Understanding the basics of the way UK buy-to-let mortgage deals work is an essential part of you becoming and effective UK property investor. You might be surprised to find out that each country in the world operates very differently in the way it offers mortgages. The good news is that the UK is one of the most advanced countries in terms of the financing it is able to offer investors. As many of you will be aware, this all came about with the first UK buy-to-let mortgages in 1996 but over the last ten years or so it has developed significantly and offers great opportunities to the would-be investor.
I have been to other countries looking at investment opportunities but only to be disappointed by the relatively poor financing deals that are available. This could include relatively low loan to value offerings, compulsory capital repayment, lower repayment periods, inability to re-mortgage shortly after purchase and so on and so forth. No other country in the world that I am aware of offers such a flexible offering as the UK does for mortgage deals. This is great news for us here in the UK…as long as we understand what is on offer. The caveat to all this is that the flexibility can lead you into possibly over committing yourself if you are so inclined, whereas the financing abroad will often force you to be more cautious.
Understanding what financing options to go along with will depend upon what your investment strategy is. For example, if you are looking at buying a property using a mortgage, doing the property up and then selling on at a profit there would be no problem in paying a higher interest rate if it meant not having any early redemption penalties to pay when you payback the mortgage loan on the sale of the property. Equally, high redemption penalties may not be so much of a problem if your intention is to buy and hold the property for five to ten years or so.
Taking the wrong financing options could cost you significant amounts of money so some time invested in understanding the way the UK buy-to-let mortgage market works is time well spent. Here is an introduction to the general framework within which the mortgages operate. Make sure you understand all the material presented here as well as understanding the information in other articles, in particular those articles that cover all the ‘hidden’ costs that can be packed into a mortgage deal.
Always take the advice of an independent financial advisor but also be aware that the buy-to-let mortgage market is not regulated by the IFA like the residential mortgage market is. This means that even if you take advice that proves to be very poor advice then there is nothing you can do about it in terms of complaints or compensation. I have certainly taken some advice in my early days that I could consider to be poor advice. However, I can see that the decisions taken would have been good for the broker in terms of commission! So although you need to take professional advice on all matters relating to property investment, remember that you need to know enough to be able to ask intelligent questions and therefore be quite comfortable that the advice you are being give is good advice.
Interest-only and Repayment Mortgage Options
With UK buy-to-let mortgage deals, there are essentially two types of repayment options; these are interest only and interest plus repayment. These options are already familiar to many of us in residential mortgage selection. The former being what was used along with the endowment policies where only interest is paid throughout the loan period until the final day of the loan period when the endowment policy matures and is used to pay off the capital sum. The latter being the traditional mortgage that gradually pays off the capital loan throughout the term of the loan as well as paying the interest.
The difference however with buy-to-let is that it is not going to be your home; so it doesn’t really matter if you don’t pay any capital off because you can sell the house to pay that off and then just take the increase in values as profit. So interest-only is the preferred mortgage format for many in UK buy-to-let as it keeps the monthly repayments down to a minimum and makes it more affordable from a cash-flow point of view. Clearly, if you invest in several properties then at the end of the loan term you can sell a few of them to fully pay off the loans on the others. However, if your strategy was to keep all the properties you have bought then you would need to arrange repayment mortgages on each one or have some other investment vehicle that would accumulate sufficient funds to pay off the loan amount at the end of the loan term.
Interest-only mortgages have the advantage that the whole of the loan payments is able to be offset against income for tax purposes. Also, as mentioned above, it lowers the amount payable monthly and therefore enables you to more easily cover the mortgage payments with the rental income. As yields have fallen recently due to increases in house prices, this is all the more important. It is no longer so easy to find properties that do give enough rental income to cover the interest let alone any repayments as well. Even if you opt to have an investment vehicle and take out interest-only mortgages, you will still have to find money to fund the investment vehicle that will amount to a figure about the same as if you took out a repayment mortgage.
Another thing to bear in mind is that the maximum size of a loan is often also governed by the rental income versus the repayment amount (often called ‘rental coverage’).
Options on Paying Interest Charged to Your Mortgage
Whether you go for interest-only or interest and capital repayment, you will still have to choose how you pay the interest element of the loan. The options you have on this payment are described below.
Standard Variable Rate
This is the lenders standard interest rate and is often the most uncompetitive but typically as the least additional costs of conditions to it. So if you are just after a loan for a short period of time this may well be the one for you. The mortgage company is in control of this and can make it whatever it thinks the market can stand. Although it may be the most expensive option over the long term, it could well turn out to be the cheapest for a shorter term of loan. You could well request a normal loan period of say 25 years but then redeem the mortgage in less than a year and pay very little in terms of additional costs to do this.
Trackers (base rate and LIBOR)
This mortgage rate is linked to, or tracks, the Bank of England base rate or LIBOR at an agreed percentage above (the difference between this rate and the base rate or LIBOR is what makes money for the mortgage company). When this changes, so does your mortgage interest rate. These mortgage deals are low risk products for lenders as any increase in rates can be instantly passed on to their customers. In times of base rate uncertainty the cheapest deals are often these kinds of deals (after SVR deals of course), however this also means that you carry all the risk if rates go higher.
Discounted
Discounted rates offer a reduction in mortgage interest rates for a specified period of time (usually one, two or three years). This discount period can be very useful especially on a new purchase where the rental yield is low as it will reduce or even eliminate any negative cash flow you may incur until rental rates catch up and give you a reasonable yield against your loan figure. However, there are often high set up costs or admin fees associated with these and that once the discount period ends the mortgage rate becomes quite uncompetitive. The other thing is those terrible tie-in periods, some will just be for the period of the discount which is fine in my book, but watch out for those that extend a few years beyond this and can be very expensive to get out of in terms of redemption penalties! I am personally suffering from this in a time when mortgage rates are on the increase that is most painful! I doubt any mortgage deal will tempt me into taking one on that has extended tie-ins ever again!
Fixed Rate
A fixed interest mortgage is one where the interest rate is fixed at a specified rate for an agreed period of time. This could range from say 12 months to the full term of the loan term. Typically the period is between 2 and 5 years. The attractive thing for the borrowers is the certainty – i.e. knowing that whatever happens to base rates your payments will be the same each month. The downside is that if rates fall you could be left paying more than if you were on a variable rate. If only we had a crystal ball!
Capped
This type of mortgage came into being to ‘protect’ house buyers from drastic rises in interest rates such as those experienced in the UK in the early 1990’s. It gives a maximum interest rate that will be charge and allows you to take advantage of lower interest rates in case these go down. This is not a common product nowadays but it is one to be aware of.
So those are the basics of how the UK buy-to-let mortgage deals work. As stated earlier, you also need to know about how charges are added to the mortgage deals in order to make the best selection. You also need to understand what your investment strategy will be so that you can choose the best type of deal to suit your strategy. And finally, since we don’t have a crystal ball, you need a fair bit of good luck because no-one can predict the future!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Tuesday, 25 September 2007
Wednesday, 12 September 2007
ARTICLE: The ‘Dirty Dozen’ of UK Buy-to-let Mortgage Deals
Faced with rising base rates, UK buy-to-let mortgage providers are seeking to continue to make cash from their borrowers, so they still need to make their deals appear attractive. However, in a highly competitive market place you can be sure that things are not always as they seem at first! You need to know what to look for to make sure you don’t get into a buy-to-let mortgage deal that is not all it seemed to be when you first read the ‘headlines’ about it! So you must look beyond the headlines to fully understand what mortgage deal you are really getting into.
Here are a dozen mortgaging cost factors that you need to be aware of and take account of when deciding which mortgage deal to go along with. Of course you should always take professional advice before getting into any UK buy-to-let mortgage deal.
OK, here they are…the ‘Dirty Dozen’:
1. Exit fees
An exit fee is supposed to be there to cover the administrative costs in closing a loan out when you either pay off the loan or switch to a different mortgage provider. Typically these fees can be any where between around £100 to £200 or more. This may not be very much in mortgage cost terms and that is why mortgage companies get away with charging it. Some UK buy-to-let mortgage deals however do not demand such exit fees, so it is just another thing to be aware of when you are comparing mortgage deals.
Another thing to bear in mind regarding these fees is that some people have found it is possible to reduce the fees to nothing simply by complaining. If you think the fee is unreasonable you could always contact the FSA by complaining in writing if they won’t at least reduce the fee to something reasonable. If you have many buy-to-let mortgages then these costs mount up if you need to move mortgage deals on a regular basis so it is worth doing what you can to reduce these costs
2. Standard Variable Rate
The standard variable rate is a lender's fluctuating rate of mortgage borrowing, typically around 1.5 to 2% higher than the Bank of England base rate. It is also the default mortgage rate when their customers’ mortgage deals expire. This is when the lenders make easy money when borrowers do not move on to a better deal. A real sting in the tail is when this is virtually forced on their customers for a period of time due to something called ‘extended tie-ins’ which we will discuss below.
You should really be looking to find a better deal as soon as you are faced with a UK buy-to-let mortgage deal going on to standard variable rate as these usually represent the worst offers in the market place.
You could actually just go straight onto standard variable rate as a buy-to-let mortgaging arrangement. However, the only possible reason I could see for anyone doing this is to get into a deal that may not have any other form of ‘penalty’ such as the redemption penalties being described later in this article. That would mean that the lender would be free to terminate the loan at any time without further financial implications.
A buy-to-let mortgage deal could be appropriate when the immediate future of an investment is uncertain, for example the owner of a property may not be sure whether they want to sell it or let it out. In the case of buying somewhere to do up and sell it could still work out to be the best option due to low or no charges when the loan is paid off (such as would have to be the case on the selling of the property).
3. Portability
Taking a UK buy-to-let mortgage out on a property often means committing to the deal for at least a year and may be even two or three years or even more. As a lot can change during longer periods, it is important to find out whether you could switch the security for the mortgage over to another property. This means that if you did find good reason to have to move the mortgage onto another property (such as the selling of the first one) then you could do this without financial implications that leave you worse off and the mortgage company better off.
If you find out that a buy-to-let mortgage deal is portable then you should go one step further and find out what the costs would be in actually porting it over to another property in your portfolio. This will be another factor that will help you compare mortgage deals. Depending on your situation it may or may not be significant but you should at least be aware of it.
4. Valuation fees
Before a buy-to-let mortgage provider will lend you the money, they will want to ensure that the property against which the loan is secured is worth the amount you are claiming. A professional valuation is therefore required. The charges for this are levied by the mortgaging company so you will need to check what these fees are as it all adds to the cost of the mortgage.
Sometimes this is offered free of charge in order to try to attract you into taking up that particular deal; other times it may be higher than what you would normally pay for a valuation fee. To me it is just another element to consider in what the overall true cost of the mortgage is.
5. Arrangement Fees or Admin Fees
Mortgage arrangement fees can be very significant and represent a major cost of a UK buy-to-let mortgage deal in the short term. These fees are often added to the loan so the mortgagee does not need you to find such a large amount of money and therefore it is psychologically more acceptable as well as more acceptable to their bank account! For the mortgage provider this is also attractive because they not only charge you the money but then make interest on the amount they have charged over the period that you hold the mortgage with them!
These fees can be up to around 2.5% of the loan figure. Sometimes these fees are a fixed amount rather than a percentage of the loan. Some are even quite reasonable. In general however these costs are quite significant and in my opinion they are just used to dress up an offer to seem attractive, when in actual fact they are going to make a killing out of you!
6. Booking Fees
A booking fee is paid when the application for the mortgage is made and it is non-refundable if you don’t go ahead with the mortgage. In this sense it is a kind of deposit on the deal that covers the mortgage company’s administration costs if you don’t take out the mortgage.
7. Offer Period
Be careful to note the offer period because this is the period over which the one-off fees such as the legal, valuation, and arrangement fees are effectively spread. So the shorter the offer period (ie the period over which the discounted or fixed interest rate is available, before going back to standard variable rate) then the higher the effective charges are when considered on a month-by-month basis. For example, a £1200 fee will cost you effectively £100 per month if the offer period is for 12 months only but will cost you half of that at £50 per month if the offer period is for 24 months, and even less if the offer period is for 36 months.
Another thing to be aware of regarding offer periods is that if the offer period is for a long period of time, say five years, then you may be locking yourself into a deal that seems good now but in three years time would be a poor deal (say if interest rates had lowered significantly by then and you had locked yourself in on a fixed rate deal).
When I look at any mortgage deal it is absolutely fundamental for me to find out what the offer period is. I have heard of some deals that sounded like great deals but then found out that the offer period was only for one year and the arrangement fee was very high; when all the costs were then spread on a month by month basis I found that it would be better for me to stay with the existing provider on standard variable rate!
I always add up the one-off costs and then spread these over the offer period to work out the equivalent monthly charge and then use this figure as the basis of comparing the various deals and also comparing to what I am currently being charged for the loan.
8. Early redemption charges
Most UK mortgage deals involve an early repayment charge often known as ‘redemption penalties’, this effectively locks the borrowers in for at least the length of the offer period and sometimes even longer. Some redemption charges are much higher charges than others and can be dressed up in all kinds of formulas but it is important to work out exactly what this means in currency terms. Often there is a sliding scale of charges depending upon the time at which the mortgage is redeemed. Usually, the longer you have held the mortgage then the lower the charge, but this is not always the case.
9. Legal Fees
It is normal for the person taking out the loan to provide the solicitor to carry out the conveyancing and professional legal advice for the loan. This will involve checking the title for the property, checking that there are no problems that have become evident that could affect the value of the property (including searches into mining, drainage, environmental etc). There will be a fee for the solicitor’s time and additional fees for what they term ‘disbursements’ that are costs for getting the searches done. You will often have to estimate this charge but a solicitor can give you such an estimate on request and it should be the same no matter which mortgage deal you go along with.
These legal fees need to be paid each time you remortgage. Searches are often only valid for a period of three months so these will also need to be paid for each time. There are some mortgage deal offers that include the conveyancing as part of the deal so this will be a saving you can factor in if this is the case.
