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Buy To Let Book
The purpose of this buy to let book / guide is to share my own personal experiences with you in property investing. Click on the links below to jump to the desired section, or just scroll down and read.
Introduction
This buy to let book is presented to you free of charge and is based on Lady Lea's personal experience. Please read it bearing this in mind - and understand that times change, and some things that may have been possible in investing in the past, may not be possible now.
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Preparing for a life change
Your Life Will Change. Being a Property Investor is not a regular 9-5 job and you must be prepared for the changes that this will make to your lifestyle, whether you do this part-time or full-time. Like most things in life, Property Investment requires commitment, dedication and a certain amount of discipline, it won't happen all by itself, you need to put effort into it. At times it can be hard work, other times it can be fun and entertaining, but regardless of this you will only get out of it what you put in. Make sure you have the right attitude before you start, or you may just end up wasting time and money.
Friends, Family and Others - Those around you will not necessarily agree with your choice of occupation or investment, some may even consider you crazy and try and talk you out of it. This is a genuine way of earning an income and some people do very well out of it. You need to remain positive and focused. It is often futile trying to make all your family and friends understand what you are doing or why as no amount of explanation will make them understand or agree with you. Learn to accept their view but not adopt it.
It would be foolish to ignore every opinion or piece of advice that people give you, you might learn something from someone else's experience. However, they are not necessarily right and just because one person had a bad experience doesn't mean you have to follow in their footsteps or make the same mistakes.
What will other people feel about you once your achieve your goals? Will they change their negative attitudes? Many people experience a strange phenomenon when they leave the rat-race and become financially free, others often assume that you are wealthy, some will even become difficult to deal with because of this. When you are doing well some friends may expect you to pay for everything, family members can become jealous and cause friction. You must be prepared for these changes in those around you.
What Does the Future Hold - Where do you see yourself in two years? What about five years from now, or ten years? Most people want to have achieved something in that time frame, will you if you continue what you are doing now? People do not plan to fail, but they do fail to plan. Establish and understand your goals or targets, ensure that you work towards them and not in the other direction. It is hard to measure success when you are working for yourself, but you can always see the results of your efforts.
SECTION REVISION - 1) Make a list of the things you expect to be able to achieve from being a Property Investor. Now write against each a time frame within which you think you can achieve each item. This is your set of goals. 2) Consider who of your friends, family or colleagues you can talk to.
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Finding / sourcing property
Research is King
First hand research is critical, you can't believe everything you are told, so you must do your own research, this is normally referred to as Due Diligence. You can not hold anyone else responsible for the decisions you make, so you have to be as sure as you can be about the facts and information you have at your disposal. You will invariably find instances when you have to go with your best guess or gut instinct, but these situations should be in the minority, good research and credible information are paramount in the Property world.
One key thing to remember in the research process, if someone is trying to sell you something then they are not usually the best source of factual information, especially if they are working on a commission basis. Also, when purchasing off a development through a Finder or Broker, they may try to persuade you by saying that the deal is so good they are buying a few units themselves. On the face of it this is a powerful argument, but in reality it can often be just a sales ploy. Consider that the Finder will get a 1%, 2% or even 3% Finder's Fee on each unit they sell, multiply that across how many units they are representing in the development and you will see that, in many cases, they can afford to take a loss on the units they buy themselves (if in fact they are buying any), as long as they can sell the remainder. In other instances the Finder may have bought the units up front and then is selling them on for a profit margin as well as a Finder's Fee, this only increases their ability to make a loss on any units they may choose to buy themselves. Be wary.
What Type of Property Will You Buy?
Quite simply, the type of property you should buy is the type of property that is in demand. It doesn't matter what it is so long as other people want it and it will make a profit. These days builders and developers are building apartment blocks specifically for Investor demand, this means that they may have done no research at all into the area to see if people actually want to buy and live there or rent the properties, this is an example of supply. You are looking for the other side of the equation, demand. it is quite often a safer bet to look at traditional, established housing where the demand is easier to determine rather than some brand new building that has no history behind it. After all, there are only so many people that can or want to live in the inner city. Obviously once you have found an area of demand there must be a supply properties or you can't buy anything, but there are ways to generate supply in areas of high demand.
Supply and Demand
In Property there is an old saying that the three most important things in a property are "Location, location and location". This is true when comparing apples with apples, meaning that out of two similar properties the one in the best location will normally be most desirable. But when looking at Buy To Let it is more important to assess "Demand, demand and demand". There is no point in buying a flat in a beautiful location if no one wants it. Many people look at factors like shops, facilities, transport, hospitals and general infrastructure in the local area, but it doesn't matter what is in the locale if people don't want to live there. Conversely, there may be no facilities at all yet people still want to live there, for whatever reason. Don't get tied up or bogged down in analysing the crime rate, council tax or schools, (although these factors can be important) if it is in demand then this is the most important factor to start your analysis of the property.
Similarly, you can’t buy a flat that is close to a university or hospital and expect to let it out instantly, many other Landlords have usually had the same idea. Therefore, you may face stiff competition to let your flat and this normally means you will have to lower your rent to compete or add some incentive, both of which directly affect the profitability of your business venture.
There may well be instances where there is genuine demand near a university or hospital, but you should be lead to an area and property by the demand and not the existence of local amenities that are currently present or promised for the future. Many times the sales patter will include future developments in the area like a new train station, shopping mall, cinema complex or something along these lines, it is best to ignore these things and focus on "day one" value and status.
How Will You Find Property to Rent?
Again, it is a matter of demand, but how do you establish demand? One simple method is the "Pin in the Map".
