Purchasing buy to let properties is one of the biggest and wisest investments you can make. If it is your first investment property you might be unsure of how it works, to make it easier for you, we have put together a guide of things you may need to consider:
1. Weighing up your obligations of becoming a landlord
It is important that you go into this sector with your eyes wide open, knowing your legal rights and obligations as a landlord and similarly your tenant’s rights and obligations too. Not only this but it is crucial to be aware of the potential risks associated with letting your property out and ensuring that you have done everything you can to firstly prevent things from happening and secondly to safeguard yourself and your investment in the eventuality that something did go wrong. Some issues to consider are how to serve relevant notices or draw up tenancy agreements, referencing tenants, dealing with problematic tenants, chasing rent arrears, registering deposits and dealing with damages disputes. There is plenty of useful information out there for landlords on the Citizen’s Advice Bureau and the Government website.
2. Decide how your property will be managed
Obviously the cheaper option is to privately manage your property yourself, however, this can be quite time consuming and problematic if you have little to no experience in this area. Letting agents can offer you years of knowledge, experience and advice in this area to help safeguard your investment. They can also offer you different levels of service depending on your needs. At Cook Residential we have built up very close alliances with local specialist letting agencies that we are able to put you in touch with so that you can discuss your needs and get a quote accordingly.
3. Researching the area
Knowing the property market in the area is essential to a great investment. For a low risk investment purchase, look for a property in an area of high demand will ensure your property will get snapped up quickly and won’t be left empty for long periods of time between tenancies. It is wise to discuss this with a local letting agent to get a true reflection of supply and demand in the area (preferably one that just specialises in lettings only). They will also be able to provide you with rental valuations of any prospective properties so that you can work out your potential rental yield against the purchase price (see point 7). This will help you get an idea of what would make a good financial investment.
4. Think of your target tenant
For example, university students are looking for a fully furnished accommodation with locks fitted on bedroom doors. Students generally return a higher rental yield but you may get a higher turnover of younger tenants and can be more complex to manage. Young working professionals or a family tend to seek a long term unfurnished or part-furnished property but the rental value compared to that of a student market would be substantially lower.
5. Buy to let mortgages
If you’re not making a cash purchase, you would generally need a minimum of 25% deposit for a buy to let mortgage, however this could be less for some people. When you start to research your mortgage options, we would recommend you speak to an Independent Financial Advisor to ensure you receive the best advice for your circumstances. Getting the right advice is paramount in this area particularly with the Mortgage Credit Directive coming into force on 21st March 2016. If you would like more information on buy to let mortgages please get in contact with our recommended independent mortgage advisor.
6. Considering your other costs
A landlord’s biggest cost is likely to be the mortgage but depending on the property there may also be substantial ongoing costs of maintenance, insurance, ground rent, service charges and a plethora of other optional add-ons such as lettings agent’s fees or advertising the flat privately, getting a third party to undertake an inventory and so on. There can also be clauses within the lease that may prevent or impose a financial charge if you choose to let an apartment out. This is worth investigating further prior to formally instructing solicitors to avoid any hidden charges or disappointment further on down the line.
7. Working out your gross / net rental yield
The simplest calculation of rental yield involves dividing the yearly rent by the sale price of the property. Take the real example of a flat priced at £500,000 commanding a rent of £850 per week. The yield is 8.8%, arrived at by dividing the annual rent £44,200 (£850 multiplied by 52 weeks) by the property sale price.
This is a “gross yield”, but it doesn’t take into account any of the costs associated with owning and renting a property out.
It is less helpful to a landlord hoping to achieve an income after costs from their investment. They need to work out a “true yield” or “yield net” of costs.
To work out the yield net then all of the associated property costs and add on’s (as referenced in point 6) need to be worked out annually, deducted from the gross yearly rent and then divide the sale / property price by this net figure to get a percentage return.
Based on data from the first quarter of 2015, the LendInvest Buy-to-Let Index shows the average rental yield for a one-bed property across the UK is 5.9 per cent, compared with 5.3 per cent for a two-bed, 4.7 per cent for a three-bed and 4 per cent for a four-bed.
8. Consider renovating a property
If you would like to increase your investment in the long run, renovating a property is a great way to increase your profits and long term investment. But, if you would like a low maintenance option you can easily find a well-presented property that already has a tenant in situ or is ready for a tenant to move straight in.
9. Decorate neutral
Keep it simple. Remember that not everyone has your unique tastes. So in order to appeal to your target tenants, decorate neutrally! Do not overspend on fixtures and fittings, tenants are unlikely to treat the property as well as a homeowner would because it is not their investment to look after.
10. Make an offer with your proof of funds
Before you make an offer, be sure of all your costs and make sure your finances are in place. Ensuring you have proof of funds when you offer shows that you are a serious buyer and will speed up the negotiation of the sale. If you don’t have your proof of funds ready then you may lose the property to another buyer. Proof of funds will need to be in the form of a mortgage agreement in principle, letter or email from a financial advisor or bank / savings statements.
Looking for an investment property and a Estate Agents in Cheltenham? We have plenty of great investments to choose from, some of which that already have tenants in situ. Give us a call or register your details online to find out more.