10. Extended Tie-ins
These are really something to be avoided like the plague! I have however seen many deals being offered that are conditional on extended tie-ins. I for one have fallen foul of this when I was just starting out. Basically and extended tie-in means that you cannot leave (without penalty) for a set time after the offer period ends so you are therefore agreeing to stay on at standard variable rate for that period. May justification for going along with such a deal was merely a hope…ie I was hoping that the interest rates would come down so that the standard variable rate would not hurt so much when I ran into that period of the loan. Well how wrong I was, interest rates have risen and the extended tie-ins are costing me a small fortune each month. I committed to about six of these and the tie-in is for four years!
I doubt I will be taking out any deals with extended tie-ins associated with them in the future having gone through this experience!
11. Higher Lending Fee
These are sometimes charged when the loan to value is above a certain level say 75%. This is basically an insurance fee that the lender uses to take out insurance to cover their selves in case of you defaulting on the mortgage. If this was to happen then they can claim the insurance pay out that would cover the difference between the 75% and whatever you have taken out in LTV (say 85%). They get this money quickly and then would sell on your home to get back the rest of the money. So really it is insurance for the lender and not you! Again, it is another charge to be accounted for when comparing mortgages.
12. Admin Fee
These fees are basically the same as arrangement fees discussed above. It would not be normal to get both an arrangement fee and an admin fee although I suppose all is fair game in buy-to-let. I mean the more costs the mortgage companies can put in the ‘small print’ the better as far as they are concerned as it will lure in more business!
So now you are aware of the ‘Dirty Dozen’. However, as things are always changing, you constantly need to be alert to any additional charges that are included in the mortgage deal. Remember, that after you have signed on the dotted line and sent the mortgage deed in, it is you who have to meet all the obligations and charges or else risk losing the property to the mortgage company!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Here are a dozen mortgaging cost factors that you need to be aware of and take account of when deciding which mortgage deal to go along with. Of course you should always take professional advice before getting into any UK buy-to-let mortgage deal.
OK, here they are…the ‘Dirty Dozen’:
1. Exit fees
An exit fee is supposed to be there to cover the administrative costs in closing a loan out when you either pay off the loan or switch to a different mortgage provider. Typically these fees can be any where between around £100 to £200 or more. This may not be very much in mortgage cost terms and that is why mortgage companies get away with charging it. Some UK buy-to-let mortgage deals however do not demand such exit fees, so it is just another thing to be aware of when you are comparing mortgage deals.
Another thing to bear in mind regarding these fees is that some people have found it is possible to reduce the fees to nothing simply by complaining. If you think the fee is unreasonable you could always contact the FSA by complaining in writing if they won’t at least reduce the fee to something reasonable. If you have many buy-to-let mortgages then these costs mount up if you need to move mortgage deals on a regular basis so it is worth doing what you can to reduce these costs
2. Standard Variable Rate
The standard variable rate is a lender's fluctuating rate of mortgage borrowing, typically around 1.5 to 2% higher than the Bank of England base rate. It is also the default mortgage rate when their customers’ mortgage deals expire. This is when the lenders make easy money when borrowers do not move on to a better deal. A real sting in the tail is when this is virtually forced on their customers for a period of time due to something called ‘extended tie-ins’ which we will discuss below.
You should really be looking to find a better deal as soon as you are faced with a UK buy-to-let mortgage deal going on to standard variable rate as these usually represent the worst offers in the market place.
You could actually just go straight onto standard variable rate as a buy-to-let mortgaging arrangement. However, the only possible reason I could see for anyone doing this is to get into a deal that may not have any other form of ‘penalty’ such as the redemption penalties being described later in this article. That would mean that the lender would be free to terminate the loan at any time without further financial implications.
A buy-to-let mortgage deal could be appropriate when the immediate future of an investment is uncertain, for example the owner of a property may not be sure whether they want to sell it or let it out. In the case of buying somewhere to do up and sell it could still work out to be the best option due to low or no charges when the loan is paid off (such as would have to be the case on the selling of the property).
3. Portability
Taking a UK buy-to-let mortgage out on a property often means committing to the deal for at least a year and may be even two or three years or even more. As a lot can change during longer periods, it is important to find out whether you could switch the security for the mortgage over to another property. This means that if you did find good reason to have to move the mortgage onto another property (such as the selling of the first one) then you could do this without financial implications that leave you worse off and the mortgage company better off.
If you find out that a buy-to-let mortgage deal is portable then you should go one step further and find out what the costs would be in actually porting it over to another property in your portfolio. This will be another factor that will help you compare mortgage deals. Depending on your situation it may or may not be significant but you should at least be aware of it.
4. Valuation fees
Before a buy-to-let mortgage provider will lend you the money, they will want to ensure that the property against which the loan is secured is worth the amount you are claiming. A professional valuation is therefore required. The charges for this are levied by the mortgaging company so you will need to check what these fees are as it all adds to the cost of the mortgage.
Sometimes this is offered free of charge in order to try to attract you into taking up that particular deal; other times it may be higher than what you would normally pay for a valuation fee. To me it is just another element to consider in what the overall true cost of the mortgage is.
5. Arrangement Fees or Admin Fees
Mortgage arrangement fees can be very significant and represent a major cost of a UK buy-to-let mortgage deal in the short term. These fees are often added to the loan so the mortgagee does not need you to find such a large amount of money and therefore it is psychologically more acceptable as well as more acceptable to their bank account! For the mortgage provider this is also attractive because they not only charge you the money but then make interest on the amount they have charged over the period that you hold the mortgage with them!
These fees can be up to around 2.5% of the loan figure. Sometimes these fees are a fixed amount rather than a percentage of the loan. Some are even quite reasonable. In general however these costs are quite significant and in my opinion they are just used to dress up an offer to seem attractive, when in actual fact they are going to make a killing out of you!
6. Booking Fees
A booking fee is paid when the application for the mortgage is made and it is non-refundable if you don’t go ahead with the mortgage. In this sense it is a kind of deposit on the deal that covers the mortgage company’s administration costs if you don’t take out the mortgage.
7. Offer Period
Be careful to note the offer period because this is the period over which the one-off fees such as the legal, valuation, and arrangement fees are effectively spread. So the shorter the offer period (ie the period over which the discounted or fixed interest rate is available, before going back to standard variable rate) then the higher the effective charges are when considered on a month-by-month basis. For example, a £1200 fee will cost you effectively £100 per month if the offer period is for 12 months only but will cost you half of that at £50 per month if the offer period is for 24 months, and even less if the offer period is for 36 months.
Another thing to be aware of regarding offer periods is that if the offer period is for a long period of time, say five years, then you may be locking yourself into a deal that seems good now but in three years time would be a poor deal (say if interest rates had lowered significantly by then and you had locked yourself in on a fixed rate deal).
When I look at any mortgage deal it is absolutely fundamental for me to find out what the offer period is. I have heard of some deals that sounded like great deals but then found out that the offer period was only for one year and the arrangement fee was very high; when all the costs were then spread on a month by month basis I found that it would be better for me to stay with the existing provider on standard variable rate!
I always add up the one-off costs and then spread these over the offer period to work out the equivalent monthly charge and then use this figure as the basis of comparing the various deals and also comparing to what I am currently being charged for the loan.
8. Early redemption charges
Most UK mortgage deals involve an early repayment charge often known as ‘redemption penalties’, this effectively locks the borrowers in for at least the length of the offer period and sometimes even longer. Some redemption charges are much higher charges than others and can be dressed up in all kinds of formulas but it is important to work out exactly what this means in currency terms. Often there is a sliding scale of charges depending upon the time at which the mortgage is redeemed. Usually, the longer you have held the mortgage then the lower the charge, but this is not always the case.
9. Legal Fees
It is normal for the person taking out the loan to provide the solicitor to carry out the conveyancing and professional legal advice for the loan. This will involve checking the title for the property, checking that there are no problems that have become evident that could affect the value of the property (including searches into mining, drainage, environmental etc). There will be a fee for the solicitor’s time and additional fees for what they term ‘disbursements’ that are costs for getting the searches done. You will often have to estimate this charge but a solicitor can give you such an estimate on request and it should be the same no matter which mortgage deal you go along with.
These legal fees need to be paid each time you remortgage. Searches are often only valid for a period of three months so these will also need to be paid for each time. There are some mortgage deal offers that include the conveyancing as part of the deal so this will be a saving you can factor in if this is the case.
10. Extended Tie-ins
These are really something to be avoided like the plague! I have however seen many deals being offered that are conditional on extended tie-ins. I for one have fallen foul of this when I was just starting out. Basically and extended tie-in means that you cannot leave (without penalty) for a set time after the offer period ends so you are therefore agreeing to stay on at standard variable rate for that period. May justification for going along with such a deal was merely a hope…ie I was hoping that the interest rates would come down so that the standard variable rate would not hurt so much when I ran into that period of the loan. Well how wrong I was, interest rates have risen and the extended tie-ins are costing me a small fortune each month. I committed to about six of these and the tie-in is for four years!
I doubt I will be taking out any deals with extended tie-ins associated with them in the future having gone through this experience!
11. Higher Lending Fee
These are sometimes charged when the loan to value is above a certain level say 75%. This is basically an insurance fee that the lender uses to take out insurance to cover their selves in case of you defaulting on the mortgage. If this was to happen then they can claim the insurance pay out that would cover the difference between the 75% and whatever you have taken out in LTV (say 85%). They get this money quickly and then would sell on your home to get back the rest of the money. So really it is insurance for the lender and not you! Again, it is another charge to be accounted for when comparing mortgages.
12. Admin Fee
These fees are basically the same as arrangement fees discussed above. It would not be normal to get both an arrangement fee and an admin fee although I suppose all is fair game in buy-to-let. I mean the more costs the mortgage companies can put in the ‘small print’ the better as far as they are concerned as it will lure in more business!
So now you are aware of the ‘Dirty Dozen’. However, as things are always changing, you constantly need to be alert to any additional charges that are included in the mortgage deal. Remember, that after you have signed on the dotted line and sent the mortgage deed in, it is you who have to meet all the obligations and charges or else risk losing the property to the mortgage company!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Friday, 10 August 2007
ARTICLE: 10 Great Tips for UK Buy-to-let
1. Learn about the business you are involved in
Especially if you are new to buy-to-let deals (and we’re all ‘new’ at some point), you need to get as comfortable as possible about the business you are getting involved in. Expensive mistakes can easily be made, so read up about it and attend recommended courses before you invest. I did read up on the subject before making my first investment, I did not however attend a course but did decide to do this a year later. This was just so I could be comfortable I was not missing anything which could cost me dearly…however I found that just by reading I had got a hold of most of the basics of UK buy-to-let deals and buy-to-let mortgages, so I suppose you could too (but I would recommend people attending good courses on this subject as well).
Make sure you get a balanced view of the subject as there are many publications and articles that have been written with a vested interest in getting you active in the field of UK buy-to-let deals (so they can profit from you!). Do you think these articles will emphasise the risks or just concentrate on the benefits? Well you need to know the risks as well as the benefits so you can take a decision as to whether you want to get involved in UK buy-to-let, and if you do then to what extent?
If you know of someone who has entered the UK buy-to-let market why not ask them if they would mind talking to you about their experiences. Ask them about both their good and bad experiences so you can plan your dealings to take advantage of their experiential learning…it is a conversation that could save you a great deal of money! If you don’t know of anyone directly then ask around and see if anyone else knows anyone else already involved in the UK buy-to-let market. Talk to them about the structure of their investment deals and also what mortgage deals they would recommend and why.
If you can’t find anyone to talk to there is always the internet chat rooms and message boards on this subject, but nothing is as good as a face-to-face chat from someone you can trust and from someone who has no vested interest in you entering the UK buy-to-let market. This means that their views will very likely be unbiased and independent, something you will struggle to find elsewhere except perhaps in trustworthy books on the subject.
However, at the end of all this remember to take professional advice before carrying out any financial transactions. By all means talk to people, but treat all their ‘advice’ on UK buy-to-let as information. This information from their ‘advice’ will help you feel more comfortable with any true professional advice you are given and will therefore help you to make your investment decisions with confidence.
2. Do your sums
Buying an investment property in the UK with a buy-to-let mortgage deal is easy. Buying a good deal is entirely another thing! You have to look out for the good deals and know what you are looking for.
So what is a good deal? Some will tell you it is an investment that has great capital gain potential, others will tell you it is a property what commands a rent that easily covers all outgoings and leaves you with a profit at the end of the year (often termed ‘positive cash flow’ properties). There is much talk and publicity around nowadays that show negative cash flow properties make the largest amount of money when accounting for capital gains. Well this may be true in some cases, but capital gains cannot be guaranteed and you need to be able to support the shortfall in covering all the expenses and mortgage payments on your UK buy-to-let deal, so this is quite a risky business.
As an example, to illustrate how bad things can get, I will tell you about a few of my negative cash-flow properties. Although the company promoting the properties talked about capital appreciation, there has been an oversupply of these city-centre apartments I invested in and capital values have in fact dropped! And dropped quite significantly! This means that I am left paying money out of my own pocket for something that I cannot even sell without suffering a capital loss of around 30% or so. It is a good job that I also have some positive cash flow properties in my UK buy-to-let portfolio to help cushion the blow. As soon as I can off-load these properties without suffering unacceptable losses I will do so.
So that is my experience of negative cash flow investing! I am sure however that if I had been more careful in where I had invested then I could have at least realised a capital gain. This would mean that I could have then sold the properties when I wanted rather than feeling forced to hold on to them to avoid a painful capital loss! So be very careful if you go down this route and be very confident that there will be a capital appreciation over a short period of time, or else risk getting yourself into the painful situation as just described!