Before we discuss this method we need to digress slightly and decide what kind of return on your investment you are looking for. Do you want an immediate income from positive cashflow or are you looking for long term appreciation from capital growth? The two are not necessarily mutually exclusive, it is possible to find a property that will represent both investment options. However, as a rule a single property will tend to lean towards either positive cashflow which is best achieved in the North, or capital growth which is best achieved in the South. It must be stated that this is a vast generalisation but it is a very good rule of thumb when you are starting out. These investment types are dealt with in more detail below.
The North South Divide
So now you have decided which investment type interests you most, it is a simple matter of getting a map of England and drawing an East-West (horizontal) line across the country, roughly through Birmingham and Peterborough. This is your North/South Divide. Now take a pin, close you eyes and stick it in the map, in either the North region or the South region depending on what investment type you are primarily after. Find the closest town to where your pin has ended up and this is your starting point.
Now get the Yellow Pages, Thompson Local Directory or whatever resource you prefer and find all the Estate Agent and Letting Agent addresses and telephone numbers in that area. It is normally best to visit the area and physically walk the streets but you can make your initial enquiries over the telephone. Contact the local Letting Agents and see if they have Tenants waiting for places to rent, i.e. demand. if so, ask what kind of places are in demand, 1 bedroom, 2 bedroom, etcetera. Find out what the local market is like, do people generally want a flat furnished or unfurnished, is a parking space important and any other likes or dislikes. There are many factors to consider and enquire about, make friends with the Agent and get them talking about what is going in their immediate area. Local knowledge is often the edge you need to make an informed decision. Always make notes, you will more than likely investigate many different areas and it is easy to forget what was said. Also, you can compare what each Agent in the area has to say, just to make sure they are not talking hot air or trying to lead you astray.
Once you have established what is in demand in the area you can call the local Estate Agents to find out if any of these type of properties are available. Obviously every area will be different and you can not always match up rental demand with sale supply, but you can get creative and manufacture the supply in a number of ways. For instance, if the demand is for 1 bedroom flats or studios you could buy a 3 or 4 bedroom house and convert it. The initial capital outlay will more than likely be higher and there are more issues to consider, like planning permission, but the returns may well be higher as well. It is generally accepted that you can let out two 1 bedroom flats for more than one 2 bedroom flat. Work through the numbers and see if it makes sense. It is worth noting that there are specific laws and rules governing the requirements for Houses of Multiple Occupancy (HMO) and these can make setting up an HMO a costly exercise. Check into any such costs before committing to buy a property for this kind of activity.
If your chosen area lacks supply of the right properties and the rental demand is good, you can always approach owners of the type of properties that you want and make them an offer. This can be achieved by dropping a note, business card or leaflet through the letterbox. You need to know in advance what kind of price range is acceptable to you and your area, so if an owner contacts you then you are prepared to discuss numbers and you know your limits. No matter how the conversation or negotiation goes you should always make an offer that suits your budget and circumstances, even if it is very low. You never know what the owner's/vendor's circumstances are and they may contact you back latter on to renegotiate or even accept your offer if they are in a difficult financial situation.
What Resources are There to Assist?
There are so many resources out there to assist you in your property research, but they all need you to make an effort, the information does not just arrive of its own accord. You should be diligent in your research as it is after all you financial investment that is at stake. Do not rely on an individual resource for accurate information, always cross reference or corroborate it with another source.
You can use any and all of the following to find information :
- The Internet offers many websites for property research, just make sure you check the date of the information.
- Newspapers in general can give you good indications of what is going on.
- Estate Agent publications that lists what is currently on their books.
- Estate Agent's window displays showing what is for sale and what has sold, go in and ask for how much.
- Letting Agent's current listings sheet to see what is available to let and what the rental is.
- Classified publications like Loot can be a good source of local information.
- The Yellow Pages and Thompson's Local Directories can be useful for find local trades people if you need quotes for building or other works.
Always try and physically visit the area you are researching to get first hand knowledge and experience, pick up the local papers to see what is going on in the local property market. Do not try to compare the locale with another part of the country, each area has its own specific property market and market conditions, these can vary from village to village. There is no such thing as a national property market in respect to supply, demand, pricing and movement. Always focus on one area at a time to avoid confusion.
Always ensure that you are looking at true demand, not just supply dressed up to look like demand.
What Type of Tenant Will You Seek?
As much as it is a mistake to buy a property on the basis of supply rather than demand, so too, it is generally a mistake to base the purchase of your rental property on a specific type of Tenant that you wish to attract. Similar to the ideas expressed above regarding surrounding amenities, there is no point buying a posh apartment thinking that this is what urban professionals want and will pay lots of money to rent. Whereas this may true in an area of high demand for this type of property, you can not create the demand simply by supplying something that you think is wanted.
As always, your investment should be based upon local information and what the current state of the local market is, not tomorrow, next week or a year hence, but today. Demand will fluctuate, you cannot change this, but it is better to buy what people want now than what they might want in 12 months time.
If you research the local market properly and supply the type of properties that the local people want, then it is you that will be sought by Tenants who want your flat, and not you who is constantly advertising and chasing Agents and Tenants to let out your empty flat.
Where in the Country Will You Buy?
The most common assumption subconsciously made by those new to Buy To Let, and even by some veterans, is that there is a perfect place somewhere in the country to buy and let property, some kind of Property Investor's nirvana. There is no such place. The best place to buy is where there is genuine demand.
The Best Place To Buy
It is true that some people have found areas that have had consistently high rental demand, year after year, and they have made a good living from letting properties in these areas. But as soon as a location gets known as a "hot spot" every man and his dog floods into the area, buying up places to let out. What happens then is a simple matter of basic market economics, the balance swings from Demand to Supply and, because the Tenants suddenly have so much choice, the rent starts to fall as the competition increases between Landlords.
Remember that property markets are as local as the village or borough that they are in and that there is a general North/South divide on investment types, either positive cashflow or capital appreciation respectively.
SECTION REVISION -
- Adopt a policy of First Hand Information and Due Diligence.
- Look for genuine demand not simply supply of property.
