(i) Is Buy to Let right for you?
Are you a high rate tax payer? Do you intend to borrow money to leverage your deposit? If so, consider the recent changes in tax law that effectively penalise investors in the highest income tax bands. If you are sure, consider how best to invest. Investing through a limited liability investment vehicle – take specialist tax advice.
(ii) Do your Research
Investing in property is a far more demanding and dynamic proposition than buying stocks, shares and unit trusts. Like most investments, it has risks attached, such as bad tenants, unpaid rent, property damage and falling house prices.
If the worst happens it’s going to be easier if you buy relatively close to where you live. The added advantage to this is that you are more likely to know the area intimately. Recognising the difference between two roads just a hundred meters apart might make all the difference.
Try to pick a location you know and which is ‘on the up’. You don’t want to buy in a poor location that is becoming a problem. Just because somewhere is cheap does not mean it’s a good investment. You should be considering capital growth as well as initial rental return on capital. Consider buying close to home. How will you deal with that burst water pipe of broken central heating boiler if your property is 200 miles away?
(iii) Buy the right type of property
There is little sense buying a large family home in an area popular with the sophisticated urban professional, or the one bedroom flat in an area with great schools and popular with young families.
Consider whether a House of Multi-Occupancy is right for you. If it is, University towns and locations with large infrastructure projects underway may offer you a pool of tenants looking for shared accommodation. But remember, there are particular regulations that affect properties let to multiple occupiers.
Some landlords prefer modern flats because the maintenance issues are usually dealt with by a formal service charge and managed by the building’s Freehold owner or a tenant’s committee (in this instance, as owner of the flat’s long lease, you are the tenant as far as the committee goes.
Some landlords hate flats and will only ever buy houses. There is something to say for owning a Freehold property outright, but there are benefits to either. Just be aware of the differences.
(iv) Monitor your Cashflow – Do your sums!
Make sure you do your sums. Don’t forget ‘hidden costs’ like stamp duty, legal fees and expenses, inspections by gas and electrical specialists, repair and maintenance, agent’s fees and disbursements and the voids you can expect between tenants.
Who pays the mortgage when the property is empty (or worst still, occupied but not rent producing!). Make sure you have a cash contingency to cover you for the most scenarios. Put aside sufficient money for the mortgage and the taxman and remember to run a cash float to allow for unexpected expenses such as a broken boiler or new windows!
(v) Decide who will be managing your property & ask for advice
Unsurprisingly, we always recommend a Landlord considers using an experienced managing agent to let and manage their property. Regulations in respect of new tenancies and the ongoing management of tenanted property continues to grow and if you don’t comply, the penalties can be severe!
Are you going to let it furnished or unfurnished? What certificates do you need? How much rent deposit do you want and why does the law say you can’t hold it? How do you get a credit reference for your prospective tenant? A good letting and managing agent, such as Duncan Yeardley, will help you avoid common mistakes and take the hassle out of dealing with your tenants, especially if a dispute arises.
(vi) Consider joining the Residential Landlords Association (RLA)
Sadly there are a growing number of get-rich-quick ‘cowboys’ out there, so beware third parties that offer to take your money and invest it for you or, alternatively, offer to teach you ‘all you need to make a million’ If it sounds too good, it almost certainly is.
That said, do browse the web for credible sources of advice. There are several private landlords out there that started as amateurs and are now the owners of huge portfolios and some of them are only too happy to lend a guiding hand to a novice.
Some now write for the Sunday papers and encourage enquiries. As a general rule, if they’ve been going for 15 years or more and they have their own significant portfolio, it’s likely they’ve been doing something right and have something worth saying – if they are prepared to say it!
A good starting point is the RLA (Residential Landlords Association).
(vii) Be Clear why you are investing
Many people have done well in property over the years in large part due to luck and an ever-rising housing market. The last fifty years has seen unprecedented growth in available loans, rising capital values and a continual demand (in the right places) for housing stock.
The past, of course, does not indicate what will happen in the future and housing is, as the financial crash of 2008 illustrated all too painfully, linked to international debt and macroeconomic factors outside our control. If you are investing, decide if you are looking for capital growth or a high initial rate of return, allow for unexpected expenses and rising interest rates and think about the potential downsides.
If you are still keen to invest, treat it like a business. Remember, property, like share ownership, is a dynamic investment that requires skill, knowledge, time, effort – and sometimes a bit of luck!
(viii) Try to add more value to your purchase
Many investors simply buy and hold. This is a perfectly respectable strategy but you are unlikely to outperform the market doing this. If you have knowledge that might help you, look at how you might use it.
Are you a plumber – or a carpenter? Can you find a place where a new bathroom and kitchen would make the place more appealing? If you can add value (at a profit) this is a great way to create equity and build a protective buffer against any future hardships that might befall you.
Of course, don’t go looking for work only to do it and find you’ve made no profit. Make sure you allow for all your expenses, and a decent allowance for your time and risk, before committing to that run-down ‘fixer-upper’.
(ix) Shop around for the best mortgage deal
Your new investment needs to make a profit. It is likely that one of your largest expenses will be the monthly mortgage payment, so make sure you secure the best terms you can. This will include the existing mortgage rate, how any future rate increases are reflected in the repayments, the type of mortgage you are taking and just how flexible it is if you need to sell. Fees and penalties now form a large part of the cost of a mortgage. Make sure you get it right.
Buy to Let Mortgages for Landlords
(x) Keep thorough accounts and always pay for the best advice
Like any other business, property can be complex and expensive if you get it wrong. Like any prudent business person, always seek out the best advice and make sure you consider the potential downside.
It’s often said that along with the ability to run a pub or restaurant, most people have a secret conviction that there is nothing to running a property business. But like any other industry, property is a business in which many very capable and well-informed people work their entire lives – not all of them profitably! If you are to be successful you’ll need the best advice from the outset.
Securing the best advice is always a good mantra whatever you choose to do in life. Keeping good tax records is just basic common sense. After all, when that big capital gains tax bill finds its way to you in 20 years time, you’ll want to mitigate it as much as you possibly can!