Positive cash flow properties on the other hand will bring in a profit each year so you should have no reason to be in a rush to sell these. Typically such properties are at the low end of the market and it is often claimed that such properties do not have the same rate of capital appreciation. However, I have seen some such properties increase in value in percentage terms as much as any other property at the high end of the market. It is down to supply and demand at the end of the day, amongst a few other things affecting capital appreciation.
Whether you go in for positive or negative cash-flow UK buy-to-let deals, you will need to do your sums to make sure you know that you are getting what you are expecting. In the case of positive cash flow you need to be sure you are going to get this as some deals appear to deliver positive cash flow but when you look into all the associated costs you find that this is not actually true. In the case of negative cash flow buy-to-let deals, you need to know that you are able afford to make up the shortfall in paying the mortgage from your own pocket. Some more experienced investors get into negative cash flow investing because they already have a portfolio of positive cash flow properties that will provide the finance required to support the costs. Get into negative cash flow investing too early in your investment ‘career’ and you could be in for a short, sharp, shock; or may be not so short…maybe more like long and painful!
Make sure you account for all the outgoings when calculating whether it will be a positive or negative cash flow property. The things you will need to account for include:
- Mortgage interest on your mortgage deal (also allow for an appreciable increase in interest rates, not just the present rate)
- Void periods for when the rental property provides no income
- Agency charges if you use an agent (this includes so-called tenant placement fees as well as their monthly commission)
- Allowances for maintenance or damage repair
- Service charges that have to be paid to the managing company of apartment blocks if you are buying an apartment
- Periodic ‘refresh’ costs that keep the property in an attractive condition such are repainting and replacing floor coverings every 2 – 3 years.
- Contingency funds for bad tenants who default on rent payments and may also damage your property.
- Re-mortgaging costs every 2 – 3 years to keep you on competitive UK buy-to-let mortgage deals.
So sit down with a pen and paper and write down the cost of the mortgages on the properties you are looking at and the rental income you are likely to get. Then estimate the annual operating expenses and include many of the items as listed above as well as any others that may be appropriate. Total up the costs then take these costs away from the expected rental income to see whether you can afford to take ownership of the property or not. Ideally the rental income should cover all expenses but this is not currently easy to do after the recent increases in property prices. At least you have all the facts in front of you to take a logical decision rather than an emotional decision. Whether you want to take on negative cash flow in the hope of future capital gains is then up to you.
3. Find the best mortgage deal available
Just like you should take your time in finding the right investment property, you should also take time in finding the best mortgage deal. It is not just the property alone that makes a good buy-to-let deal, it is also the mortgage as this represents your single largest item of monthly expenditure associated with the investment property.
To get the best mortgage deal you do not just walk into your nearest bank or building society and ask for a mortgage. They will of course be happy to oblige but it will be very unlikely that they will be able to offer you a good deal. However, many people who do just this when they need a financial product (and this is one of the reasons why banks make many millions in profit!).
You will need to consult with a qualified professional specialist in UK buy-to-let mortgage deals, this usually comes in the form of an IFA that also functions as a buy-to-let mortgage broker. Remember that you can ask their advice without obligation to use their services, so contact a few and see how good a deal they could get you. However, you should know the basics of UK buy-to-let mortgages and be reasonably conversant with the associated terminology in order to get the best out of their advice (read understand what they are saying!).
4. Invest in the right area
Often ‘the right area’ means a place where people would like to live and this can be for a variety of reasons. Reasons may well include the location being in an ideal commuter location, having good public transport links, having good schools for young families, even where the students want to live if you are in the student rental market.
The ‘right area’ for you will also be linked to your target tenant market (see below). Whilst it is hard to say exactly what the right area for you is, you at least must have a target area and that can be as geographically large or small as you like. I have known some people to even just target buying in selected few streets with the objective or owning several or even most properties on those streets! However, the more narrow you make your target area the less deals will come up of course. The main thing is to know where you want to invest so you avoid just buying anything anywhere and making a mistake.
5. Think about your target tenant market
Instead of imagining whether you would like to live in your investment property yourself, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and so these will need a more of a blank canvas.
The above goes for decorating and fixtures and fittings, if you are offering the property unfurnished, but also the furniture if you are offering the property furnished. Also try to be as neutral as you can so that the property appeals to a wide range of possible tenants in your target market.
When deciding whether to buy the property or not, you also need to decided whether the property is in the right locality for your target tenant market. If you are quite flexible then maybe you buy the property and then decide how to give it a makeover that will attract the tenant market that is prevalent in that area.
6. Don't set your sights too high, at least not in the short-term!
Stories abound about UK buy-to-let millionaires and their huge property portfolios that they have built from scratch and starting with hardly any money in the bank. However, in most places in the UK the days of high double-digit annual percentage house price increases are gone. This is why many experts are now saying you should invest for income and not short-term capital growth (see discussion above about positive and negative cash flow investing). There are still some people who are advising to invest for capital, not surprisingly this is the people who are selling the high priced properties that do not give positive cash flow from achievable rental income.
Because capital appreciation rates are much slower nowadays, we have to accept that our increase in wealth will not be as sudden as those who invested before prices rose astronomically in the UK after the turn of the century. For more significant increases in capital gain it would be necessary to go further afield to places abroad that are considered as ‘emerging markets’. However, these are not without problems and in many cases carry much higher risks than investing in the UK. For example, the costs involved in purchasing a property can be much higher than in the UK so if you bought a property and then sold it for a similar price soon after, you would stand to lose money unless the value had increased at least as much as the purchase costs (in Germany you can expect to pay 13% of the purchase price in ‘closing costs’!).
I always wish that I had started investing about five years before I did. If I had done this then I could retire today just eight years on for sure and could have probably have retired several years ago. Alas this was not the case, but at least I have made a start now and therefore made my first steps on my way to financial independence. After a little over three years of investing to date, I am not a multi-millionaire and neither should you expect to be. This is not to say that you just might get lucky but I would not say you should expect to be able to achieve millionaire status in such a short space of time. So for me, I see investing in UK buy-to-let property deals as something for the long term nowadays…say at least five to ten years.
7. Consider investing outside your immediate area
Most UK buy-to-let deal investors look for properties near to where they live. This is a good thing to do if your local town or city is a good area to invest in. By this I mean you get reasonable capital appreciation and the rental income can cover most if not all of the running costs and mortgage payments. Knowing the area you are investing in is of great advantage and you should be very careful of investing in an area that you are not familiar (or the risk of making a bad investment is very high). There is also the advantage that the property is close by and therefore you are able to keep an eye on it and even possibly manage it yourself to keep your costs down.
However, if your home town or city is not a good prospect for investment, you should not discount looking further afeild In considering remember that the costs you will have to cover are likely to be higher as you will almost definitely be employing an agent to manage the property for you. As a general rule anything more than an hour’s drive away is a candidate for a managing agent. Some investors would put all their properties out to agencies irrespective of how close by they are but when the properties are further afield there really is little option but to do this. The additional costs will be around 10 –15% of the rental, with occasional special payments when new tenants are taken on for example. You may also decide to pay contactors to do basic maintenance work that you could have easily done yourself if the property was close by, such as painting a wall or replacing a floor covering.
Casting your net wider and looking at other areas in the UK for your buy-to-let deal means you need to do some homework before you invest. Find the right areas that are considered as present of future investment ‘hotspots’. There are many companies offering advice on where to invest but make sure that you also get some independent professional advice on the matter also. When you have found somewhere that you are convinced has a good potential for investment then you need to go and get familiar with the area. Make sure you are aware of what areas as good for investment purposed and know what your target tenant market is then look for suitable buy-to-let properties in that area.
Some experienced investors even buy into deals sight unseen but this is extremely risky if you don’t have significant capital or equity to your name. So leave this for the more wealthy and experienced investors and make sure you go see all properties that you are seriously considering buying. Don’t forget to take professional advice as well which is all the more important if it is not in an area that you are fully familiar with.
8. Negotiate on price
As a UK buy-to-let investor you need to realise that you have the same advantage as a first-time buyer when it comes to negotiating a discount on the deal. Because you are not reliant on selling a property to buy the sellers property, then you are less of a risk as far as the sale falling through goes. This can be a significant advantage when negotiating a significant discount on the deal.
Some seasoned investors will not even consider purchasing a property unless they can get of the order of 15 – 20% discount against present market value. They can achieve this because they find what are called ‘motivated sellers’ (people that need to sell quickly for various reasons). However, beginners should be careful not to let this put them off making their first purchases as it may not be possible to find these deals until a list of useful contacts is built up. I can remember seeing the same person coming out to look at properties when I first started investing in UK buy-to-let deals. After about a year I asked him how his investments were going but he told me he had not yet made any purchases because he thought that people were asking too much for the properties. However, in the year that he made no purchases the property prices would have risen anyway, so just buying something would have made him more money than buying nothing, even if he could not find the properties at what he thought was the right price.
Even if the prices that properties are being marketed at seem too high, you can always make a lower offer. A technique of seasoned investors is to make low or ‘cheeky’ offers on many properties knowing full well that many of their offers will be flatly refused, but then occasionally getting a bargain makes it all worthwhile. This works much better in a flat or declining market of course than if the market is rising as there are less buyers to compete with.
Finding our why someone is selling a property will help you to gauge whether you are likely to succeed in getting a significant reduction in price. You need to find out if anything could be motivating them to make a quick sale. Examples would be such things as imminent repossession, matrimonial separation, and relocation.
9. Be aware of the risks
Before you make any investment you should fully investigate all the downsides before deciding to take risk of investing. It is a dangerous thing to just plough ahead regardless and bury your head in the sand when it comes to the possible downsides. To be forewarned is to be forearmed as they say, so being aware of the possible downsides will help you to prepare for managing a bad situation as and when it arises. It may be that after acquainting yourself with some specific risks, you decide to change your investment strategy to avoid those risks altogether.
The risks associated with investing may will be affected by the chosen area and chosen buy-to-let properties. However, some are more general and these include the risk of the property being empty, the risk of serious damage including damage from the floods as we have seen recently if the property is in such a risk area, the risk of a serious defect either being found or developed after purchase that would affect future resale.
10. Decide if you want to be a hands-on or an armchair investor
Agreeing on a deal, raising the UK buy-to-let mortgage, and then having the conveyancy carried out is only a small first step in owning a property. When you rent it out either you can manage all this process yourself or get an agent to do it for you. Agents will charge you a management fee, but have the knowledge to effectively deal with the required documentation and regulations as well as sorting any problems out if things go wrong. You can make more money by renting the property out yourself but you need to know what you are doing first to meet legal obligations and be prepared to give up some of your own time that will be spent on viewings, problems and arranging or carrying out repairs.
As the costs differ between the two approaches it is important that you account for the additional costs if you are going to use an agency. This is so you know that you are sure you can afford it. Some experienced investors do not worry too much about whether the agency fees and other costs are fully covered by the rental income. This is because they are investing below market value and in areas where there is a significant capital appreciation predicted so any shortfalls in funding can be met by future re-mortgaging of the property against the increase in value. This can however be a dangerous approach for people just starting out in property and if things don’t work out as intended.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Especially if you are new to buy-to-let deals (and we’re all ‘new’ at some point), you need to get as comfortable as possible about the business you are getting involved in. Expensive mistakes can easily be made, so read up about it and attend recommended courses before you invest. I did read up on the subject before making my first investment, I did not however attend a course but did decide to do this a year later. This was just so I could be comfortable I was not missing anything which could cost me dearly…however I found that just by reading I had got a hold of most of the basics of UK buy-to-let deals and buy-to-let mortgages, so I suppose you could too (but I would recommend people attending good courses on this subject as well).
Make sure you get a balanced view of the subject as there are many publications and articles that have been written with a vested interest in getting you active in the field of UK buy-to-let deals (so they can profit from you!). Do you think these articles will emphasise the risks or just concentrate on the benefits? Well you need to know the risks as well as the benefits so you can take a decision as to whether you want to get involved in UK buy-to-let, and if you do then to what extent?
If you know of someone who has entered the UK buy-to-let market why not ask them if they would mind talking to you about their experiences. Ask them about both their good and bad experiences so you can plan your dealings to take advantage of their experiential learning…it is a conversation that could save you a great deal of money! If you don’t know of anyone directly then ask around and see if anyone else knows anyone else already involved in the UK buy-to-let market. Talk to them about the structure of their investment deals and also what mortgage deals they would recommend and why.
If you can’t find anyone to talk to there is always the internet chat rooms and message boards on this subject, but nothing is as good as a face-to-face chat from someone you can trust and from someone who has no vested interest in you entering the UK buy-to-let market. This means that their views will very likely be unbiased and independent, something you will struggle to find elsewhere except perhaps in trustworthy books on the subject.
However, at the end of all this remember to take professional advice before carrying out any financial transactions. By all means talk to people, but treat all their ‘advice’ on UK buy-to-let as information. This information from their ‘advice’ will help you feel more comfortable with any true professional advice you are given and will therefore help you to make your investment decisions with confidence.
2. Do your sums
Buying an investment property in the UK with a buy-to-let mortgage deal is easy. Buying a good deal is entirely another thing! You have to look out for the good deals and know what you are looking for.
So what is a good deal? Some will tell you it is an investment that has great capital gain potential, others will tell you it is a property what commands a rent that easily covers all outgoings and leaves you with a profit at the end of the year (often termed ‘positive cash flow’ properties). There is much talk and publicity around nowadays that show negative cash flow properties make the largest amount of money when accounting for capital gains. Well this may be true in some cases, but capital gains cannot be guaranteed and you need to be able to support the shortfall in covering all the expenses and mortgage payments on your UK buy-to-let deal, so this is quite a risky business.
As an example, to illustrate how bad things can get, I will tell you about a few of my negative cash-flow properties. Although the company promoting the properties talked about capital appreciation, there has been an oversupply of these city-centre apartments I invested in and capital values have in fact dropped! And dropped quite significantly! This means that I am left paying money out of my own pocket for something that I cannot even sell without suffering a capital loss of around 30% or so. It is a good job that I also have some positive cash flow properties in my UK buy-to-let portfolio to help cushion the blow. As soon as I can off-load these properties without suffering unacceptable losses I will do so.