- Assess day one value and not future developments or promises.
- Investigate one area at a time and make notes.
- Know what you can afford and what will make profit, stick to it.
- Make the Tenants chase you and not the other way around.
- Make full use of all resources at your disposal.
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Power Team
What is a Power Team?
This term, in regards to Property Investment, has come to define the group of people that you rely upon to make your business work properly. This group will normally comprise your conveyancing solicitor, accountant, mortgage broker and the most important member of the team, your Letting Agent.
4.2 Why is a Power Team Crucial to Your Success?
You can't be everywhere doing everything at once. It may be that you do you own conveyancing or accounts, in which case you may not have a solicitor or accountant on your team, but in general it is best to have these specialised tasks performed by people who work at it full time, leaving you time to research and make the high level decisions about your property business/investment. There is often little point in trying to be a multi-tasking professional as no one task will ever get done properly and the more distractions you have from your primary task the more chance that you will make a mistake.
Power Team Members
The Letting Agent is always number one in your team and you should make an effort to establish a very good relationship with all the Letting Agents that you come in contact with. After all, these are the people who will tell you about demand in their areas and you want them to come to you first, rather than some competitor Landlord/Investor. You may will be giving these people business, if you let your properties through an agent, and so you need to communicate clearly with Letting Agents that if there is genuine demand you can react to that and supply suitable properties to the local market.
Your Power Team may include other people, usually Estate Agents will feature somewhere in there too. You must make a continued effort to keep Estate Agents aware of your existence, when a suitable property comes on the market in an area of demand, you want them to call you first, so try and impress upon them that you are serious about buying property that suits your requirements. Make it clear what type of properties you are after.
Finding Your Power Team
Establishing a good working Power Team is all about relationships. As with any relationship it takes time, experience and continual effort to make something worthwhile.
You cannot expect to meet someone, that you don't know, on the street and immediately have a history with this person like you would have with a friend you have known for years. This is the same in professional relationships, a good business relationship cannot be adopted or passed on by recommendation. Even if your friend recommends their accountant to you, you will not have the same relationship with the accountant that your friend does.
You may well have to try several different firms before you find a solicitor or accountant that responds to your individual needs and whom you can work and communicate with effectively. But there are ways to establish the abilities of any potential service that you might use. Ask them about what they do for other clients, explain your needs in detail and make sure they understand you and you requirements. If you don't feel that they will be able to perform then try someone else.
Don't take on a Power Team member on the basis of low cost alone, more often than not this means that they will no work as hard for you or it could mean they will have too many other clients to attend to your matters promptly. This is most applicable for Estate Agents and Letting Agents, if you tie them down to very low percentage commissions then they are less motivated to work properly for you. However, it may be that with some services you are able to negotiate a mutually beneficial discount in return to volume trade, for example bulk conveyancing for a solicitor or multiple properties to let for the Letting Agent.
SECTION REVISION -
- Build a strong Power Team for support.
- Develop your own relationships over time, do not try to adopt someone else's.
- Business is always a two way street, you must offer the other party something.
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Purchasing Property
Purchasing Property
Your Property Buying Toolkit
As with any task in life, it pays to be prepared and have the right tools to hand when evaluating prospective property purchases. So what do you need in your property assessment tool kit?
Here is a list of basic tools that will be helpful :
- Have a good Pen or two, you need to make notes.
- A Notebook is better than loose-leaf paper, it keeps your notes together.
- A Clipboard helps when making notes in difficult places, it is best to get one with a cover in case you are out in wet weather.
- Some kind of distance measuring device; a tape measure is good, but if you can afford it the laser or sonic measuring units make the job a lot easier. You will need to know the size of the rooms to estimate any refurbishment costs.
- Have a Spirit Level along too, even a small pocket size one will do. You should know what surfaces are not level or true and might need further investigation.
- A Damp Detector is an essential piece of kit as most kinds of internal damp will point at a potentially large problem elsewhere. These pocket size units are not expensive and could save you a lot of money.
- A Torch is a good idea for poking around the loft or basement and when visiting properties in the dark that may have no external lights or even no current power supply.
- A Calculator is also very helpful in case you need to work out figures on the spot to make an offer, work out commissions or estimate repair costs.
- A Camera can be useful to record any problems or simply as a memory aid, if you view several properties in one day they can sometimes all blend into one memory. A photograph of the outside will at least distinguish between the different properties. A digital camera is ideal so you don't have developing costs. Polaroid cameras are very good too, so you can get an instant photo on the spot.
- Utility Tool. Something like a Swiss Army Knife or a Leatherman style multi-tool can be very handy if you need a screwdriver, knife or some other implement to complete you property examination.
- Gas and Electric Meter Cupboard Key, it can be helpful to check what kind of meter is installed and what the current readings are. Some properties have Pay As You Go card meters.
- To tie all these tools together you should have a comprehensive Homebuyer Report or some kind of Checklist. It is easy to miss things when walking around a new property, make sure you check as much as you can on your first visit and note it down in a format that means you can compare it with other properties that you have assessed.
The above list is just a suggestion of tools that may be useful when assessing any property for purchase. You never know what you are going to run into so it pays to have a good toolkit along every time. There may well be other tools that you like to carry or have found useful in the past, but it pays to make your toolkit as compact as possible, so that you aren't lugging a huge toolbox around with your all the time.
Buying and Selling Checklist
Once you have decided on your purchase things can get pretty exciting and everything starts to move very fast. Several months down the track there will be a lot of information that you will need and no one else is going to collect it for you, some of it may even have disappeared or changed by that time. So it is important to know right from the start the information that is going to be needed later on and make sure you collect it as soon as possible. It is even more confusing if you have a number of properties being bought and sold at the same time, so make sure you have an effective filing system and make us of it.
