property as a long term capital investment.
The problem will be that you will need fairly serious amounts of capital to capitalise on this developing situation. There will still be mortgages available, but only to people who are regarded as a reasonably good credit risk. The days of the 90% and 100% mortgages are generally over for the foreseeable future, and in the end that will not be a bad thing.
When the current boom began back in the 'gold rush days of the late nineties it was relatively easy to profit from buy to let. Landlords with the right properties could achieve as much as 15% yield along with phenomenal capital growth and even a 'so-so' property could be profitable.
That is no longer the case. With the huge increase in property prices and the increasing competition between landlords for tenants, it's become hard to get more than a 5.5% Net Yield, so more than ever it's very important to buy the 'right' property.
Buying investment property Do's and Don'ts
I suppose these do's and don'ts are not really hard and fast 'rules', and there are always exceptions, but you would do well to follow these guidelines where practical in order to profit from your properties.
1. Don't get too personal
Don't buy an investment property just because you personally would like to live in it. Always look at it from potential tenants' points of view.
Also, try to avoid spending too much refurbishing the property. You may fall in love with a fantastic £20,000.00 kitchen and a £10,000.00 bathroom with taps costing over £200.00 each, but unless yours is an extremely up-market apartment, you will be wasting your money, as there tends to be a 'ceiling' rent for a given size flat or house in any given location.
2. Do research the market. Who will be your tenants?
Where and who are your potential tenants? Are there businesses and organisations locally with an ever changing workforce, such as hospitals, universities, even TV studios where people are usually employed on short-term contracts?
Flats and house conveniently located for these kind of places should usually let easily.
3. Do be well connected
The old adage, 'Location, Location, Location' is paramount when it comes to suitable buy-to-let property. It is always helpful for the property to be no more than 15 minutes walk from a station if in a city like London, or at least close to other travel links such as motorways, bus routes etc. Also, look for handy shopping facilities, bars and restaurants, as these are always attractive to tenants.
4. Don't fool yourself!
If you're buying a leasehold property, always remember to factor in ALL the costs.
Here is a useful checklist:
- Check the Service Charges
- Check the Ground Rent
- Check the Buildings Insurance (usually included in the service charge)
- Remember that you may well have void periods, possibly up to two months in every 12 during change of tenants etc.
- Remember repairs and renewal costs
- Gas and possibly electricity safety checks can cost up to £150.00 a year, although if you shop around you can probably spend less.
5. Do pay attention to things you can't control
If you are buying a flat, pay particular attention to the common parts, it's no use ending up with your very own 'palace' set in a 'slum'! This can often be an issue in converted property, where there can sometimes be no formal or at best an ill-defined responsibility for the maintenance and cleaning of common parts such as hallways, drives and gardens.
Finding the 'right' property
So what is the 'right' property? Although it may be blindingly obvious, first of all, the right property is one you pay the right price for! Successful buying to let is all about return on investment, whether that be capital appreciation over the long term or rental return. If you pay too much, no one is going to pay you more rent to compensate you.
This does not mean that you should always opt for the cheapest property. I once saw a two bedroomed terraced property in Manchester on the market for about £12000.00. I mentioned it to someone who knows that city very well and she asked me the name of the street. When I told her, she said the house was overpriced!
As a general rule, it's better to look for good buy-to-let property in urban or suburban areas, rather than rural ones, simply because there are likely to be far more people looking for rented accommodation in urban and suburban areas. The countryside and the shires are more attractive for people nesting, older people who are settling down or retiring - these folk usually choose to purchase rather than rent.
For example, someone I know used to rent a two bed-roomed property that was worth around £270,000.00 in a semi-rural location and was paying around £800.00 per month in rent. Many properties at that time that were costing less than this within inner London were returning over £1200.00 per month in rent.
What about Ex-Local Authority Property?
Ex-local authority property, originally purchased under the right to buy scheme, can be a good investment, but you must do your homework, and a lot of legwork. A few council estates are run down, poorly managed and have significant problems of anti-social behaviour, but most are OK and have no more problems than other private inner city areas.
Check out the property, walk around the estate a bit. Is there much graffiti? Is the place generally litter-free? How does it feel? If it's a high rise block, what are the lifts like?
In general it's best to be a bit flexible. Offer the property furnished or part furnished and be prepared to accommodate the wishes of a tenant you feel is worth it.
New Build or Old Build?
Be careful when buying brand new. Bright shiny city centre apartments are so seductive, with their designer kitchens and bathrooms, but they are not always good value for money. Very often the developer will have set a price that is not really a true market price.
Property Clubs
City centre developments are also favourite of 'Property Clubs', who profess to negotiate bulk deals with developers and pass on a so-called discount to their members. No doubt there are bargains to be had occasionally by buying in this way but I personally would avoid them like the plague!
If you must buy new, it's sometimes best to buy the last flat in the block as the developer wants to move on to the next project and may be open to lower offers.
Where is the best place to look for suitable investment property?
As I have already said, for the best rental yield and minimum void periods it's usually best to purchase in urban areas, cities, places with universities, hospitals, good employment opportunities etc.
But should you consider buying a property a long way away, in another part of the UK. It is certainly true that some cities and areas of the UK are better than others when it comes to renting out property.
For various historical, cultural and employment security reasons, apart from London, many northern and midlands cities offer good opportunities for rental investment, with very healthy rental yields.