So that is my experience of negative cash flow investing! I am sure however that if I had been more careful in where I had invested then I could have at least realised a capital gain. This would mean that I could have then sold the properties when I wanted rather than feeling forced to hold on to them to avoid a painful capital loss! So be very careful if you go down this route and be very confident that there will be a capital appreciation over a short period of time, or else risk getting yourself into the painful situation as just described!
Positive cash flow properties on the other hand will bring in a profit each year so you should have no reason to be in a rush to sell these. Typically such properties are at the low end of the market and it is often claimed that such properties do not have the same rate of capital appreciation. However, I have seen some such properties increase in value in percentage terms as much as any other property at the high end of the market. It is down to supply and demand at the end of the day, amongst a few other things affecting capital appreciation.
Whether you go in for positive or negative cash-flow UK buy-to-let deals, you will need to do your sums to make sure you know that you are getting what you are expecting. In the case of positive cash flow you need to be sure you are going to get this as some deals appear to deliver positive cash flow but when you look into all the associated costs you find that this is not actually true. In the case of negative cash flow buy-to-let deals, you need to know that you are able afford to make up the shortfall in paying the mortgage from your own pocket. Some more experienced investors get into negative cash flow investing because they already have a portfolio of positive cash flow properties that will provide the finance required to support the costs. Get into negative cash flow investing too early in your investment ‘career’ and you could be in for a short, sharp, shock; or may be not so short…maybe more like long and painful!
Make sure you account for all the outgoings when calculating whether it will be a positive or negative cash flow property. The things you will need to account for include:
- Mortgage interest on your mortgage deal (also allow for an appreciable increase in interest rates, not just the present rate)
- Void periods for when the rental property provides no income
- Agency charges if you use an agent (this includes so-called tenant placement fees as well as their monthly commission)
- Allowances for maintenance or damage repair
- Service charges that have to be paid to the managing company of apartment blocks if you are buying an apartment
- Periodic ‘refresh’ costs that keep the property in an attractive condition such are repainting and replacing floor coverings every 2 – 3 years.
- Contingency funds for bad tenants who default on rent payments and may also damage your property.
- Re-mortgaging costs every 2 – 3 years to keep you on competitive UK buy-to-let mortgage deals.
So sit down with a pen and paper and write down the cost of the mortgages on the properties you are looking at and the rental income you are likely to get. Then estimate the annual operating expenses and include many of the items as listed above as well as any others that may be appropriate. Total up the costs then take these costs away from the expected rental income to see whether you can afford to take ownership of the property or not. Ideally the rental income should cover all expenses but this is not currently easy to do after the recent increases in property prices. At least you have all the facts in front of you to take a logical decision rather than an emotional decision. Whether you want to take on negative cash flow in the hope of future capital gains is then up to you.
3. Find the best mortgage deal available
Just like you should take your time in finding the right investment property, you should also take time in finding the best mortgage deal. It is not just the property alone that makes a good buy-to-let deal, it is also the mortgage as this represents your single largest item of monthly expenditure associated with the investment property.
To get the best mortgage deal you do not just walk into your nearest bank or building society and ask for a mortgage. They will of course be happy to oblige but it will be very unlikely that they will be able to offer you a good deal. However, many people who do just this when they need a financial product (and this is one of the reasons why banks make many millions in profit!).
You will need to consult with a qualified professional specialist in UK buy-to-let mortgage deals, this usually comes in the form of an IFA that also functions as a buy-to-let mortgage broker. Remember that you can ask their advice without obligation to use their services, so contact a few and see how good a deal they could get you. However, you should know the basics of UK buy-to-let mortgages and be reasonably conversant with the associated terminology in order to get the best out of their advice (read understand what they are saying!).
4. Invest in the right area
Often ‘the right area’ means a place where people would like to live and this can be for a variety of reasons. Reasons may well include the location being in an ideal commuter location, having good public transport links, having good schools for young families, even where the students want to live if you are in the student rental market.
The ‘right area’ for you will also be linked to your target tenant market (see below). Whilst it is hard to say exactly what the right area for you is, you at least must have a target area and that can be as geographically large or small as you like. I have known some people to even just target buying in selected few streets with the objective or owning several or even most properties on those streets! However, the more narrow you make your target area the less deals will come up of course. The main thing is to know where you want to invest so you avoid just buying anything anywhere and making a mistake.
5. Think about your target tenant market
Instead of imagining whether you would like to live in your investment property yourself, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and so these will need a more of a blank canvas.
The above goes for decorating and fixtures and fittings, if you are offering the property unfurnished, but also the furniture if you are offering the property furnished. Also try to be as neutral as you can so that the property appeals to a wide range of possible tenants in your target market.
When deciding whether to buy the property or not, you also need to decided whether the property is in the right locality for your target tenant market. If you are quite flexible then maybe you buy the property and then decide how to give it a makeover that will attract the tenant market that is prevalent in that area.
6. Don't set your sights too high, at least not in the short-term!
Stories abound about UK buy-to-let millionaires and their huge property portfolios that they have built from scratch and starting with hardly any money in the bank. However, in most places in the UK the days of high double-digit annual percentage house price increases are gone. This is why many experts are now saying you should invest for income and not short-term capital growth (see discussion above about positive and negative cash flow investing). There are still some people who are advising to invest for capital, not surprisingly this is the people who are selling the high priced properties that do not give positive cash flow from achievable rental income.
Because capital appreciation rates are much slower nowadays, we have to accept that our increase in wealth will not be as sudden as those who invested before prices rose astronomically in the UK after the turn of the century. For more significant increases in capital gain it would be necessary to go further afield to places abroad that are considered as ‘emerging markets’. However, these are not without problems and in many cases carry much higher risks than investing in the UK. For example, the costs involved in purchasing a property can be much higher than in the UK so if you bought a property and then sold it for a similar price soon after, you would stand to lose money unless the value had increased at least as much as the purchase costs (in Germany you can expect to pay 13% of the purchase price in ‘closing costs’!).
I always wish that I had started investing about five years before I did. If I had done this then I could retire today just eight years on for sure and could have probably have retired several years ago. Alas this was not the case, but at least I have made a start now and therefore made my first steps on my way to financial independence. After a little over three years of investing to date, I am not a multi-millionaire and neither should you expect to be. This is not to say that you just might get lucky but I would not say you should expect to be able to achieve millionaire status in such a short space of time. So for me, I see investing in UK buy-to-let property deals as something for the long term nowadays…say at least five to ten years.
7. Consider investing outside your immediate area
Most UK buy-to-let deal investors look for properties near to where they live. This is a good thing to do if your local town or city is a good area to invest in. By this I mean you get reasonable capital appreciation and the rental income can cover most if not all of the running costs and mortgage payments. Knowing the area you are investing in is of great advantage and you should be very careful of investing in an area that you are not familiar (or the risk of making a bad investment is very high). There is also the advantage that the property is close by and therefore you are able to keep an eye on it and even possibly manage it yourself to keep your costs down.
However, if your home town or city is not a good prospect for investment, you should not discount looking further afeild In considering remember that the costs you will have to cover are likely to be higher as you will almost definitely be employing an agent to manage the property for you. As a general rule anything more than an hour’s drive away is a candidate for a managing agent. Some investors would put all their properties out to agencies irrespective of how close by they are but when the properties are further afield there really is little option but to do this. The additional costs will be around 10 –15% of the rental, with occasional special payments when new tenants are taken on for example. You may also decide to pay contactors to do basic maintenance work that you could have easily done yourself if the property was close by, such as painting a wall or replacing a floor covering.
Casting your net wider and looking at other areas in the UK for your buy-to-let deal means you need to do some homework before you invest. Find the right areas that are considered as present of future investment ‘hotspots’. There are many companies offering advice on where to invest but make sure that you also get some independent professional advice on the matter also. When you have found somewhere that you are convinced has a good potential for investment then you need to go and get familiar with the area. Make sure you are aware of what areas as good for investment purposed and know what your target tenant market is then look for suitable buy-to-let properties in that area.
Some experienced investors even buy into deals sight unseen but this is extremely risky if you don’t have significant capital or equity to your name. So leave this for the more wealthy and experienced investors and make sure you go see all properties that you are seriously considering buying. Don’t forget to take professional advice as well which is all the more important if it is not in an area that you are fully familiar with.
8. Negotiate on price
As a UK buy-to-let investor you need to realise that you have the same advantage as a first-time buyer when it comes to negotiating a discount on the deal. Because you are not reliant on selling a property to buy the sellers property, then you are less of a risk as far as the sale falling through goes. This can be a significant advantage when negotiating a significant discount on the deal.
Some seasoned investors will not even consider purchasing a property unless they can get of the order of 15 – 20% discount against present market value. They can achieve this because they find what are called ‘motivated sellers’ (people that need to sell quickly for various reasons). However, beginners should be careful not to let this put them off making their first purchases as it may not be possible to find these deals until a list of useful contacts is built up. I can remember seeing the same person coming out to look at properties when I first started investing in UK buy-to-let deals. After about a year I asked him how his investments were going but he told me he had not yet made any purchases because he thought that people were asking too much for the properties. However, in the year that he made no purchases the property prices would have risen anyway, so just buying something would have made him more money than buying nothing, even if he could not find the properties at what he thought was the right price.
Even if the prices that properties are being marketed at seem too high, you can always make a lower offer. A technique of seasoned investors is to make low or ‘cheeky’ offers on many properties knowing full well that many of their offers will be flatly refused, but then occasionally getting a bargain makes it all worthwhile. This works much better in a flat or declining market of course than if the market is rising as there are less buyers to compete with.
Finding our why someone is selling a property will help you to gauge whether you are likely to succeed in getting a significant reduction in price. You need to find out if anything could be motivating them to make a quick sale. Examples would be such things as imminent repossession, matrimonial separation, and relocation.
9. Be aware of the risks
Before you make any investment you should fully investigate all the downsides before deciding to take risk of investing. It is a dangerous thing to just plough ahead regardless and bury your head in the sand when it comes to the possible downsides. To be forewarned is to be forearmed as they say, so being aware of the possible downsides will help you to prepare for managing a bad situation as and when it arises. It may be that after acquainting yourself with some specific risks, you decide to change your investment strategy to avoid those risks altogether.
The risks associated with investing may will be affected by the chosen area and chosen buy-to-let properties. However, some are more general and these include the risk of the property being empty, the risk of serious damage including damage from the floods as we have seen recently if the property is in such a risk area, the risk of a serious defect either being found or developed after purchase that would affect future resale.
10. Decide if you want to be a hands-on or an armchair investor
Agreeing on a deal, raising the UK buy-to-let mortgage, and then having the conveyancy carried out is only a small first step in owning a property. When you rent it out either you can manage all this process yourself or get an agent to do it for you. Agents will charge you a management fee, but have the knowledge to effectively deal with the required documentation and regulations as well as sorting any problems out if things go wrong. You can make more money by renting the property out yourself but you need to know what you are doing first to meet legal obligations and be prepared to give up some of your own time that will be spent on viewings, problems and arranging or carrying out repairs.
As the costs differ between the two approaches it is important that you account for the additional costs if you are going to use an agency. This is so you know that you are sure you can afford it. Some experienced investors do not worry too much about whether the agency fees and other costs are fully covered by the rental income. This is because they are investing below market value and in areas where there is a significant capital appreciation predicted so any shortfalls in funding can be met by future re-mortgaging of the property against the increase in value. This can however be a dangerous approach for people just starting out in property and if things don’t work out as intended.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Wednesday, 11 July 2007
ARTICLE: The Rights of the Tenants in the UK
In the UK, the tenants appear to be much better protected legally than the landlord is by the tenancy agreement. Most of the UK legislation that has been put in place has been to increase the protection of the tenant against so-called ‘unscrupulous landlords’. Although such landlords do exist in the UK, the buy-to-let market really does have a great deal of well-intentioned people as buy-to-let property owners. The Press however, and the tenant-biased protection groups, would however have you think differently. To this end there is a great deal of bad press around about examples of bad landlords, but how many examples of good landlords do you see publicised? I bet not many!
We should however not be surprised at this; after all, stories about bad things sell more papers and make better news reporting ‘entertainment’, it would appear, than stories about the good. What is disappointing is that such opinions find their way through to supporting legislation that is making the landlords activities more burdensome and increasingly protects the tenants, some of which take advantage of the legislation and use it to ‘hurt’ well-meaning landlords.
So understanding the rights of the tenants (however the legislation may have been arrived at) is a necessary part of UK buy-to-let deal investing. You will see what all this is about when you eventually get a bad tenant, and especially if it is one who knows about their rights as tenants. I remember my first situation with a bad tenant who was not paying and when I took some professional advice, the words I first heard regarding my legal position on the matter was along the lines of: ‘Remember, the cards as stacked against you, if you remember that it will help you see everything in context’. I was then advised on my options, none of which excited me and actually left me feeling quite frustrated. Frustrated because I had to carry on paying the mortgage throughout this ordeal and this had to come out of my own pocket.
One way to protect yourself (as best you can) is to become more knowledgeable about this subject so as to minimise the chances of any major problems with tenants. There are some organisations and companies offering detailed training in this area and anyone dealing with the UK buy-to-let market should at least attend one of these, say the one run by the Residential Landlords Association for example. I have been on that course and it takes you though the issues step by step showing you what action to take at each stage in the lifecycle of a tenancy.
However, as a basic appreciation of this subject, I have put together the following information that at least should highlight the main areas you need to be aware of in the UK buy-to-let market. It does not however claim to be comprehensive as this would not be possible to present in just an article-length document. You should not be dealing in the UK buy-to-let market unless you have a good appreciation of the issues outlined below, unless of course you have more money than sense. At the end of the day, most investors in buy-to-let need the rent money to pay for the mortgage and any non-payment of rent or damage to the property (or both!) will therefore seriously affect your short-term wealth.