Here is a checklist of information that you may need to know depending on what kind of property you buy and/or sell :
- Vendor's Details. Make sure you know who you are buying the property from and if possible get a forwarding address for them in case you need to contact them later on.
- Purchaser's Details. When selling a property on the Purchaser will become liable for things like utilities and council tax, make sure you know who they are and get a correspondence address from them if it is different from the property address itself.
- Utilities. Gas, Electricity and Water meters. Ensure someone gets readings of all these meters at the correct times and dates. Some supply companies will bill you right up to when you advise them of the change and not the change date itself. Make sure you keep a good track of the dates that you are liable for supply and the accompanying readings as these will change and you can’t come back months later and see what it was before.
- Tenant's Details. Even if you are using a Letting Agent, it pays to know who your Tenant is. Again, they will become liable for things like utilities and council tax, the Letting Agent often does not follow up on these things and you need to advise the relevant party that you are no longer responsible for the costs.
- Start of Tenancy, Duration of Tenancy. Again, a simple thing, but it is a very important date in regards to liability for utilities and council tax. Make sure you have it on file.
- NHBC Certificate. If your new property has NHBC cover make sure you have the certificate and know what it covers. In the case of multiple properties in one block, make sure you know which certificate relates to which property as they often carry a plot number that is different from the street number or address.
- Utility Account Numbers. Make sure you know who the supplier is, their address and phone number and the relevant account numbers. This will make your life a lot easier when it comes to cancelling utilities.
- Service Charge Details. Is your property Leasehold? You should know who the Freeholder is, their contact details and your account number with them. In the case of Buy To Let, make sure they have your correspondence address or they will just send the accounts to the flat and your Tenant may will bin them.
- Council Tax. Make sure you have the local Council Tax office contact details and your account number. This makes it easier to advise them of when you cease to become liable for the Council Tax. You should also advise them if the property is vacant, during refurbishment or prior to letting, as most councils will give a discount on vacant properties, but often only for the first six months.
- Solicitors. Keep track of the Solicitors on both sides of the transaction in case you need to come back them for something later on. This is quite rare, but it can be necessary and you will kick yourself if you don't know later on.
Write Things Down
It is always a good idea to keep some kind of diary of events, times and dates in relation to a property so you can easily refer back to it later on. Memories fade but paper remembers things very well. Makes notes of who said what and when as well as logging any correspondence that is sent or received, this simple practice can sometimes save you a lot of money, stress and aggravation.
SECTION REVISION -
- Assemble a small but useful toolkit for your visits to properties.
- Make notes and keep a diary or events.
- Find out important information as soon as possible and keep track of it.
- Do not rely on other people to do things properly for you, be prepared to find the information yourself and take action. At the end of the day it is your name on the accounts.
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Financials
Choosing the Right Property
So now you have learned how to locate and research a property, but out of the properties that you might find, which one(s) do you actually purchase? In short, the ones where the figures stack up.
To explain this further it is essential that you view your property investment as a business and not just some form of gambling, although the property market contains a number of elements of risk, as do most types of investment. Just like in any kind of business you need to know that you will be making money and not losing money, it is the bottom line that tells you if you are running a profitable business or not. However, there are at least two different high level categories of ways to profit from investment in property, these are explained here.
Investment Types
Capital Growth - Appreciation
This is the most common way that people think of earning money from property, usually because it is the property that they own and live in. This type of investment is the act of buying property for one price and selling it later on for a higher price, the difference is often referred to as Appreciation. This method of profit usually takes time over which the value of the property increases. However, you can add value to the property by doing some kind of work to it, like refurbishment or an extension. In other instances you may be lucky enough to buy something for less than it is worth and sell it the next day for market value thereby making a profit on the 'turn' or 'flip'. You will normally have to pay Capital Gains Tax on the increase of the property's value when you sell it.
Positive Cashflow - Income
This is the type of profit usually made by Landlords where the overheads of owning and letting a property are less than the income generated from same. What this means is that if you add up your mortgage payments, management fees and cost of repairs the total should be less, across the same period, as the rent paid by the Tenant. For example, if you pay out £500 per month on overheads, you would want to be letting the place out for at least £550 in order to make a profit, or Positive Cashflow. You will normally have to pay Income Tax on the profit made from rental.
The above two types of investment are not the only two and they are not necessarily mutually exclusive, that means it is possible to find a property that represents both types of investment. In fact most property will have some kind of appreciation, although there are areas that have had zero growth over the past few years and, indeed, some areas that have had negative growth, that means the value of property has actually dropped.
Similarly, Positive Cashflow is variable and can rise and fall with market conditions, you can only make your best, informed decision on the day, for the day, with all the available information. Historical trends may point towards a potential future, but this is not any kind of guarantee.
Plan for Voids
You must build Voids into your cost structure or overheads. Void Periods, referred to simply as Voids, are the times when your flat is not let out but you must continue to pay the mortgage and associated costs like Service Charges, in the case of a Leasehold property. This is why the most common Buy To Let mortgage is worked out on a factor of 130%, the Lender expects Voids and incidental costs and is building in a simple safeguard for their financial exposure to you. By anyone's standards the factor of 130% is a good rule of thumb, this means that your actual rental income should be 130% of your mortgage payments.
Many Investors and Landlords have been caught out by not accounting for Voids and suddenly running short of money when they have to pay their mortgage with no rental income to balance the outgoing cash. In areas of high competition your property may be empty for several months. It is a good idea to have around three months worth of mortgage payments set aside for your Buy To Let property in case of Voids.
The more properties you have in your rental portfolio the less chance there is that you will run short of cash for the mortgage payments, as you balance the risk of Voids across the entire portfolio and not just on a single property. However, this assumes you have sensibly spread your rental properties across various different areas to avoid loss of income if one particular area is impacted for some reason. For example, if you have five flats in one apartment building, they will all suffer from the same local market conditions. In times of low demand and high competition you will have not one but five Voids to contend with. If you had five rental properties in different suburbs of the same town or city then you have reduced your chances of having all five properties empty at the same time. Better still to have these five properties in different towns altogether. As the old saying goes, don't have all your eggs in one basket.