Local can be best
If you already live in or near a good investment area it is in my opinion, best to research your local area first because you know it best. Also, you can easily go back several times to check that you are making the right decision, whereas this is often very difficult if you're faced with a long journey to go back and forth to make these necessary checks. Again, investing locally was the policy followed by Judith and Fergus Wilson when building their buy to let empire around Ashford in Kent.
Is it worth buying at auction?
Most people tend to buy property in the traditional way. They see a suitable property put in an offer subject to contract (in England & Wales), once accepted they proceed to arrange a mortgage and employ a solicitor, surveyor etc to deal with conveyancing and surveys that may be required. This process can take up to three months and purchasing leasehold property is a particularly drawn-out process.
But there is a quicker way. Buy at auction. You can usually buy property at auction for less than in the traditional way, but there are some very important limitations to bear in mind. Your bid is NOT 'subject to contract', as the hammer falls you have to pay the 10% deposit plus any auctioneer's fees, and within 28 days you must complete the purchase.
So, auctions are really for people with available funds, and you are also strongly advised to have checked through the legal pack and carried out a survey before bidding - so you really need to know what you're doing. In times of high property demand, auctions are usually best left to professional developers and builders as they have the available funds and know pretty clearly how much they will have to spend refurbishing the property. And in the case of builders of course the refurbishments are an internal cost.
Buying investment property in Scotland
Also, please bear in mind that even Scotland's property law is quite different from England's. In England and Wales a purchaser's offer is always 'subject to contract', which means that either party can withdraw at any time without penalty right up to Exchange of Contracts. In Scotland, people are usually required to put in sealed bids, based on 'offers over' a given price. Confusingly, these offers can sometimes be up to 20% over the 'asking price'.
Once your sealed bid is formally accepted by the vendor you are locked into a contract and both parties risk substantial penalties for withdrawal. So...it's important to do necessary legal searches and surveys before putting in the offer.
Although the English system does have the problem of gazumping and gazundering and people just withdrawing, I still think that the Scottish system is a bit too rigid and 'clunky'. Personally, I believe that the English system could easily be improved by each party placing say £1000.00 not returnable deposit with a stakeholder once a purchaser's offer is formally accepted.
Don't be an 'armchair investor'
Over the past few years many people have believed that all they need to do in order to invest in property was to browse a few websites, maybe join a property club and let the club select properties from which they then select.
When it comes to successful property investment, whether you're buying to let or looking to develop, there is no alternative to 'getting your hands dirty'. You have to actually view property yourself - no one is going to be as careful with your money as you. It can be pretty hard and tedious work but unfortunately, as in slimming where the only thing that really works is eating less and exercising more...there is no simple substitute.
Yield or Capital Growth?
A very important consideration when buying any investment property is to decide what is more important to you, YIELD or CAPITAL GROWTH, or a good combination of the two?
The way to work out the yield on a property is to take the annual gross rent, subtract ALL costs (ie service charges, ground rent, buildings insurance, repairs and renewals) and divide it into the TOTAL cost price and multiply by 100 - this will give you the Gross Yield in percent. In order to determine the all important Net Yield you must subtract any letting agent commission.
Here is an example:
- Total cost of leasehold flat: £200,000.00 including fees, stamp duty etc.
- Annual Gross Rent: £11,000.00
- Annual Service Charge, Buildings Insurance, Ground Rent: £1140.00
- Letting Agent's Commission (8% Let Only): £880.00 plus VAT = £1034.00
- Gross Yield = £11000.00 - £1140 = £9860.00 ÷ £200,000.00 x 100 = 4.93% Gross Yield
- Net Yield = £9860.00 - £1034.00* = £8826.00 ÷ £200,000.00 x 100 = 4.41% Net Yield
*agent's commission
Remember that this is the TRUE way to work out whether a property offers a good yield. Don't just add up all your costs, including the mortgage repayments, subtract them from the rent and say, 'that's how much I'm making'. Of course this calculation is essential, but only for your own personal circumstances. In other words, can YOU afford it, can you pay the mortgage, service charges etc during void periods, but it will not tell you the actual investment potential.
Barring major disasters, I would say that good property well located in the UK will usually be a superb long-term and probably medium term investment. But, assuming you are not concerned with capital growth, or believe there will be none in the short term and need to know whether you should buy to let or simply stuff it all in the bank then, as the Americans say, 'just do the math'. Work out the Net Yield and see how it compares with current savings rates.
When it comes to buy to let properties, yield or capital growth, you can't have everything
Generally speaking, there is usually a trade-off between yield and capital growth - you may get a good yield, but you usually have to sacrifice some capital growth. Often very up-market properties tend not to give such a good yield but do return good capital growth.
I personally believe that unless you are very wealthy or desperately in need of the rent as income, it's best to settle for a good balance - average yield with average capital growth.
A better yield
As long as you purchase within a major city like London, you will usually get a far better rate of rental return from a council property, although you will not get quite the same amount of capital appreciation. But of course, in the unlikely event that the market goes down (shock horror!) then you will get correspondingly less capital depreciation! In this respect, the purchase of a good ex-local authority property is actually a lower risk option than buying a more up-market one.
Can you get a mortgage?
Of course, unless you are a cash rich investor, it all finally comes down to getting a mortgage, which these days is not as easy. Remember that many lenders will not lend on blocks of more than six stories, so always check with your broker or mortgage provider first before proceeding too far with your purchase.