Tenancy Types
The vast majority of people who rent properties in the UK are on an Assured Short-hold Tenancy (AST). There are however other agreements that exist which afford different rights. We are only going to discuss the details of the AST here as it is this agreement that forms the basis of most of the UK’s private rental market.
Just for your information however, examples of tenants who are not on ASTs are:
- tenants in council or housing association accommodation,
- tenants who have lived in the property a long time from before when ASTs existed and come under the Rent Act,
- tenants living in the same house as that which is occupied by their landlord,
- tenants living in property rented from the Crown
- students living in halls of residence,
- and anyone staying in a hostel or bed and breakfast accommodation.
With the exception of the first two items on the list, where a tenant as ever more rights including the passing on of tenancies, all the other situations give rise to reduced protection for the tenant as compared to the tenant on an AST.
Property Possession With Assured Short-hold Tenants
An AST gives people a legal right to live in a rented home, either for a fixed-duration or on a rolling contract known as a periodic tenancy. Normally, an agreed duration is stated on the agreement and this is at least six months. After the six months then, if both tenant and landlord agree, the AST becomes a periodic tenancy that means the tenant just has to give at least one months notice to leave with the notice ending on the date that rent is due.
There can be fixed periods agreed of more than six months but it is not in the interest of the landlord to do this for it is only after the end of the fixed period that the landlord can ask for their property back by using what is known as a Section 21 Notice. This is merely a notice that states that the landlord requires the return of the property, there is no need for the landlord to give a reason for this. This notice requires to the landlord to give the tenant at least two months notice.
If there is some breech of the agreement before the end of the initial fixed period, or even during a periodic tenancy, then the landlord can use what is known as a Section 8 Notice. Usually the breech of the agreement will be for non-payment of rent but there are many other reasons.
Depending up on the reason there will be an associated duration for the notice. This period is from when the notice was served on the tenant to the time when the required action, ie leaving the property, is required. For a Section 8 Notice being served for rent arrears this is 14 days. However, it is not so straight forward because the tenant does not after leave until the bailiffs are sent in and this requires a court order. To get a court order this requires a court hearing and this takes time to arrange (possibly even a few months). In addition, the tenant can appeal against the notice. For example, if it was for non-payment of rent then the tenant may claim that the landlord did not maintain the property properly. So I think you can see how messy and drawn out getting possession of your property back can be when you have an awkward tenant!
A tenant has the right to live in their home without being bothered by the landlord. The landlord and other people such as tradesmen cannot just enter when they wish and must ask permission to visit. This permission would typically be requested at least 24 hours before and at a mutually convenient time. At this time it would be OK for the landlord or appointed person to take keys with them but it is best to go when the tenant is there and knock on the door to request access.
If the above rules are not followed then a tenant could claim harassment. This becomes a particular problem if you are ever in a situation where you are chasing rent payment as you can well imagine. If the tenant does not want to pay you and you are persistent in requesting payment then they can easily call the police and claim harassment! In the meantime your UK buy-to-let mortgage deal will still be requiring that you make regular payments of the buy-to-let property may be repossessed!
Tenant Responsibilities
With rights come responsibilities and so tenants should keep within the detailed terms of their rental agreement. Typical main conditions include: rent should be paid in full and on-time, bills paid for utilities and council tax, reasonable care taken of the property, tenants and their visitors must behave in a socially responsible way, allow access when needed for any repairs or extraordinary events, and not leave their home empty beyond a fortnight without first informing the landlord.
However, as you may well imagine, the Law does not make it so easy for these responsibilities to be enforced by the landlord. And bad tenants, of which there are a significant number, don’t fulfil many of these responsibilities. The best you can do is to make sure the people you are letting the property to will be good tenants and that means a lot of checks need to be done before signing on the dotted line. But that is another story and a subject in its own right. The main focus of this article was to highlight that the tenant has a major claim on your property when you let it out to them, and removing them from your property is not easy. So be careful who you decide to take on as your tenants, it is one of the most important decisions you will make in any given year!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
We should however not be surprised at this; after all, stories about bad things sell more papers and make better news reporting ‘entertainment’, it would appear, than stories about the good. What is disappointing is that such opinions find their way through to supporting legislation that is making the landlords activities more burdensome and increasingly protects the tenants, some of which take advantage of the legislation and use it to ‘hurt’ well-meaning landlords.
So understanding the rights of the tenants (however the legislation may have been arrived at) is a necessary part of UK buy-to-let deal investing. You will see what all this is about when you eventually get a bad tenant, and especially if it is one who knows about their rights as tenants. I remember my first situation with a bad tenant who was not paying and when I took some professional advice, the words I first heard regarding my legal position on the matter was along the lines of: ‘Remember, the cards as stacked against you, if you remember that it will help you see everything in context’. I was then advised on my options, none of which excited me and actually left me feeling quite frustrated. Frustrated because I had to carry on paying the mortgage throughout this ordeal and this had to come out of my own pocket.
One way to protect yourself (as best you can) is to become more knowledgeable about this subject so as to minimise the chances of any major problems with tenants. There are some organisations and companies offering detailed training in this area and anyone dealing with the UK buy-to-let market should at least attend one of these, say the one run by the Residential Landlords Association for example. I have been on that course and it takes you though the issues step by step showing you what action to take at each stage in the lifecycle of a tenancy.
However, as a basic appreciation of this subject, I have put together the following information that at least should highlight the main areas you need to be aware of in the UK buy-to-let market. It does not however claim to be comprehensive as this would not be possible to present in just an article-length document. You should not be dealing in the UK buy-to-let market unless you have a good appreciation of the issues outlined below, unless of course you have more money than sense. At the end of the day, most investors in buy-to-let need the rent money to pay for the mortgage and any non-payment of rent or damage to the property (or both!) will therefore seriously affect your short-term wealth.
Tenancy Types
The vast majority of people who rent properties in the UK are on an Assured Short-hold Tenancy (AST). There are however other agreements that exist which afford different rights. We are only going to discuss the details of the AST here as it is this agreement that forms the basis of most of the UK’s private rental market.
Just for your information however, examples of tenants who are not on ASTs are:
- tenants in council or housing association accommodation,
- tenants who have lived in the property a long time from before when ASTs existed and come under the Rent Act,
- tenants living in the same house as that which is occupied by their landlord,
- tenants living in property rented from the Crown
- students living in halls of residence,
- and anyone staying in a hostel or bed and breakfast accommodation.
With the exception of the first two items on the list, where a tenant as ever more rights including the passing on of tenancies, all the other situations give rise to reduced protection for the tenant as compared to the tenant on an AST.
Property Possession With Assured Short-hold Tenants
An AST gives people a legal right to live in a rented home, either for a fixed-duration or on a rolling contract known as a periodic tenancy. Normally, an agreed duration is stated on the agreement and this is at least six months. After the six months then, if both tenant and landlord agree, the AST becomes a periodic tenancy that means the tenant just has to give at least one months notice to leave with the notice ending on the date that rent is due.
There can be fixed periods agreed of more than six months but it is not in the interest of the landlord to do this for it is only after the end of the fixed period that the landlord can ask for their property back by using what is known as a Section 21 Notice. This is merely a notice that states that the landlord requires the return of the property, there is no need for the landlord to give a reason for this. This notice requires to the landlord to give the tenant at least two months notice.
If there is some breech of the agreement before the end of the initial fixed period, or even during a periodic tenancy, then the landlord can use what is known as a Section 8 Notice. Usually the breech of the agreement will be for non-payment of rent but there are many other reasons.
Depending up on the reason there will be an associated duration for the notice. This period is from when the notice was served on the tenant to the time when the required action, ie leaving the property, is required. For a Section 8 Notice being served for rent arrears this is 14 days. However, it is not so straight forward because the tenant does not after leave until the bailiffs are sent in and this requires a court order. To get a court order this requires a court hearing and this takes time to arrange (possibly even a few months). In addition, the tenant can appeal against the notice. For example, if it was for non-payment of rent then the tenant may claim that the landlord did not maintain the property properly. So I think you can see how messy and drawn out getting possession of your property back can be when you have an awkward tenant!
A tenant has the right to live in their home without being bothered by the landlord. The landlord and other people such as tradesmen cannot just enter when they wish and must ask permission to visit. This permission would typically be requested at least 24 hours before and at a mutually convenient time. At this time it would be OK for the landlord or appointed person to take keys with them but it is best to go when the tenant is there and knock on the door to request access.
If the above rules are not followed then a tenant could claim harassment. This becomes a particular problem if you are ever in a situation where you are chasing rent payment as you can well imagine. If the tenant does not want to pay you and you are persistent in requesting payment then they can easily call the police and claim harassment! In the meantime your UK buy-to-let mortgage deal will still be requiring that you make regular payments of the buy-to-let property may be repossessed!
Tenant Responsibilities
With rights come responsibilities and so tenants should keep within the detailed terms of their rental agreement. Typical main conditions include: rent should be paid in full and on-time, bills paid for utilities and council tax, reasonable care taken of the property, tenants and their visitors must behave in a socially responsible way, allow access when needed for any repairs or extraordinary events, and not leave their home empty beyond a fortnight without first informing the landlord.
However, as you may well imagine, the Law does not make it so easy for these responsibilities to be enforced by the landlord. And bad tenants, of which there are a significant number, don’t fulfil many of these responsibilities. The best you can do is to make sure the people you are letting the property to will be good tenants and that means a lot of checks need to be done before signing on the dotted line. But that is another story and a subject in its own right. The main focus of this article was to highlight that the tenant has a major claim on your property when you let it out to them, and removing them from your property is not easy. So be careful who you decide to take on as your tenants, it is one of the most important decisions you will make in any given year!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Monday, 9 July 2007
ARTICLE: Investing in a Buy-to-Let Deal Means Taking on the Duties and Responsibilities of a UK Landlord
I have always been quite good at finding of buy-to-let deals and arranging suitable mortgages quite quickly. Although there is work to be done in this, and you need to know what you are doing or take good advice, it has to be said that the buying of property and the mortgaging of that deal is quite easy in the UK.
After having done this and taken ownership of the property, you then have to let it out in order to pay the mortgage and this means taking on the responsibilities of a buy-to-let landlord. There is far more involved in this than just making the purchase and with it come some legal duties and responsibilities. An outline of the main duties and responsibilities of a UK landlord are outlined and discussed below.
This is not meant to put you off and really these duties and responsibilities are not too onerous, however you should realise that for each buy-to-let deal you get into you have to take on these responsibilities for that property in order to let it out and get the rental income to pay for the mortgage. You could of course buy the buy-to-let property and keep it empty and wait for capital appreciation before selling, but this would cost you a lot of money and limit how many properties you could buy. If you did decide to do this then take my advice and make sure you tell your insurance company (most insurance policies put a limit on how long the property should remain empty before you need to notify them as empty properties attract premium rates due to the increase risks of damage).
You cannot even escape the duties and responsibilities by employing a rental agency as before your letting agent will begin to act on your behalf, they will normally establish a legally binding contract with you that places most of the responsibilities ultimately back on you. In reality however they will do a lot of the associated admin work and checks required on your behalf, so you can off-load the workload but not the ultimate responsibility.
Making the Property Fit for Letting
First and foremost you should focus on providing a safe property for people to live in. A good first step is to have the property surveyed with what is called a Homebuyers Survey carried out by a RICS registered surveyor. That survey will detail what is wrong with the property. These surveys will tell you what work needs doing urgently and what work can be left to a later date. This survey is more expensive than a property valuation survey but less expensive than a full structural survey. In most cases the Homebuyers Survey is quite adequate for buy-to-let deal investing and will ensure that the property can be mortgaged once any urgent items have been addressed.
Whether or not you supply the property furnished, part-furnished, or unfurnished is a decision you need to make with the advice of a letting agency for the rental market in that area of the UK where you are investing in buy-to-let deals. My advice would be the fewer furnishings you can get away with in your buy-to-let property the better! This is because it is less expensive in upkeep on wear and tear or damage, and less hassle to deal with.
Your buy-to-let property should also then be tidied up to make it suitable for letting as well as removing any articles that are not form part of the lettings agreement.
The condition of the buy-to-let property at the time of letting should be recorded in an inventory that lists all the items forming part of the let and includes a description of their condition at the time of the let. It is my strong advice to take photos and include these in the inventory document in case there are any disagreements at the end of the let and a court has to get involved. This is when your inventory will protect you in the UK courts if it is good, or let you down if it is too basic and is open to interpretation and criticism. The tenant will have to sign this document to declare their agreement that it is a true and accurate description of the property and its contents at the time of the let. If you are not confident about doing this then you should either get a professional to do one for you or take some advice on what to do.
Providing Insurance
The extent of insurance cover for each buy-to-let deal will depend on whether you are providing a reasonable investment in contents or not. If you are not providing a significant amount of contents then just basic buildings insurance is sufficient, be aware however that this will not protect some of your basic contents such as carpets.
The mortgage deal arranged on your UK buy-to-let property will also require buildings insurance to be put in place and they will also tell you what it should be insured for. This will not be insurance advice, it will be an instruction as without that level of insurance cover for the building the mortgage company will not give you the mortgage deal. You will also need to tell the insurance company to record the name of the company offering the mortgage deal as an interested party on the insurance certificate.
For fully furnished lets then you need to be insuring for contents as well as buildings insurance. Bear in mind though that the deposit money should cover any damage to contents caused by the tenants and you are really just insuring for the larger degrees of damage, not small accidents resulting in damage to certain items of furnishings.
Another insurance that is in your best interest as a landlord is liability insurance. This will provide cover if you are taken to court by a tenant for damages for personal injury. This liability insurance often forms part of the buildings insurance, however with some insurance companies it is an optional extra and my advice is pay for it and take it! It is usually only a small cost in comparison to the main insurance premium but can cover you for several million in damages.