It is important to remember that no matter how many properties you have and no matter how spread out they are, there is always a slim chance that they might all suffer Void Periods at the same time. You should have a plan in case this happens, but you can lessen the chance of this happening by staggering your Tenancy Periods so they don't all start and end in the same month. This would normally happen anyway as various Tenants come and go at different times.
Yields and Profits
There are many methods that people use to calculate what they call the Yield. Yields are essentially the ratio of income generated by a property in relation to the initial capital input and costs associated with obtaining and letting the property. Yields are normally represented as a percentage figure and depending on the area and the person you ask you will get a different story as to how much of a Yield is worthwhile. Some people assess the potential income from a property by performing a series of complicated calculations and arriving at this Yield percentage, they already know their personal limits and may accept an 11% Yield but reject a 10% Yield.
But when you look at the big picture most Yield calculations are really a waste of time as the conditions they have based their calculations on will change tomorrow. Furthermore, the idea in business is to make money and not lose it, therefore, generally speaking, any income is good income even if it is only 5%. Obviously there are practical considerations but you have to remember that these figures can change from day to day and are completely dependant on how you calculate your Yield.
The preferred method of establishing the viability of a Positive Cashflow type of investment is simply looking at how much profit you have after your costs. If your flat costs £500 per month to run then an income of £490 per month is Negative Cashflow, but an income of £550 is Positive Cashflow. It all comes down to what you are comfortable with and how much you need to establish a Void buffer as mentioned above.
Try not to get bogged down with hairline percentage variances where 10% is bad and 11% is good, instead focus on real income and what this means to your property business.
One way of improving your income is to have an Interest Only mortgage, as opposed to a standard Repayment mortgage. This can mean considerably lower repayments each month, but beware, at the end of the mortgage you will have to repay the principle loan amount in full. This is often an ideal method when you only plan to have a property for say 5 to 10 years of a 25 year mortgage, as when you sell it you would hope to repay the principle mortgage amount anyway, but in the meantime you have had to pay less each month. If the Capital Growth in the property is good then at the end of the mortgage term you may well be able to refinance or sell it and pay the principle back with enough left over to reinvest in something else. It very much depends what your long term plans are, but Interest Only mortgages can be a valuable tool for Property Investors and Landlords.
Different Deal Types
There are probably an infinite number of ways to structure a property deal, in fact there are very few rules and you can be as creative as you like provided you operate within the constrains of any lending criteria if you are using mortgage finance. So there is no way we could not possibly list and define all the various options, but we have chosen to highlight a few of them here to show you the kind of options that are out there as well as the pros and cons of each.
No Money Down
This is the most common type of deal sought by Property Investors who are new to the market or wanting to invest as little capital as possible. If you think about this option carefully it soon becomes a very unappetising method of property investment. Up front it appears that you will get something for nothing, as we all know this is a very rare thing in life, even more so in business.
For a start, the name of this type of deal is a bit of a misnomer as it infers that you can own a property by not putting any money into the deal, if this were true then everyone would be out getting property for nothing. There will normally be some kind of deposit to be paid in order to secure your interest in your chosen plot. There will eventually be conveyancing fees to pay and possibly some other incidental costs. But even if you manage to get the rights to buy a plot without parting with a penny, by the time your property is built and ready to complete it may have changed in value quite considerably. This can be good, but often is just the opposite.
When new developments are pre-valued (valued before they are built) the developer often has little more intention than to sell the bulk of the properties to Investors and will push to obtain a high valuation in order to make their supposed discounts appear very attractive. But by the time the properties are finished the market can suddenly turn your investment into a nightmare. This is because the standard Buy To Let mortgage is based on the ratio of 130%, as explained above, which can result in the Lender offering you a lot smaller mortgage than you were expecting. The end result is that you find yourself contracted to buy something that you don't have the money for. At this time you only have a few choices :
- Option 1 : Try and find the deposit money plus any additional funds needed to complete on the purchase, this often means taking out a loan from somewhere or borrowing money to cover the purchase and then finding you have to make mortgage payments on something that will not let out either. This can lead to a downward spiral in finances.
- Option 2 : Accept that you have to pay the deposit but cannot afford the balance to complete and ,therefore, lose the property and your deposit.
- Option 3 : Try to find someone to buy you out of your contract. Even if your contract is transferable this is like blood to sharks, once someone knows you back is to the wall they will tie you down to an absolute minimum and you may still walk away from the deal a few pounds poorer.
- Option 4 : You might be lucky, given the short notice period to complete, to find an onward buyer who will back-to-back the deal, but this is unlikely and quite rare.
Back-To-Back
This type of deal has a few variations but the basic concept is where you line up a purchase a property and the subsequent sale of the same property so that the inbound purchase and the outbound sale complete on the same day. The idea is to make a profit from buying low and selling high.
Whereas back-to-back deals are more easily carried out on new-build properties, thereby allowing a good lead time to locate a buyer, in many cases established properties can be bought and sold this way too. Sometimes it is down to good fortune and other times it is good management. If you can exchange early and have a long period until completion you can give yourself time to find a buyer, but you obviously have to have something that is in demand and that you have bought in cheap.
Cash Back
This type of deal is quite straightforward, however, it still has certain inherent dangers. The basic concept is that you find a property that has a market value higher than the purchase price and you obtain a mortgage based on the market value. For example, if the property is valued at £100,000 but you can buy it for £75,000, then your 85% Buy To Let Mortgage will result in a loan of £85,000 giving you £10,000 cash back on completion of the purchase. Some solicitors do not like this kind of transaction as they believe it is misleading the Lender, check that your solicitor will do this before you start. You must remember that your solicitor has a responsibility to the Lender to ensure that mortgage fraud is not taking place.
