Five dos and don’ts if you’re buying to let
Are you planning to buy to let? Or perhaps you’re a landlord already. Whether you’re a first-timer or hope to expand your property portfolio, take some tips for success from Stuart Cunningham, Chief Executive at Commercial Trust.
Buy-to-let property investment has soared in popularity lately, thanks to the combination of a raft of perk and poor returns from traditional investments. Now that pension freedom is give over-55s unprecedented access to their pension pots, there is talk of an influx of ‘silver landlords’ boosting the already huge numbers buying property to rent out.
However, if you want a good return from your investment (or want to boost the returns from property you already own), then proceed with caution. Plenty of new landlords make the same basic errors – and plenty of experienced ones do to. Here are the buy-to-let dos and don’ts.
Planning for your first investment
DON’T: Assume it will be easy money
DO: Research the market thoroughly and leave as little as possible to chance
Buying to let can be profitable, but it requires a lot of planning and hard work.
First, do thorough research into the area where you plan to buy. What are the local price trends? Is there high demand from potential tenants? What sort of money would you need to invest to get a decent return?
Also remember what will be required of you as a landlord. You will need to provide certain basic services for your tenant, and if you want to remain competitive you may well need to go above and beyond your minimum legal obligations. You will also need to pay tax, both on your rental profits and on any capital gains when you sell the property. Plus of course there will be running costs – cleaning, decoration, repairs, refurbishment, agent and solicitor fees, service charges and ground rent (for a leasehold property), buy-to-let mortgage repayments and many more.
Also note that if you are based in Wales, you will have to receive training from Rent Smart Wales and obtain a licence from them in order to operate as a landlord.
You’ll also encounter the standard problems of a professional landlord: rent arrears, void periods and emergency repairs for instance, and there’s always the possibility of problem tenants. You’ll need to plan ahead for these to ensure that your business is as watertight as possible.
Choosing a property
DON’T: Buy somewhere simply for convenience or buy ‘sight unseen’.
DO: Research the area (and the property) before you buy.
There’s a lot to be said for buying locally: you know the area, you can get to the property easily in a pinch, and you might even know a few local landlords who can give you pointers. But if the market isn’t right, you might need to look further afield.
Promising areas are those where prices are low enough to invest, but on the rise; where the transport links and local amenities are good; and above all, where there is high demand from your target tenant demographic (more on this below).
Never buy a property you haven’t seen. Inspect it thoroughly yourself (or ask a trusted third party to do it, if attending the property is too difficult). Also strongly consider instructing an accredited surveyor to cast a professional eye over it before you make a purchase.
Choosing a target market
DON’T: Assume that a one-size-fits-all approach is the way forward.
DO: Decide on a target demographic and tailor your purchase accordingly.
Different people want different things. It’s a mistake to think your two-bed maisonette located a thirty-second walk from the city’s entertainment district will appeal as much to a young family as it will to a couple of young professional sharers.
Both the area and the property type will determine the level and type of interest you get, so your target market should be a prime consideration when picking a property.
Planning your business strategy
DON’T: Wing it!
DO: Give careful consideration to exactly what you want to achieve from your investment and how you will go about doing so.
Some people invest in buy-to-let for future gains, some for a steady income, and some for a mixture of both. What you hope to achieve will have a massive impact on your business strategy. Central to this are two concepts: your attitude to risk, and your ‘investment horizon’.
What does your ‘attitude to risk’ mean? It describes how willing you are to risk the loss of some or all of the money you have invested, on the basis that more risk can yield bigger and better returns. Some buy-to-let strategies, such as recycling deposits from heavily-geared (i.e. high loan-to-value) properties to build up a portfolio quickly, are considerably riskier than others.
Your investment horizon refers to how much time you have to recoup any potential losses. Over time, it is thought that inflation will iron out any short-term losses, and so the longer the term of an investment, the less risky it is considered to be. This is particularly pertinent for retirees who are considering using their pensions to enter the market; here, the investment horizon may be considerably shorter, so this may require a lower-risk approach.
It is entirely up to you whether you want to treat your property as an income source or as a low-yield nest-egg; which is the right decision for you will depend on your circumstances. If you are in any doubt about the best way forward, be sure to seek independent financial advice.
Financing the purchase
DON’T: Opt for the first mortgage you come across.
DO: Shop around for the best deal.
There are now literally hundreds of buy-to-let mortgages available. Given that your mortgage interest will most likely to be your biggest outgoing each month, getting the right one will be crucial to your business strategy.
Bear in mind, however, that the right deal is not necessarily the cheapest. Some mortgages have special features, such as allowing you to switch at any point without incurring exit fees (known as ‘early repayment charges’), or enabling you to offset your savings against the loan to reduce the interest you pay. Others are tailored for specific types of purchases, such as large multi-unit blocks or houses in multiple occupation (HMOs).
So before you settle, be sure to shop around. If you are struggling to find an appropriate lender or simply need help sifting through the options available, remember that the advice of a professional buy-to-let broker can be instrumental in securing the best deal possible.