Providing maintenance for the fabric of the property
This is a cost that is often left out of buy-to-let deal calculations and my advice would be always include something significant for it. I have seen many books and courses give the advice that 10% of the annual rental income is about the right level. I think over the long term this is probably correct but do bear in mind that it can be much more than this.
As an example I just had a tenant let me know her roof was leaking and when I sent someone out to patch it up he rang me back with the news that really it needs a new roof covering (this will cost much more than 10% of the annual rent). So just make sure you have the cash flow to cover such high maintenance costs that you will incur from time to time.
This 10% is assigned not only to cover repairs to the fabric of the building but also maintenance of the services to the property (see below).
Maintenance of Appliances
One of the most common and expensive failures in my experience is the gas-fired boiler. Not only is it expensive it is often hard to get someone to come out at short notice to fix the problem. This is one area where I have considered service contracts but often such contracts carry an even heavier charge than paying on a breakdown situation basis.
Another common failure for me has been the washing machine. I think tenants don’t treat my appliances as they would there own so like everything else left at the properties the wear and tear (as well as abuse) on these items is much greater than it would be if it were the tenants own property. Most of my properties are let unfurnished but with some appliances, however due to problems with washing machine breakdowns I now try to let without supplying these items. In fact many tenants want to bring their own washing machines with them so this tends to work out OK. As well as less maintenance expense it is less hassle so it is my advice that you minimise any appliances you think you need to supply in order to attract a let.
Maintenance of Services
The services of electricity, water and gas all need to be maintained. These services can develop faults and fail from time to time. In my experience the most common time of year for a failure is winter time when these services are needed most! The colder weather puts strain on these services due to the cold temperatures (sometimes freezing) as well as wet and damp weather.
Problems you will have may include water leaking from pipes damaging plastering to ceilings for example and electrics tripping out (especially if you have sensitive RCD protection installed). I have also had situations where tenants have rung saying there is a major leak only to find out later that they had been messing around with some valves at the back of the boiler in at attempt to get the boiler working.
There are also annual checks to be done. A copy of the landlord's gas safety check certificate for the property needs to be left with the tenants or the lettings agency. The gas check, which must be done by a registered CORGI gas fitter, is a legal requirement and should any of your tenants suffer from a gas installation without the check being in place, this would be dealt with as a criminal offence! I once did not leave a copy of the certificate with the tenant and when a problem developed on their gas meter the gas service provide came and fixed the fault but then duly disconnected the supply to the house because they could not provide a copy of the certificate! This obviously cost me money as I had to get the reconnection made by a registered CORGI gas fitter. This is therefore another good reason to leave the certificate with the tenant (and tell them to keep it somewhere safe!).
There is no such annual checks as regards electrical testing but it would be advisable to get a qualified electrician to check your property say once every 5 years and my advice would be certainly before you let out your buy-to-let property. Any appliances in the property should also be checked, again there is currently no specified testing requirement but a portable appliance type test done on an annual basis would be more than adequate.
Again all this work is supposed to be covered by the estimate of 10% of annual rent. So you can see that we have not exactly been generous here in coming to this amount!
Ensuring any Contents Comply with Appropriate Health and Safety Regulations
The three main areas for legislative compliance in buy-to-let property deals are gas, electric and furniture.
The main requirement regarding gas is the landlords gas safety certificate mentioned above. This needs to be renewed annually. It is better to minimise the amount of gas appliances in my experience as this must be one of the most potentially dangerous areas (hence the fact it is a criminal offence not to have the check in place). A gas combi boiler however is often an essential part of the heating system for a property so we will therefore need the annual checks just for this appliance.
Electric has also been mentioned above and for this there is no current strict regulations to which the landlord must comply but it would be prudent to ensure that the electrical installation complies with all relevant electrical installation regulations. For this it is necessary that an appropriately qualified electrician carries out a test on the property and places a certificate on it. Often there will be some minor remedial works to do and occasionally you will find that it requires a virtual re-wire!
Any furniture in the house needs to comply with the Furniture and Furnishings (Fire)(Safety) Regulations 1988. This is not a problem if you are supplying new furniture as these need to comply when sold. However, for any older furnishings you may buy second hand you have to be careful on this one. There should be a label to state that it complies with the regulations.
If you are not providing such furnishings then you need to have a clause in your tenancy agreement to state that any non-compliant furniture is not allowed in the property.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
After having done this and taken ownership of the property, you then have to let it out in order to pay the mortgage and this means taking on the responsibilities of a buy-to-let landlord. There is far more involved in this than just making the purchase and with it come some legal duties and responsibilities. An outline of the main duties and responsibilities of a UK landlord are outlined and discussed below.
This is not meant to put you off and really these duties and responsibilities are not too onerous, however you should realise that for each buy-to-let deal you get into you have to take on these responsibilities for that property in order to let it out and get the rental income to pay for the mortgage. You could of course buy the buy-to-let property and keep it empty and wait for capital appreciation before selling, but this would cost you a lot of money and limit how many properties you could buy. If you did decide to do this then take my advice and make sure you tell your insurance company (most insurance policies put a limit on how long the property should remain empty before you need to notify them as empty properties attract premium rates due to the increase risks of damage).
You cannot even escape the duties and responsibilities by employing a rental agency as before your letting agent will begin to act on your behalf, they will normally establish a legally binding contract with you that places most of the responsibilities ultimately back on you. In reality however they will do a lot of the associated admin work and checks required on your behalf, so you can off-load the workload but not the ultimate responsibility.
Making the Property Fit for Letting
First and foremost you should focus on providing a safe property for people to live in. A good first step is to have the property surveyed with what is called a Homebuyers Survey carried out by a RICS registered surveyor. That survey will detail what is wrong with the property. These surveys will tell you what work needs doing urgently and what work can be left to a later date. This survey is more expensive than a property valuation survey but less expensive than a full structural survey. In most cases the Homebuyers Survey is quite adequate for buy-to-let deal investing and will ensure that the property can be mortgaged once any urgent items have been addressed.
Whether or not you supply the property furnished, part-furnished, or unfurnished is a decision you need to make with the advice of a letting agency for the rental market in that area of the UK where you are investing in buy-to-let deals. My advice would be the fewer furnishings you can get away with in your buy-to-let property the better! This is because it is less expensive in upkeep on wear and tear or damage, and less hassle to deal with.
Your buy-to-let property should also then be tidied up to make it suitable for letting as well as removing any articles that are not form part of the lettings agreement.
The condition of the buy-to-let property at the time of letting should be recorded in an inventory that lists all the items forming part of the let and includes a description of their condition at the time of the let. It is my strong advice to take photos and include these in the inventory document in case there are any disagreements at the end of the let and a court has to get involved. This is when your inventory will protect you in the UK courts if it is good, or let you down if it is too basic and is open to interpretation and criticism. The tenant will have to sign this document to declare their agreement that it is a true and accurate description of the property and its contents at the time of the let. If you are not confident about doing this then you should either get a professional to do one for you or take some advice on what to do.
Providing Insurance
The extent of insurance cover for each buy-to-let deal will depend on whether you are providing a reasonable investment in contents or not. If you are not providing a significant amount of contents then just basic buildings insurance is sufficient, be aware however that this will not protect some of your basic contents such as carpets.
The mortgage deal arranged on your UK buy-to-let property will also require buildings insurance to be put in place and they will also tell you what it should be insured for. This will not be insurance advice, it will be an instruction as without that level of insurance cover for the building the mortgage company will not give you the mortgage deal. You will also need to tell the insurance company to record the name of the company offering the mortgage deal as an interested party on the insurance certificate.
For fully furnished lets then you need to be insuring for contents as well as buildings insurance. Bear in mind though that the deposit money should cover any damage to contents caused by the tenants and you are really just insuring for the larger degrees of damage, not small accidents resulting in damage to certain items of furnishings.
Another insurance that is in your best interest as a landlord is liability insurance. This will provide cover if you are taken to court by a tenant for damages for personal injury. This liability insurance often forms part of the buildings insurance, however with some insurance companies it is an optional extra and my advice is pay for it and take it! It is usually only a small cost in comparison to the main insurance premium but can cover you for several million in damages.
Providing maintenance for the fabric of the property
This is a cost that is often left out of buy-to-let deal calculations and my advice would be always include something significant for it. I have seen many books and courses give the advice that 10% of the annual rental income is about the right level. I think over the long term this is probably correct but do bear in mind that it can be much more than this.
As an example I just had a tenant let me know her roof was leaking and when I sent someone out to patch it up he rang me back with the news that really it needs a new roof covering (this will cost much more than 10% of the annual rent). So just make sure you have the cash flow to cover such high maintenance costs that you will incur from time to time.
This 10% is assigned not only to cover repairs to the fabric of the building but also maintenance of the services to the property (see below).
Maintenance of Appliances
One of the most common and expensive failures in my experience is the gas-fired boiler. Not only is it expensive it is often hard to get someone to come out at short notice to fix the problem. This is one area where I have considered service contracts but often such contracts carry an even heavier charge than paying on a breakdown situation basis.
Another common failure for me has been the washing machine. I think tenants don’t treat my appliances as they would there own so like everything else left at the properties the wear and tear (as well as abuse) on these items is much greater than it would be if it were the tenants own property. Most of my properties are let unfurnished but with some appliances, however due to problems with washing machine breakdowns I now try to let without supplying these items. In fact many tenants want to bring their own washing machines with them so this tends to work out OK. As well as less maintenance expense it is less hassle so it is my advice that you minimise any appliances you think you need to supply in order to attract a let.
Maintenance of Services
The services of electricity, water and gas all need to be maintained. These services can develop faults and fail from time to time. In my experience the most common time of year for a failure is winter time when these services are needed most! The colder weather puts strain on these services due to the cold temperatures (sometimes freezing) as well as wet and damp weather.
Problems you will have may include water leaking from pipes damaging plastering to ceilings for example and electrics tripping out (especially if you have sensitive RCD protection installed). I have also had situations where tenants have rung saying there is a major leak only to find out later that they had been messing around with some valves at the back of the boiler in at attempt to get the boiler working.
There are also annual checks to be done. A copy of the landlord's gas safety check certificate for the property needs to be left with the tenants or the lettings agency. The gas check, which must be done by a registered CORGI gas fitter, is a legal requirement and should any of your tenants suffer from a gas installation without the check being in place, this would be dealt with as a criminal offence! I once did not leave a copy of the certificate with the tenant and when a problem developed on their gas meter the gas service provide came and fixed the fault but then duly disconnected the supply to the house because they could not provide a copy of the certificate! This obviously cost me money as I had to get the reconnection made by a registered CORGI gas fitter. This is therefore another good reason to leave the certificate with the tenant (and tell them to keep it somewhere safe!).
There is no such annual checks as regards electrical testing but it would be advisable to get a qualified electrician to check your property say once every 5 years and my advice would be certainly before you let out your buy-to-let property. Any appliances in the property should also be checked, again there is currently no specified testing requirement but a portable appliance type test done on an annual basis would be more than adequate.
Again all this work is supposed to be covered by the estimate of 10% of annual rent. So you can see that we have not exactly been generous here in coming to this amount!
Ensuring any Contents Comply with Appropriate Health and Safety Regulations
The three main areas for legislative compliance in buy-to-let property deals are gas, electric and furniture.
The main requirement regarding gas is the landlords gas safety certificate mentioned above. This needs to be renewed annually. It is better to minimise the amount of gas appliances in my experience as this must be one of the most potentially dangerous areas (hence the fact it is a criminal offence not to have the check in place). A gas combi boiler however is often an essential part of the heating system for a property so we will therefore need the annual checks just for this appliance.
Electric has also been mentioned above and for this there is no current strict regulations to which the landlord must comply but it would be prudent to ensure that the electrical installation complies with all relevant electrical installation regulations. For this it is necessary that an appropriately qualified electrician carries out a test on the property and places a certificate on it. Often there will be some minor remedial works to do and occasionally you will find that it requires a virtual re-wire!
Any furniture in the house needs to comply with the Furniture and Furnishings (Fire)(Safety) Regulations 1988. This is not a problem if you are supplying new furniture as these need to comply when sold. However, for any older furnishings you may buy second hand you have to be careful on this one. There should be a label to state that it complies with the regulations.
If you are not providing such furnishings then you need to have a clause in your tenancy agreement to state that any non-compliant furniture is not allowed in the property.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Monday, 25 June 2007
ARTICLE: Advice on Some Potential Hazards of UK buy-to-let
There are some things you need to be aware of when investing in UK buy-to-let and taking advice on buy-to-let mortgage deals. The objective here is not to say ‘don’t do it!’, it is merely to point out that there are some potential pit falls. I have personally hit a few of these when I first started out and I am still paying the price for this today (both financially and emotionally in wishing I had been more sensible). So armed with this information, it could help you from making the mistakes that I have made. However, I think you have got to accept that this is not a risk-free business and costly mistakes can and will be made. Equally, when good decisions are made then good money can be made also!
Annual Capital Appreciation Rate
A recent boom in UK property prices is a key component in what has sparked an explosion in buy-to-let. The value of the average UK home nearly doubled between the summer of 1999 and 2004, according to the Land Registry. Average UK house prices surged from £98,000 to £188,000.
UK property prices increased at a staggering average annual rate of around 15% between 1999 and 2004, easily beating returns from any other investment form including stocks and shares. This amazing performance has created an expectation among some that this can be repeated. Such people point to the history of property doubling every seven to ten years since the time property ownership became widespread last century.
It is possible for prices to keep rising as wages are always rising in line with inflation at least (usually slightly ahead of average). However, with the first-time buyers now struggling to get on the property ladder, it is hard to expect the price increases seen in the last boom mentioned above. Those selling buy-to-let investment property and mortgage deals would however have you believe this because it makes it easier for them to sell the property of course! It seems like good sound advice as it is based on historical date but as always past performance is not necessarily a good indicator of future performance.