Most Lenders will only lend on the purchase price, this is called a Loan To Purchase (LTP), so you need to find a Lender who will lend on the value, this is called a Loan To Value (LTV). The other method is to find a Lender who will lend you more than the value, or purchase price, of the property in the first place. Some Lenders offer, from time to time, up to 125% of the value of the property. Sometimes they will release the funds upon completion as part of the basic mortgage, other times they will release funds towards payment of works or improvements in the property. In the case of improvements they usually want to see invoices or receipts and may make payment directly to the supplier of the goods and services in question.
The only point of note, regarding this type of mortgage, is that your property finance will be what is termed "highly geared". This means that you have the maximum amount of equity squeezed out of the property. The problem with this is that it normally means that your mortgage payments will be higher which may cause you problems in generating Positive Cashflow from that particular property. It may also mean that it takes a lot longer to achieve any Capital Growth in the property.
SECTION REVISION -
- Your Buy To Let property investment is a business, treat it like one.
- Make sure the financial figures stack up on your potential property purchase.
- Do you want Capital Growth, Positive Cashflow or both?
- Make your decision based on today's status, information and market conditions.
- Plan ahead for Voids, it will happen.
- Spread the risk, don't put all your eggs in one basket.
- Avoid complicated Yield Calculations and focus on real income.
- Is an Interest Only mortgage the right choice for you?
- What kind of deal type makes the most sense and contains less risk?
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Preparing property to let
Now that you have found and bought a property to let out, what do you need to do to it to prepare it for rental? Even if your property is brand new there are still things that must be done to prepare the property, to protect yourself and comply with the law.
NOTE : The information in this section is understood to be correct at the time of writing. However, you should not rely on the accuracy of this information and you should always check for yourself what the latest rules and laws are to make sure you are up to date with current requirements. If in doubt, contact the Health & Safety Executive and Trading Standards Office for more information.
Gas Test
It is required, by law, that the Landlord have a Gas Safety Test performed every 12 months. It is best practice to use a CORGI registered installer to perform the safety check. Provided your property and appliances are safe, you will be issued with Gas Safety Certificate which you must retain for 2 years. A copy of the Gas Safety Certificate must be given to the Tenant upon them taking up residence and thereafter within 28 days of the annual check.
When you re-let your property you should check to make sure that the previous Tenant has not left any gas appliances behind, if so these should be removed and the new Tenant should again be issued a copy of the Gas Safety Certificate.
Where possible you should make this check yourself or at least confirm it has been done. This is because you, the Landlord, are responsible for the safety of the property and the Tenant under the 1998 Regulations which are enforced by the Health & Safety Executive. If you use an Agent, and they forget, then you may still be held liable if a problem arises. There are severe penalties for non-compliance which can be imposed and the death of someone from your negligence can result in manslaughter charges for Landlords and Letting Agents. Let's be very clear about this, non-compliance is a criminal offence and courts can impose unlimited fines and imprisonment. You should be aware that this may invalidate your property insurance and could leave you personally liable for any civil damages claims, past records show that awards in such cases have proved to be very.
If in doubt about your Gas Test, check with the Health & Safety Executive.
PAT - Electrical Test
The Portable Appliance Test (PAT) applies to the wiring and general electrical safety of your property as well as any electrical device that you provide in your property. When letting a property you must ensure that all electrical systems and appliances are in good and safe working order. If you fail to comply with this regulations then you can be charged as a criminal which may result in a fine of £5,000 per item not in compliance, six month's imprisonment or even manslaughter charges in the event of death. The Tenant may also pursue you for civil damages and your property insurance may be invalidated. Even light bulbs in bathrooms have special requirements, make sure you get it all checked out properly.
Whereas there is no statutory requirement to have annual safety checks on electrical equipment, as there is with gas, the Landlord is still responsible for electrical systems and appliances on the property and the safety associated with these items. So it makes sense for you to regularly have your appliances and wiring checked by a qualified electrician.
If in doubt about your PAT Test, check with the Health & Safety Executive.
Floor Coverings
At some point you will have to make a decision regarding ongoing maintenance costs and floor coverings are a perfect example of items that must be considered. For example, is it best to put down an expensive carpet and hope it lasts for 10 years or lay something that is cheaper to replace if it gets damaged? You have to consider that not all Tenants will treat your property, and its contents, like you would. It doesn't matter if they are minimum wage earners or corporate high-flyers, you never can tell who will take care of things and who will not. So most times it is better to ere on the side of caution and either install something hard wearing or something that you will expect to replace every 2 years or so.
There are many alternatives to carpet, many Landlords choose to laminate or linoleum flooring as it is hard wearing and practical, but it is also colder and can make some places echo and seem unattractive to certain Tenants. You might lay some flooring tiles, but the tile grout will eventually need to be replaced as it deteriorates or is damaged from normal wear and tear.
Furnished or Unfurnished
This is a question that gets asked a lot and there is no correct answer. But consider this, if you have your flat furnished with lots of nice things and then someone wants to rent it unfurnished do you turn them away or do you try to put your things in storage somewhere else for the duration of the tenancy. This could cost you in moving and storage fees and your things will deteriorate in storage. But if you turn away a Tenant in a difficult market your flat could remain empty for a long time.
If you do decide to let your residential property furnished then you must ensure that certain types of furniture and furnishings that you supply meet the safety regulations in force at the time. If you do not comply with the regulations it is a criminal offence and may result in a fine of £5,000 per item not in compliance, six month's in prison or even manslaughter charges in the event of death. Tenants may sue you for civil damages as well. Any property insurance may become invalid leaving you personally liable for potentially huge sums of money.
