Rising mortgage rates, low returns and uncertainty in the housing market – the rental market has been hit hard. With some advice and fancy footwork you can sidestep the pain of investing in the buy to let market.
Prior to 2008, buy to let was the poster child of the property investment market. Entrepreneurs small and large poured amazing sums of money into property investment but then the recession hit and fortunes tumbled.
Buy to let businesses are still alive and kicking but if you’re looking to make the leap into this business you should read these 10 pieces of investment advice.
1. Researching the rental market is key
How many of you have woken up one day and decided you’ve had enough? You’ve decided that you’re tired of working for the man and now it’s time to go it alone. Buy-to-let seems like an easy option. You’ve got some cash to invest in a house or two: how hard can it be?
Like any business venture, the first step in your success plan is research. Property investment may seem like the right thing to do but you need to ask yourself a few questions:
- Is this the best investment you can make? Could you earn more money elsewhere e.g. stocks and shares?
- Are property too high? For a snapshot of the UK housing market, you might be interested to know that currently, housing is about 20% overpriced compared to the rest of Europe.
- How much profit could you expect to earn when you sell off your rental properties? This one is a bit of an open question but the more houses you own, in theory, the bigger your profit when you sell up.
2. Where you buy is key
Taking your research a little further, you need to consider what’s right for your potential customers. Put aside your personal views and look at it through the eyes of the people you want renting your property. There are any number of houses that have the wow factor but we choose where we want to live based on a number of factors.
Before you rush out to invest your hard earned money in a house put yourself in a renters shoes. Use the tried and tested ‘what if’ method to weigh up the pros and cons such as:
- Do you want to rent to young families? If so, think about the proximity of schools. Are the schools the best performing in the area? What transport links do they have? Are there play areas near the property>
- Is the mainstay of your property portfolio aimed at individuals? If so, how close is the town centre? After a days work, a single renter might be strapped for time so consider the proximity of supermarkets.
- If you’re looking to provide properties to older renters… Are your renters infirm? Do they have trouble getting up and down stairs? How far do they have to travel to reach the shops? If they have pets, you might want to consider how close you are to local parks or the countryside.
If you can’t find the house you’re looking for locally then you may need to consider looking further afield.
3. How much money will you need?
You probably already know how much you can afford to pay for a house but the most important financial aspect is the returns you’ll make.
In the glory days of the buy to let boom, many money lenders were looking for rental payments that could cover 125% of the monthly mortgage payments. On top of this figure, mortgage providers were also asking for a 15% deposit on the house purchase. Like I said, that was in the good old days.
Then the recession hit and it hit hard.
Most money lenders have become incredibly risk averse. Deposit requirements have jumped to between 25% and 30% (and that’s only an average figure – some lenders want more). On top of this, buy-to-let mortgages now come with high arrangement fees.
Consider these points:
- Could you afford future interest rate rises? Calculate the cost of your mortgage based on the current figure the banks are offering and a worst case scenario. As an example, factor in a 3% rise and ask yourself if you could afford the interest payments.
- Could you afford to have your properties sat empty for any length of time? Don’t simply think about your properties being empty for a few weeks – ask yourself if you can afford to have not rental income for a few months.
- If this is going to be your sole source of income can you afford to pay yourself enough to live on? In an ideal world everything would simply work out but, sadly, the world is far from ideal.
What will happen if the property sits empty for a month or two? These are all things to consider.
And that brings us nicely on to…
4. How much money can you earn from rental properties?
At this point you need to remember that you’re not going to be rolling in the money after a few months. In fact, if you look at any business that has been called an overnight success you’ll probably find that years of blood, sweat and tears went into making it an ‘overnight success’.
Here’s a quick calculation of what you could expect to earn from one house:
The house costs £150,000 and you’ve taken out a 15% mortgage. Your monthly repayments to the lender are £500.
Your rental income is £850 a month.
That gives you a positive sum of £4,200 profit but that’s not the end sum.
Factor in taxes, the cost of maintaining the building and insurance and you’ll probably be left with about £3,000. I don’t think Donald Trump is quaking in his boots just yet.
Obviously, unless you lead an exceptionally frugal life (e.g. suck water off moss and following the example of Dracula’s human lackey, Renfield, who eats flies and beetles) you’re going to be able to live on this. Sadly, you will have to stay in your day job for a bit longer.
On a more positive note, as your portfolio of properties grows and you interest rate payments drop then the closer you’ll get to living the dream.
Note: you can probably save a lot of money on maintenance costs if you do the work yourself. Be warned: trying to juggle a day job and meeting the rights of your customers is hard work. In fact, a friend of mine did this exact same thing for about 5 years until he was diagnosed with acute stress and a stomach ulcer. Also, if you’re not qualified, don’t attempt to maintain or fix gas or electrical appliances.
5. Don’t accept the first loan you’re offered
If you’re still reading you’ve probably worked out that you can probably get into the buy-to-let market and make a sustainable profit. Now it’s time to look at what the banks are offering in terms of interest rates. I probably don’t need to say that say as you’re savvy enough to know but: don’t accept the first loan offer you find.
You’ve spent hours calculating the viability of this business. You’ve walked the tight rope of mortgage applications and credit checks. There’s no need to right the arm of the first mortgage lender to smile and nob in your direction.
Even though the banks have tightened up on their loan reqirements there are still plenty of deals to be found. If in doubt, go and speak to a broker. I’ve listed some of the larger mortgage brokerages below but if you have your own preferred option then run with it.
Top 5 UK mortgage advisors specialising in buy-to-let:
You are a first time buyer
That is, when it comes to jumping on the buy-to-let ladder. You have no chain. What you do have a stack of hard cash to back you up. I know you’re all nice guys and girls so that means you won’t try and rip off a seller. By the same token, don’t let them rip you off.
No matter what any estate agent tells you, house prices in the UK have fallen (look at thisismoney’s article about the state of the housing market). With that in mind, make sure you haggle. At the end of the day, a house is only worth what the buyer is willing to pay (within reason). Pick holes in the state of decoration, sigh and tut, comment that ‘it’s not ideal’; you’re expected to do all of these.
Once your ready, put in an offer you think reflects the value of the house.
Plan your exit
There are millions of guides on the web that show you how to do thing. From taxidermy to underwater basket weaving – it’s all out there. But one thing I’ve found missing from many business plans/guides is probably the single, most important aspect: the exit plan.
Early on in the planning phase, think about where you want to take your buy-to-let business. Is it:
- Long term e.g. something you want to hand over to your children?
- Going to fund your retirement nest egg?
- Going to be something that grows and grows or do you want to keep the number of properties to a minimum?
- A business that you can easily maintain into your old age (if you’re going in that direction)?
- Reliant on investors that will want a slice of the business when you sell up?
There are more questions you need to ask yourself but the list above should give you a good idea of what you need to be thinking about.
That’s all. If you’ve got any more ideas or advice that can be added to this guide then let me know your thoughts and I’ll add an update.
I’ll be back soon with some more money saving ideas and tips.