In actual fact we don’t want property prices exploding as this can create a ‘bubble’ that can burst leaving us with the headache of negative equity. Investment in property should be seen as a long-term thing of at least 5 years in order to see reasonable returns for our labours.
The Influence of Inflation
There are many factors that affect inflation and too numerous to go into here. However suffice it to say that the future magnitude of inflation is something that we cannot be sure about. One of the major factors used to control UK inflation rate is the Bank of England interest rate that in turn affects the interest we pay on our buy-to-let mortgage deals.
So this means that when we start out in buy-to-let we cannot be sure what interest payments we are going to be making the next time we have to arrange another mortgage deal in order to get competitive mortgage rates again. All mortgage deals tend to revert to a lenders standard variable rate after several years and this rate it typically too high to make any reasonable money out of the rental income from buy-to-let property deals that have been bought at maximum gearing (see below for an explanation of this term).
Gearing ‘
Gearing’ is a word used among financial and property professionals to describe the act of borrowing to increase financial returns. Much property investment advice is based around such gearing. However, it only works strongly in your favour when prices increase. As an example, imagine you put down a deposit of £10,000 on a £100,000 property and it increases £10,000 in value. The increase is only 10% on the value of the property, but your profit is 100% because your £10,000 equity investment is now replaced by £20,000 equity. So if you were to sell you would walk away with £20,000 even though you only put £10,000 into the deal. And as we all know, such a change in property prices can happen over a short period of time such as a single year. Where else would you get 100% return on investment in a year!
This is actually what has made property such an attractive investment because gearing is so easily achieved through buy-to-let mortgage deals. However, what many property investors forget is that if prices fall then gearing works as strongly against you. Consider the opposite happening to property prices in the example above, a small 10% fall in the valuation of the property would see your entire £10,000 investment wiped out. Any further decreases in value then you would also end up owing money you did not even put into the deal in the first place.
Falling Yields
The rental income you receive from your buy-to-let property deals is not guaranteed. At the end of the last decade, some properties offered yields of 10 - 12% a year and this was on top of significant rises in the value of property.
Yields are now much lower, largely as a result of the boom that made property more expensive to buy. Typically yields will be of the order of 5 – 7% but could be lower and could be a little higher. View any advice about double-digit high-yielding properties with the greatest of suspicion nowadays.
The yield is merely the calculation of the annual rental income potential of a property expressed as a percentage of the cost of buying the property in the first place. Present day yields are getting very close to the interest rates charged on buy-to-let mortgage deals that leave very little room for ‘profit’. In fact it is easy to get into buy-to-let deals that mean you have to supplement the mortgage interest payments from your own income as the rental income is insufficient to cover the mortgage interest charges and other charges such as repairs and maintenance.
Taking advice on both the best buy-to-let investment deal as well as advice on the best mortgage deal is invaluable in getting this correct and avoiding taking on an investment that needs ‘feeding’ every month. I should know, I have a few of these (well more than a few!) in my portfolio. All because I jumped in preferring to believe what I was being told by those selling the property rather than doing my own research.
Tenants
Finding and vetting new tenants can be the riskiest part of the buy-to-let experience. You could of course leave all this to a letting agent who will charge you around 10 – 15% of the rental income for the privilege. They will also probably charge you a tenant placement fee that may take up most of the first month’s rent. Also, because of their extensive checks (which are a good thing) it will take them a while to find you a good tenant that leaves your property empty and no rental income there during this period (see ‘void periods’ below).
Alternatively you could do this yourself and save 10 – 15% of the rental income that you would otherwise pay the agent. However, if you do decide to do this then make sure you get some training or read up on the subject first so that you take the appropriate reference and make all the right checks before handing over your property.
Getting a bad tenant can be very costly. They could wreck your property, not pay you rent, and disappear without a trace. Believe me it happens, even with those who you think would be ideal tenants. I have had all of this and mostly at my expense. I have had things stolen such as washing machines and fridge freezers. Also I have had windows put through by tenants on their premature departure. So you can’t be too careful in vetting people to whom you are to hand over your property to. You need to understand some basics of tenancy law and much to your disappointment you will find out that it is mostly in their favour!.
Property Selection
Ignore personal preferences and ensure the property matches the local rental market needs. Buy-to-let is exactly that, you are buying to let it out, you are not buying it to live in it yourself. So buy with this purpose in mind. Some of the best rental areas with the highest yields may even be the less desirable areas as far as you are concerned. But as long as it is safe to go there then you should not hesitate in taking advice on investing in buy-to-let deals such areas.
You will need to know what the property types in the locality are that give the best rental returns (ie the highest yields). Ask the letting agents for the types and localities for the best rental properties. You should also avoid property with potential maintenance problems and large high-maintenance gardens as these will add little if anything to the rental value but cost a lot in maintenance.
Finding Up and Coming Areas
As an investor you need to try to pick the next boom area and find cheap property there that will soon be commanding much higher prices. To some extent however this is the equivalent of the stock market and picking the right companies to buy shares in.
There are however things that you can do to help yourself here. Acquiring knowledge of the areas before investing is a crucial component. Some of the biggest mistakes I have made have been from investing in areas that I did not know. Not only did I pay over the market price, and well over, but also suffered significant capital loss on equity overnight. Stick to an area you know well is my advice when investing in buy-to-let deals.
Clues to up and coming areas are where there are new businesses opening or new transport links being established. Many say that where cafes are opening then this is a good sign, especially if that area has had a history of not being an ‘in area’.
Void Periods
Many investors fail to factor into their calculations that their investment property will be without tenants at certain periods. These periods are what are called ‘voids’ or ‘void periods’ in property investment. To be on the safe side you should expect at least two months a year with no rent and when you put this in your rental return calculations you will see why it is easy to lose money after all charges against the property have been paid.
I would say that if you are having a letting agent let out your property then you certainly need to plan on two month’s void period. However, if you are letting the property out yourself I think that you may be able to get away with allowing one month as you will be more motivated to get a tenant for the property than the letting agent will be
Taxation
When you sell the property, you will be taxed at rates according to the capital gains rules. This is just a warning that not all the money from the sale will be yours to keep. It is not like selling your own home where all the profit is free from capital gains tax. There are rules to say what capital gains tax you will have to pay and in order to minimise this tax liability it is important to see the advice of a tax specialist. In fact you should discuss your future plans with the tax advisor if you intend to sell within the foreseeable future. For example there may be ways to eliminate or significantly reduce such tax liability if you start to take certain action several years before you come to actually sell.
If you invest in a lot of property then the Inland Revenue may well consider you as a ‘property trader’ in which case you will be taxed on all profits and not allowed any capital gains exemption on sales of property. Again you need to take the advice from a tax advisor on these matters.
Property Investment Educational Seminars
Buy-to-let has created a growth industry property investment education courses. Many of these companies claim to be able to show you how to become a property millionaire in a few year’s time.
The prices of these courses can be from several hundred pounds to several thousand pounds. However all seem to have the same basic message that you can get into property investment by starting without savings and remortgaging your home then using this money as a deposit on a buy-to-let property. Then when that property rises in value, you can then remortgage that buy-to-let property and use the money from it as a deposit on another property, and so on.
It sounds quite simple at the seminars and many of these companies offer you property to invest in right there and then at the event. However, when a sale is made the seminar company will take a commission payment for the sale and this is their real motivation to sell you property in my opinion. My experience is that such property can be a bad deal and you really don’t want to take on any property that you do not know for sure is a good deal. As I have said before, the worst investments I have made have been those that have been made outside the locality that I know.
They can also take commissions for recommending mortgages that may well not be the best for the individual, and again I have been on the receiving end of such deals. Like me you can also get a double whammy whereby they sell you a property and then an inappropriate mortgage to go with it meaning you have a poor yielding property and a high cost mortgage (although some mortgages may by low start interest rates, contractual tie-ins mean that you can’t surrender the mortgage until after several years of paying back interest at a higher rate and believe me this can hurt).
However if you can escape the hard sell, some of these courses can be useful, and in fact I would say even the high prices that are charged can be worth it for some of the information presented. I say this out of experience again because I started investing without any training and then when I did go on some training I was told to keep away from some of the deals I had already got myself into and lost much more money than the price of the course in the process!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Annual Capital Appreciation Rate
A recent boom in UK property prices is a key component in what has sparked an explosion in buy-to-let. The value of the average UK home nearly doubled between the summer of 1999 and 2004, according to the Land Registry. Average UK house prices surged from £98,000 to £188,000.
UK property prices increased at a staggering average annual rate of around 15% between 1999 and 2004, easily beating returns from any other investment form including stocks and shares. This amazing performance has created an expectation among some that this can be repeated. Such people point to the history of property doubling every seven to ten years since the time property ownership became widespread last century.
It is possible for prices to keep rising as wages are always rising in line with inflation at least (usually slightly ahead of average). However, with the first-time buyers now struggling to get on the property ladder, it is hard to expect the price increases seen in the last boom mentioned above. Those selling buy-to-let investment property and mortgage deals would however have you believe this because it makes it easier for them to sell the property of course! It seems like good sound advice as it is based on historical date but as always past performance is not necessarily a good indicator of future performance.
In actual fact we don’t want property prices exploding as this can create a ‘bubble’ that can burst leaving us with the headache of negative equity. Investment in property should be seen as a long-term thing of at least 5 years in order to see reasonable returns for our labours.
The Influence of Inflation
There are many factors that affect inflation and too numerous to go into here. However suffice it to say that the future magnitude of inflation is something that we cannot be sure about. One of the major factors used to control UK inflation rate is the Bank of England interest rate that in turn affects the interest we pay on our buy-to-let mortgage deals.
So this means that when we start out in buy-to-let we cannot be sure what interest payments we are going to be making the next time we have to arrange another mortgage deal in order to get competitive mortgage rates again. All mortgage deals tend to revert to a lenders standard variable rate after several years and this rate it typically too high to make any reasonable money out of the rental income from buy-to-let property deals that have been bought at maximum gearing (see below for an explanation of this term).
Gearing ‘
Gearing’ is a word used among financial and property professionals to describe the act of borrowing to increase financial returns. Much property investment advice is based around such gearing. However, it only works strongly in your favour when prices increase. As an example, imagine you put down a deposit of £10,000 on a £100,000 property and it increases £10,000 in value. The increase is only 10% on the value of the property, but your profit is 100% because your £10,000 equity investment is now replaced by £20,000 equity. So if you were to sell you would walk away with £20,000 even though you only put £10,000 into the deal. And as we all know, such a change in property prices can happen over a short period of time such as a single year. Where else would you get 100% return on investment in a year!
This is actually what has made property such an attractive investment because gearing is so easily achieved through buy-to-let mortgage deals. However, what many property investors forget is that if prices fall then gearing works as strongly against you. Consider the opposite happening to property prices in the example above, a small 10% fall in the valuation of the property would see your entire £10,000 investment wiped out. Any further decreases in value then you would also end up owing money you did not even put into the deal in the first place.
Falling Yields
The rental income you receive from your buy-to-let property deals is not guaranteed. At the end of the last decade, some properties offered yields of 10 - 12% a year and this was on top of significant rises in the value of property.
Yields are now much lower, largely as a result of the boom that made property more expensive to buy. Typically yields will be of the order of 5 – 7% but could be lower and could be a little higher. View any advice about double-digit high-yielding properties with the greatest of suspicion nowadays.
The yield is merely the calculation of the annual rental income potential of a property expressed as a percentage of the cost of buying the property in the first place. Present day yields are getting very close to the interest rates charged on buy-to-let mortgage deals that leave very little room for ‘profit’. In fact it is easy to get into buy-to-let deals that mean you have to supplement the mortgage interest payments from your own income as the rental income is insufficient to cover the mortgage interest charges and other charges such as repairs and maintenance.
Taking advice on both the best buy-to-let investment deal as well as advice on the best mortgage deal is invaluable in getting this correct and avoiding taking on an investment that needs ‘feeding’ every month. I should know, I have a few of these (well more than a few!) in my portfolio. All because I jumped in preferring to believe what I was being told by those selling the property rather than doing my own research.
Tenants
Finding and vetting new tenants can be the riskiest part of the buy-to-let experience. You could of course leave all this to a letting agent who will charge you around 10 – 15% of the rental income for the privilege. They will also probably charge you a tenant placement fee that may take up most of the first month’s rent. Also, because of their extensive checks (which are a good thing) it will take them a while to find you a good tenant that leaves your property empty and no rental income there during this period (see ‘void periods’ below).
Alternatively you could do this yourself and save 10 – 15% of the rental income that you would otherwise pay the agent. However, if you do decide to do this then make sure you get some training or read up on the subject first so that you take the appropriate reference and make all the right checks before handing over your property.
Getting a bad tenant can be very costly. They could wreck your property, not pay you rent, and disappear without a trace. Believe me it happens, even with those who you think would be ideal tenants. I have had all of this and mostly at my expense. I have had things stolen such as washing machines and fridge freezers. Also I have had windows put through by tenants on their premature departure. So you can’t be too careful in vetting people to whom you are to hand over your property to. You need to understand some basics of tenancy law and much to your disappointment you will find out that it is mostly in their favour!.
Property Selection
Ignore personal preferences and ensure the property matches the local rental market needs. Buy-to-let is exactly that, you are buying to let it out, you are not buying it to live in it yourself. So buy with this purpose in mind. Some of the best rental areas with the highest yields may even be the less desirable areas as far as you are concerned. But as long as it is safe to go there then you should not hesitate in taking advice on investing in buy-to-let deals such areas.
You will need to know what the property types in the locality are that give the best rental returns (ie the highest yields). Ask the letting agents for the types and localities for the best rental properties. You should also avoid property with potential maintenance problems and large high-maintenance gardens as these will add little if anything to the rental value but cost a lot in maintenance.
