New reports show that rental income in the UK is worth almost £4billion a month and the buy to let market is growing all the time.
It can be an attractive investment as the rental market at the moment is incredibly strong and, if you pick the right area and buy at the right price, the yields can be thoroughly worthwhile.
So we have some tips for you if you are considering buying a property purely to rent it out and get an income from it.
Research the Market Thoroughly
You need to know the risks as well as the benefits when considering buy to let for the first time. Make sure it’s what you want and consider whether your money would be better invested elsewhere. You may find that your money would work better in a high-rate savings account or in an investment fund.
Buying to let property means not just investing in the purchase price but maintaining the property over the coming years. You will typically need to take out a mortgage which has its own risks with rising and falling house prices. In addition, there are various legal issues to take into account.
The more research you do, the better your chances of the investment paying off.
It is advisable to instruct a lawyer at the earliest possible opportunity to carry out the conveyancing on your but to let purchase. If you are taking out a mortgage to purchase the property, the lender will require a lawyer to act on its behalf to ensure the property has what is known as a “good and marketable title” and to advise on any risks and to protect its position. You will incur search fees and you will be responsible for paying Land Registry fees to register your house purchase in addition to stamp duty land tax (SDLT) when the purchase price exceeds certain specified thresholds. Make sure that you factor in these additional costs and any professional fees when making your calculations on affordability.
Once you have bought the property, it is usual for tenants to occupy on the basis on as assured shorthold tenancy (AST). Certain legal requirements must be complied with when entering into ASTs. If these are not carried out correctly, you may encounter problems when terminating the tenancy or be liable to a fine if the tenancy deposit is not protected within a Government backed tenancy deposit scheme.
Get the Area Right
A promising area is better than an expensive or really cheap area. “Promising” may mean that a place is somewhere people want to live, and it could be for many different reasons.
Look at an area from the angle of who you would want to attract to the property. If you want young professional couples, are there good transport links? Is the property in a commuter belt? If you want the house to be a family home, look at local schools and amenities for children. Or if you’re after a house full of students check out the local universities and colleges as well as transport links.
You will need to make sure that the kind of property you can afford, the area, and the prospective tenants all match up. Bear in mind that problematic tenants can prove to be expensive. This is why is it imperative that appropriate legal documentation is drawn up correctly and legal advice is sought at the outset to avoid problems arising in the future.
Work Out the Maths
Even before you open the property pages of your local newspaper, sit down and work out what you can actually afford, the costs of houses in the areas you’re interested in, and the rent you are likely to get.
Most buy to let lenders want rent to cover 125% of the mortgage repayments and they tend to ask for 25% deposits, or sometimes even more. The rates are always considerably more than residential mortgages. You may also get hit with large arrangement fees for the best mortgages out there.
Sometimes you may realise the sums just don’t add up. If the mortgage rate and the likely rent don’t match then you may have to face facts – it just won’t work. You also have to factor in ongoing maintenance costs and what would happen if the property sat empty. You would still have to pay the mortgage but there wouldn’t be any money coming in.
Remember Your Costs
If you do decide the maths works and want to go for it, remember to work out your yield. This is the annual rent received as a percentage of the purchase price.
For example, your property cost you £200,000 and it brings in £10,000 of annual rent. This will give you an annual yield of 5%.
Rent should be the key return for a buy to let property so the higher the yield, the better. Most buy to let mortgages are done on an interest only basis, so the amount borrowed will not be paid off over time. If you can get your yield above the interest payments then you can start saving or invest any extra money.
Consider a “Doer-Upper” and Haggle Over Price
You may find a bargain out there if you are willing to do some work on the house. Remember, this isn’t going to be your property. It’s going to be for someone else to live in. Only do the amount of work necessary on the property to get it to the standard for a prospective tenant. If you want to let your house to students for example, you don’t need to put in gold taps! Don’t invest too much into renovations if you don’t know that the rent will cover the expense.
A buy to let purchase can also haggle over the purchase price of a property as you’re not in a chain. You won’t be waiting to sell a house to buy a house so you’re in a much better position to residential buyers. If you’re buying off an existing landlord who is cashing in, then you may be able to offer a lower price for a quick sale.
Hands On or Hands Off?
You will need to decide if you want to handle the day to day running of the property or want to leave it in the hands of a managing agent. Do you want to receive the phone call in the middle of the night if a pipe bursts, or would you prefer someone else to handle it?
Agents do charge a fee for looking after rental properties, but they will endeavour to look after any problems and have a plethora of contacts to go to if things go wrong. However, it can be expensive and you want agents you can trust and who are reliable. Legal advice should be obtained on the type of tenancy, what notices need to be served on the tenant prior to the commencement of the tenancy and any additional information required by law.
The agent will also advertise the property, arrange viewings, and deal with all the paperwork. You may save money doing it yourself but you have to factor in the time and effort needed to get tenants in the first place.
No matter what you decide you will need expert legal advice when purchasing a property. A solicitor will be able to help with contracts, conveyancing and re-mortgaging. If you are considering a buy to let property purchase, get in touch with Slater and Gordon’s Property Solicitors. Call us on freephone 0800 916 9083 or contact us online and we will call you.