The most fundamental decision that any landlord has to make is what property to buy. Any investment of this size needs to be accompanied by a professional and methodical process of research and financial planning, which can involve talking to lenders, agents and other landlords.
House prices are rising again, interest rates remain at record lows, demand for housing continues to grow, and buy-to-let (BTL) investing is back in vogue. Allocating capital to the housing market is a decision that needs to be based on much more research than is the case for other investment alternatives, such as choosing an ISA or buying a premium bond. The landlords who achieve the most attractive returns also tend to be those who put the most time and effort into their initial investment decisions.
Landlords will need to research not only the local area and rental market to estimate their potential returns and yields, but also the financing options available to them. The returns to be made often depend as much on the terms and conditions of the mortgage as on the income stream from tenants.
Today’s strong market conditions won’t last for ever. When the last housing boom turned into a bust, many landlords who had entered the business without doing their sums carefully were left high and dry. As well as factoring in voids and repairs, a professional landlord should prepare for the impact of a rise in interest rates, and for possible changes to legislation such as housing benefit and licensing, before committing their capital. To coin an over-used phrase, always remember the value of investments can go down as well as up.
And in addition to all the efforts they make in researching their investment, the most effective landlords are also those who understand that BTL is much more than just another investment option. “Don't see investing in property as a pure alternative to shares or a simple pension,” the NLA’s London representative, Richard Blanco, says. “You'll need to be interested in dealing with people, bricks and mortar and spreadsheets. You need to be a bit of a counsellor and good at resolving issues face to face. Landlords who get stroppy and indignant with their tenants run less successful businesses.”
Tony Richard, NLA Director and East Sussex Representative
“Before you buy a property, there is a lot to consider. What are the employment prospects like in the area? People need jobs to pay you the rent. Is there an enduring demand for homes to rent in the area? What are the local demographics, such as age, occupations and crime statistics? What are the local council’s plans for development of the area? Is the area improving or declining in popularity? What are the local rent levels and do they work with your calculations?
Auctions have been hyped up by the media and their increased popularity has led to inflated prices. I now prefer using agents, especially local independent agents to find interesting properties. I also use the internet, and do quite a bit of local legwork myself.
I would encourage anyone new to BTL to understand that the most important route to success is to develop a strong customer focus. Time spent getting it right for tenants and staying a step ahead of the competition is the surest way to succeed.
On the financial side, it is helpful to have access to expert advice. I use an accountant who specialises in property-related accounting and taxation. I also use an FCA-registered broker for raising finance. I have learnt a huge amount through becoming involved with landlord associations and in particular through the educational, advice and networking opportunities the NLA provides.”
Richard Blanco, NLA London Representative
“It’s very important to research the area and the types of tenants who rent in that area. Newcomers need to wear a business hat: think about things like gross rental yields (minimum of 6%) and whether they can build value into the property by improving it. They should decide whether they are aiming for good cash flow (rental profit after paying the mortgage) or good capital growth (increase in value of the property over time), or both.
Newcomers to BTL often underestimate just how much cash they need to start out; a 25% deposit plus legal fees, stamp duty and cash to carry out any improvements and buy furniture if required. Make sure you carry out thorough research on financial products. NLA Mortgages is a great start as it helps you survey a wide range of products. Don't just rely on brokers; lots of mutuals provide great products which aren't available via intermediaries.
Make sure you have savings for unexpected repairs or to cover arrears. Set up a separate bank account and set rental profits to one side to cover on-going costs or to put towards another deposit. Be aware that living off rental profits is generally only possible when you have six properties or more, as only then will you have enough spare cash to cover repairs and voids.
Check you are not buying into a saturated area, for example, new build blocks of flats which are being sold to landlords. And, remember with new build, discounts are just part of the sales talk. The price you pay is probably the actual pricing point, and new builds are like new cars – they lose value initially. Also think carefully before buying leasehold. A canny management company will have lots of powers to charge you various fees, making a serious dent in your profits.
I apply a set of very clear criteria which includes: geographic areas, rental yield, achieving capital growth and proximity to transport. I like buying in run down areas that I think will improve, but obviously this takes a leap of faith and there is an element of risk. I chat to other landlords, brokers, a range of lenders and often speak to agents. Getting out there and talking to people is vital.”
Jacqui Darbyshire, NLA Southwest Area Representative
“I would advise new landlords first to really think if they have the time to commit to both the research prior to purchase, and then the on-going time required in managing the property. BTL is a long term commitment and not about short term gains. The property market is cyclical and you need to have a financial buffer to see you through any down periods without being forced into a sale at a low point in the market.
A buy-to-let property is an investment decision and should always be compared against other investment options. I would recommend rigour when evaluating every property. It comes down to the combination of likely capital growth but most fundamentally, net yield. If these figures do add up, only then should potential landlords move onto the next areas of scrutiny; demand, location and type of property.
Local estate agents know what is coming to the market before it reaches any internet portals, so contacts with them, if you are looking for a particular type of property, are essential. Knowing what properties have been hanging around on the market for a long time and are overpriced is useful for negotiating a good deal. A regular review of property sales portals helps to track properties that may become bargains. For the confident, auction houses are a good source of stock, especially for properties that need building work.
I have a commercial property background and training and have close contacts with whom I can comfortably talk through an investment decision. At the end of the day, it is your own judgement and intuition that you have to rely on when deciding whether or not to invest. There are many people who can only see the downside in any situation and, if you only listen to the negative, nothing would happen at all!”