Since the 1 st of January 1997 all furniture in tenanted residential property must comply with the Fire & Safety Regulations which extends the scope of the Consumer Protection Act. These regulations cover the supplying, hiring or lending of specified goods during the course of your business. A Landlord letting out a residential property over any period would be deemed to be "letting in the course of their business" and would, therefore, need to comply.
The Fire & Safety Regulations apply to :
- Arm chairs, suites, sofas, sofa beds and futons
- Beds, bed bases, headboards, mattresses, divans and pillows
- Nursery furniture
- Garden furniture which could be used indoors
- Loose, stretch and fitted covers for furniture, cushions and seat pads
Items that are excluded from these regulations are :
- Antique furniture or any furniture manufactured before 1950
- Bed clothes, pillowcases and duvets
- Loose mattress covers
- Sleeping bags
- Curtains
- Carpets
In regards to furnishings, a good rule of thumb is to provide less rather than more. In fact, if you don't need to supply it then don't, you might just be asking for trouble and besides, if it breaks or wears out then you will have to replace it.
If in doubt about your Furnishings, check with the Trading Standards Office .
Protect Your Tenant, Your Property and Yourself
Following on from the last section, you should remember that you are running a business and the bottom line counts. That doesn't mean you have to be totally tight with your finances but on the other hand it means that you should consider carefully every item that you are considering leaving in your property.
Lets assume your property has a lawn and, as usual, it is the Tenant's responsibility to maintain it. So being a nice, helpful Landlord you decide to leave a lawnmower for the Tenant to use. If they hurt themselves with the lawnmower then you can be held liable, especially if the item is found to be defective or unsafe in some way. This can also apply to other items that you might not consider are a danger, maybe a sharp edge on a bench or worktop from an ill fitted stainless steel surface. As the UK becomes more and more a litigation nation, like the USA, you have to protect yourself and prevention is always better than cure.
Carefully select an items you choose to furnish your property with, select items that carry appropriate tags to state their compliance with safety regulations. Items should be legal, non-flammable and Tenant-proof. With this in mind, the cheapest option is not always the best, as you can increase your risk with cheaply produced items. Remember, if you don’t have to then don't supply it. Trying to be helpful can cause a problem, consider your actions.
SECTION REVISION -
- You must have a Gas Safety Check every 12 months.
- You don't have to have a PAT Test, but it makes sense so do it anyway.
- Make sure your furnishings comply with Fire and Safety Regulations.
- If you don't need to supply it then ask yourself why you want to.
- Always bear in mind that you are kitting the place out for a Tenant and not yourself.
- Prevention is always better than cure.
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Letting - you or an agent
So there you are, with your property ready to let, but do you manage it yourself or engage the services of Letting Agent to manage it for you? The answer is different for everyone because everyone has different circumstances and requirements.
To decide on which course is the best for you it is necessary to review your circumstances and abilities. If you live in London and own a flat in Liverpool then it is not practical for you to visit the flat every time you are required to do something at the property, like show potential Tenants around. But there is more to it than that, as detailed below.
If you are just starting out or are unsure then it can be best to use a Letting Agent, but you will still need to know what they do and what responsibilities you still have. Just because you have employed an agent does not relieve you of your legal responsibilities. Similarly, if you don't know what they are supposed to do how do you know if they are giving you good service or not?
What a Letting Agent Does
Most Letting Agents have a flexible structure allowing you to use part or all of the services that they offer, so make sure you ask before committing to something that may be unnecessary or overkill.
This list contains the most common things that a Letting Agent will do for you :
- Arrange Gas and PAT Tests.
- Advertise and find Tenants.
- Run credit checks on prospective Tenants.
- Arrange letting insurance.
- Prepare and supply the Assured Shorthold Tenancy (AST) Agreement.
- Prepare and supply the Property Inventory.
- Handover the property when the Tenant moves in.
- Perform regular inspections to ensure the Tenant is not misusing the property and adhering to the AST.
- Be the point of contact for enquiries from the Tenant.
- Manage the changeover of utility supply and council tax into the Tenant's name.
- Manage any maintenance requirements and often refurbishment works like fitting new carpets, cleaning and redecoration.
- Manage rent collection and payment to you.
- Perform the final inspection when the Tenant moves out.
Obviously the Letting Agent needs to be paid for their services and this is an important consideration if your property is not generating Positive Cashflow. Many Letting Agents will charge a Letting Fee for each Tenant that they place into a property and then charge you a percentage of the ongoing rental income. Sometimes the Letting Fee can be equal to, or more than, the first month's rent. This means you must be prepared to cover the mortgage payment for the first month of the tenancy as you may receive no income that month.
The ongoing Management Fee depends on the deal you have with them, but ordinarily it will be around 10% to 15% of the rent. If you have multiple properties managed through one Letting Agent then you may be able to negotiate a reduced Letting Fee or Management Fee. But be warned that some Letting Agents have very low Management Fees but have high charges for additional services, such services may include preparing an Inventory or visiting the property. As always, make sure you know what you are getting for your money, there is no point in getting a large invoice at the end of each month instead of the income that your business should be generating.
What can I do Myself?
Some people believe that they have to employ a Letting Agent, but this is simply not true. You can do anything the Letting Agent can do, including credit checks and arranging letting insurance. You might pay more for these services but it can be done. There is no legal obligation to engage the services of a Letting Agent.
As for all the other activities listed above, you can do those as well, but ask yourself if you really want to. Are you saving money only to spend time? Do you want Tenants calling you at midnight to say that the pipes are blocked? Do you know what has to be in a Tenancy Agreement without infringing on the Tenant's rights? OK, so you can buy a Tenancy Agreement or even find one on the internet, but how do you know it is up to date and correct? Do you have a fulltime job which precludes you from visiting your property during business hours? What about when you go on holiday and the Tenant has an emergency, what are you going to do then?
As you can see, there are many considerations to make before you decide to use a Letting Agent or not. Ask questions, compare the services and costs of different Letting Agents and make an informed decision. But most importantly, think about how your time is most profitably spent.
SECTION REVISION -
- Consider your personal circumstances and requirements.
- How will it affect your lifestyle of you have to manage your own properties?
- How will it affect your income to use a Letting Agent?
- If you use a Letting Agent you still need to know what they do and what you are responsible for.
- What is the most profitable use of your time and energy?
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Building your portfolio
So there you are with your first flat that you bought in an area of high demand, you have a Tenant in the flat and possibly a Letting Agent managing it for you. So what do you do now? You need to do the same thing all over again.
Owning and letting a single flat might provide you with immediate Positive Cashflow and will possibly represent some long term Capital Growth, but if you are still holding down a regular job think about what might happen during a long Void Period or if there is some other dip in the market that affects your investment. If you can't afford to pay your own mortgage as well as the one on your investment property then you might very quickly find your rock-solid investment sinking into soft sand. But just as with sand, the way to remain stable is to spread the load, or in this case, build a portfolio to spread the risk. If you have 5 flats and only 1 of them is Void, then potentially the income from the other 4 might be enough to subsidise or carry the Void property. This is one of the fundamental elements of building a Portfolio.
Even if you are a fulltime Property Investor or Landlord, you would find it hard to make a good living out of one property, so you will need to expand. The best way to do this is take your process of buying a good property, such as the process outlined in this document, and repeat it. You will invariably refine and modify the process each time as you gain more experience and establish more contacts, but the basic principles never change. So learn the process and repeat it.
Things Change
Be very aware that what may have been an area of high demand yesterday may not be today. In an area you have already researched you should have made contact with local Estate Agents, Letting Agents and other people in the industry. Refer back to your notes, make a few phone calls or drop in and visit these people to see what, if anything, has changed. Never assume that yesterday's information is still correct, adapt to the changing markets and keep up to date. Even if you are not looking to buy something you should keep up to date with your areas of interest because an Estate Agent might call and offer you a property out of the blue and you will need to register you interest fast or they will call the next Investor on their list.
Self Flooding
It is bad enough, in these days of hot-spot books and newspaper articles, that other Property Investors will possibly move into your high demand area, flooding the market with supply and turning a good market bad. There is absolutely nothing you can do to stop this. However, you can make sure you don't do it to yourself.
Imagine a pot plant that you need to water everyday, the soil in the pot can only hold so much water at any one time. If you over-water the plant then the excess water will flood the soil and spill over the edge of the pot, you can even kill the plant if you do this. What you need to do is be patient and only give the plant as much water as it needs and no more. Your local property market is just the same as the soil, if you over-supply the market with property then the excess will be wasted and you could kill your own market. You not only need to keep up to date with the local demand, but also think ahead. If you buy too many flats they could end up empty and then you will start competing with yourself to gain Tenants.
Sometimes it makes more sense to keep an area hungry, only supply 90% of what it demands, this helps to retain (ignoring other Landlord's activities) the demand and might also allow a buffer for other Property Investors moving into the area.
As always you should not keep all your eggs in one basket, you should diversify and have various properties in different locations. The further apart they are the less likely that they will all be affected by any one issue or market condition.
Another way to self-flood is to try and buy too many properties all at once in the same development, street or immediate area. Don't bite off more than you can chew. You might benefit from economy of scale, but that will not help if you are competing with yourself to let several flats at the same time. It is a much better practice to focus on one property at a time. Get each property up and running properly as a stand alone business and then move on to the next one.
SECTION REVISION -
- Build a portfolio to spread the risk.
- Never assume that yesterday's information is still correct.
- Don't self flood and area, you will end up competing with yourself.
- Don't keep all your eggs in one basket.
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Summary
This Buy to let book / guide has given you a foundation from which you can start building your own Buy To Let business and become a Landlord, but you must remember that it is you that needs to take action and make it happen. You must seek out the properties that you want to buy and look for Demand. If you just look in the newspaper or auction catalogues, to see what is on offer, then you are at looking at Supply and Supply does not mean that anyone wants to live there.
What Have You Learnt
You will hopefully have learnt that there are many ways into the property market and that the market itself is, in reality, not a national market but rather a whole series of small, local markets that each has their own unique conditions and governing factors.
You should now realise that you need to be the one who is proactive in seeking out information and not blindly accepting what its handed to you, remember that when somebody is selling you something that their interest is in the sale and not your requirements.
Look at various financial options and make sure that the type of financing you obtain is appropriate for the type of investment you are making.
It is vital to make sure that you, as a Landlord, do not end up in jail through negligence. Ensure that your property is safe and Tenant proof.
Carefully consider whether or not you will manage the property yourself or have a Letting Agent do it for you.
What Next?
The only thing left to do is take action. Find an area an research it, make phone calls and visit the area. Gather together your property assessment toolkit and hit the road.
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Fine Print
Copyright
Copyright Lea Beven © 2006 - All Rights Reserved. Reproduction of this document, in whole or in part, in any form or medium without express permission in writing from Lea Beven is strictly prohibited. You may not modify, reproduce, prepare derivative works, distribute, display, post or transmit any part of this document without express permission in writing from Lea Beven.
Disclaimer
This page expresses the ideas, opinions and views of the writers which are to be taken in context and are relative to the time of writing. The contents of this document are intended expressly as an educational aid and are not to be taken as advice, instruction or explicit direction. In no event will Lea Beven or the authors be liable for any results or damages whatsoever arising out of the use or the results of use of this document or the information contained herein.
Content
This Guide was jointly written by Lady Lea Beven and Cameron Brunton based solely on their combined experiences and knowledge of the UK property investment industry. All intellectual property rights are retained by the authors and no guarantees are made regarding the contents of this document whatsoever.