Finding Up and Coming Areas
As an investor you need to try to pick the next boom area and find cheap property there that will soon be commanding much higher prices. To some extent however this is the equivalent of the stock market and picking the right companies to buy shares in.
There are however things that you can do to help yourself here. Acquiring knowledge of the areas before investing is a crucial component. Some of the biggest mistakes I have made have been from investing in areas that I did not know. Not only did I pay over the market price, and well over, but also suffered significant capital loss on equity overnight. Stick to an area you know well is my advice when investing in buy-to-let deals.
Clues to up and coming areas are where there are new businesses opening or new transport links being established. Many say that where cafes are opening then this is a good sign, especially if that area has had a history of not being an ‘in area’.
Void Periods
Many investors fail to factor into their calculations that their investment property will be without tenants at certain periods. These periods are what are called ‘voids’ or ‘void periods’ in property investment. To be on the safe side you should expect at least two months a year with no rent and when you put this in your rental return calculations you will see why it is easy to lose money after all charges against the property have been paid.
I would say that if you are having a letting agent let out your property then you certainly need to plan on two month’s void period. However, if you are letting the property out yourself I think that you may be able to get away with allowing one month as you will be more motivated to get a tenant for the property than the letting agent will be
Taxation
When you sell the property, you will be taxed at rates according to the capital gains rules. This is just a warning that not all the money from the sale will be yours to keep. It is not like selling your own home where all the profit is free from capital gains tax. There are rules to say what capital gains tax you will have to pay and in order to minimise this tax liability it is important to see the advice of a tax specialist. In fact you should discuss your future plans with the tax advisor if you intend to sell within the foreseeable future. For example there may be ways to eliminate or significantly reduce such tax liability if you start to take certain action several years before you come to actually sell.
If you invest in a lot of property then the Inland Revenue may well consider you as a ‘property trader’ in which case you will be taxed on all profits and not allowed any capital gains exemption on sales of property. Again you need to take the advice from a tax advisor on these matters.
Property Investment Educational Seminars
Buy-to-let has created a growth industry property investment education courses. Many of these companies claim to be able to show you how to become a property millionaire in a few year’s time.
The prices of these courses can be from several hundred pounds to several thousand pounds. However all seem to have the same basic message that you can get into property investment by starting without savings and remortgaging your home then using this money as a deposit on a buy-to-let property. Then when that property rises in value, you can then remortgage that buy-to-let property and use the money from it as a deposit on another property, and so on.
It sounds quite simple at the seminars and many of these companies offer you property to invest in right there and then at the event. However, when a sale is made the seminar company will take a commission payment for the sale and this is their real motivation to sell you property in my opinion. My experience is that such property can be a bad deal and you really don’t want to take on any property that you do not know for sure is a good deal. As I have said before, the worst investments I have made have been those that have been made outside the locality that I know.
They can also take commissions for recommending mortgages that may well not be the best for the individual, and again I have been on the receiving end of such deals. Like me you can also get a double whammy whereby they sell you a property and then an inappropriate mortgage to go with it meaning you have a poor yielding property and a high cost mortgage (although some mortgages may by low start interest rates, contractual tie-ins mean that you can’t surrender the mortgage until after several years of paying back interest at a higher rate and believe me this can hurt).
However if you can escape the hard sell, some of these courses can be useful, and in fact I would say even the high prices that are charged can be worth it for some of the information presented. I say this out of experience again because I started investing without any training and then when I did go on some training I was told to keep away from some of the deals I had already got myself into and lost much more money than the price of the course in the process!
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Sunday, 24 June 2007
ARTICLE: Introducing UK Buy-to-Let Mortgage Deals
Buying investment property in the UK to let out has become increasingly more popular over the last 10 years. This is mainly because low interest rates have made mortgages more affordable and the capital appreciation of property in the UK has been nothing short of phenomenal! It has been the advice of many that property is a ‘safer’ investment than most other forms of investments (with the exception of a good old savings account and government bonds of course, if you are prepared to put up with the conservative returns from these that usually only just keep you ahead of inflation!)
Investment in buy-to-let property is also seen to be a better deal by some than an investment in a personal pension, or in some cases even a company pension scheme. That is to say, buying property now in order to live of the rental income and the equity built up in that property on retirement. This would appear to be good advice if you look at where property is going and also look at where pensions are going!
The Buy-to-Let Marketplace
In addition to The Association of Residential Letting Agents, (Arla), there are many buy-to-let mortgage deal providers offering great deals whilst operating outside the Arla scheme. This leaves you free to make your own arrangements for renting out the property without going through an Arla registered agent. Which may even mean you taking on the letting and management of that property yourself, but make sure you know what you are doing and take good advice before you attempt this, it can be a minefield!
The main difference with a buy-to-let mortgage deal as compared to a traditional residential mortgage deal, is that the lender can take account of the rent you will earn from letting our the property, as well as your personal income. This however does differ between different mortgage companies as some lenders allow you to add the rent to your personal income while others base the mortgage entirely on rental income. Also be aware that with some mortgage companies the mortgage you have on your own home will affect the amount you can borrow under their buy-to-let scheme. Take professional advice in order to find the best mortgage deal to suit your personal circumstances.
How much can you borrow?
How much you can have for a mortgage depends on the lender and the most lenders will lend is typically 85% of the property price. This means you need a deposit of at least 15%. Deals become more competitive with lower interest rates and associated costs if you can put down 20% or 25%.
However, what has historically been typical is now being challenged! There are some mortgage companies offering deals which first came in at 87% and now even some are offering 90% for buy-to-let investment properties. The market is getting more and more competitive and this is driving such deals.
A lender will also take into account how much rental income you are likely to earn on a property. The formula varies but as a rule the rental income needs to be between 130% to 150% of the mortgage payment. So if your monthly interest repayments are £1000, the rental income you should be achieving should be £1300 and £1500 respectively.
Again, as things become more competitive we are finding that these rules are being broken and some mortgage companies are offering rental income calculations that equal just 100% of rental income. You should be aware however that this can be dangerous for you as an investor and it is not good advice to base a mortgage deal on this. I mean there is no way you are going to get 100% of the rental income from letting your property. Well not month after month, year after year, so this means you are going to have to support the mortgage payments out of your own personal income. Added to this there will be maintenance costs as well, which in some cases can be quite significant. Following the old advice of 130% to 150% of the mortgage payment for rental income can therefore be a prudent choice regardless of what is on offer!
Mortgage costs
Buy-to-let mortgages are generally slightly more expensive than ordinary home loans, but rates have come down in recent years as more providers have entered the market. And as you can see for what has been said above, the mortgage deal marketplace is getting quite competitive which means lenders are now having to lower the cost of their product to attract their customers.
Before the Arla scheme for buy-to-let loans was launched in 1996, lenders charged commercial rates on loans taken out to buy property to let. The Arla intervention sparked off the proliferation in buy-to-let investment as the mortgaging costs fell and it because quite possible for rental income to cover the costs of the loan and all other costs, even leaving some left over at the end of the year as ‘profit’.
In buy-to-let mortgaging, all the usual deals apply that we are used to in residential mortgaging, such as fixed and discounted interest rates so you need professional advice to help you choose the right product for your personal cirmcumstances. Some lenders will also set rules on multiple properties, only accepting people with, say, three or five BTL mortgages. Some may also set an upper limit on the overall amount you can borrow. Again this is now being challenged, with many companies accepting individuals with up to ten BTL mortgages and some companies going into several million as an overall loan limit. Clearly, the mortgage companies see the security there is in the property that is being mortgage such that is there was a problem with repayments they could simply repossess and sell the property.
Arrangement fees for buy-to-let mortgage deals, which are roughly in line with those on residential mortgages, range from a few hundred pound up to several thousand pounds and this usually only covers and initial ‘offer period’ of a few years. These amounts can however be added to the loan so that you don’t have to find that money to pay the mortgage company up front.
Other costs such as the mortgage valuation fee and solicitor’s costs for arranging the legal side of the mortgage process also need to be taken into account. Typically these will be several hundred pounds each but you will need to get a quotation to be sure.
Tax
There is no direct tax relief on buy-to-let mortgages, however you can offset the interest payments on the mortgage against tax on rental income, along with other expenses such as letting agents' fees, repairs and maintenance costs etc. The best advice on this subject is to take professional tax advice before you submit your annual tax return (and preferably even before you make your first investment property purchase!).
And finally…You should also know that buy-to-let mortgages are NOT regulated by the Financial Service Authority (FSA) in the same way traditional home loans are now controlled. This means buy-to-let lenders do not have follow such strict rules on how they sell, promote and advertise their deals. So make sure you are armed with the basic knowledge on buy-to-let mortgages and only take advice from reputable companies. Preferably use those companies that come highly recommended to you by people who have been using them for advice for years and have come to trust them as professional and impartial advisors.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Investment in buy-to-let property is also seen to be a better deal by some than an investment in a personal pension, or in some cases even a company pension scheme. That is to say, buying property now in order to live of the rental income and the equity built up in that property on retirement. This would appear to be good advice if you look at where property is going and also look at where pensions are going!
The Buy-to-Let Marketplace
In addition to The Association of Residential Letting Agents, (Arla), there are many buy-to-let mortgage deal providers offering great deals whilst operating outside the Arla scheme. This leaves you free to make your own arrangements for renting out the property without going through an Arla registered agent. Which may even mean you taking on the letting and management of that property yourself, but make sure you know what you are doing and take good advice before you attempt this, it can be a minefield!
The main difference with a buy-to-let mortgage deal as compared to a traditional residential mortgage deal, is that the lender can take account of the rent you will earn from letting our the property, as well as your personal income. This however does differ between different mortgage companies as some lenders allow you to add the rent to your personal income while others base the mortgage entirely on rental income. Also be aware that with some mortgage companies the mortgage you have on your own home will affect the amount you can borrow under their buy-to-let scheme. Take professional advice in order to find the best mortgage deal to suit your personal circumstances.
How much can you borrow?
How much you can have for a mortgage depends on the lender and the most lenders will lend is typically 85% of the property price. This means you need a deposit of at least 15%. Deals become more competitive with lower interest rates and associated costs if you can put down 20% or 25%.
However, what has historically been typical is now being challenged! There are some mortgage companies offering deals which first came in at 87% and now even some are offering 90% for buy-to-let investment properties. The market is getting more and more competitive and this is driving such deals.
A lender will also take into account how much rental income you are likely to earn on a property. The formula varies but as a rule the rental income needs to be between 130% to 150% of the mortgage payment. So if your monthly interest repayments are £1000, the rental income you should be achieving should be £1300 and £1500 respectively.
Again, as things become more competitive we are finding that these rules are being broken and some mortgage companies are offering rental income calculations that equal just 100% of rental income. You should be aware however that this can be dangerous for you as an investor and it is not good advice to base a mortgage deal on this. I mean there is no way you are going to get 100% of the rental income from letting your property. Well not month after month, year after year, so this means you are going to have to support the mortgage payments out of your own personal income. Added to this there will be maintenance costs as well, which in some cases can be quite significant. Following the old advice of 130% to 150% of the mortgage payment for rental income can therefore be a prudent choice regardless of what is on offer!
Mortgage costs
Buy-to-let mortgages are generally slightly more expensive than ordinary home loans, but rates have come down in recent years as more providers have entered the market. And as you can see for what has been said above, the mortgage deal marketplace is getting quite competitive which means lenders are now having to lower the cost of their product to attract their customers.
Before the Arla scheme for buy-to-let loans was launched in 1996, lenders charged commercial rates on loans taken out to buy property to let. The Arla intervention sparked off the proliferation in buy-to-let investment as the mortgaging costs fell and it because quite possible for rental income to cover the costs of the loan and all other costs, even leaving some left over at the end of the year as ‘profit’.
In buy-to-let mortgaging, all the usual deals apply that we are used to in residential mortgaging, such as fixed and discounted interest rates so you need professional advice to help you choose the right product for your personal cirmcumstances. Some lenders will also set rules on multiple properties, only accepting people with, say, three or five BTL mortgages. Some may also set an upper limit on the overall amount you can borrow. Again this is now being challenged, with many companies accepting individuals with up to ten BTL mortgages and some companies going into several million as an overall loan limit. Clearly, the mortgage companies see the security there is in the property that is being mortgage such that is there was a problem with repayments they could simply repossess and sell the property.
Arrangement fees for buy-to-let mortgage deals, which are roughly in line with those on residential mortgages, range from a few hundred pound up to several thousand pounds and this usually only covers and initial ‘offer period’ of a few years. These amounts can however be added to the loan so that you don’t have to find that money to pay the mortgage company up front.
Other costs such as the mortgage valuation fee and solicitor’s costs for arranging the legal side of the mortgage process also need to be taken into account. Typically these will be several hundred pounds each but you will need to get a quotation to be sure.
Tax
There is no direct tax relief on buy-to-let mortgages, however you can offset the interest payments on the mortgage against tax on rental income, along with other expenses such as letting agents' fees, repairs and maintenance costs etc. The best advice on this subject is to take professional tax advice before you submit your annual tax return (and preferably even before you make your first investment property purchase!).
And finally…You should also know that buy-to-let mortgages are NOT regulated by the Financial Service Authority (FSA) in the same way traditional home loans are now controlled. This means buy-to-let lenders do not have follow such strict rules on how they sell, promote and advertise their deals. So make sure you are armed with the basic knowledge on buy-to-let mortgages and only take advice from reputable companies. Preferably use those companies that come highly recommended to you by people who have been using them for advice for years and have come to trust them as professional and impartial advisors.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
Thursday, 21 June 2007
First Post
This Blog offers you information on UK buy-to-let, buy-to-let deals, and buy-to-let mortgages. Advice on UK buy-to-let, deals, and mortgages should only be taken from qualified professional advisors. The information presented here will however broaden your mind on the issues surrounding UK buy-to-let, deals, and mortgages but it is not professional advice. Again, by way of a disclaimer, you must always take professional advice before committing to any UK buy-to-let deal or UK buy-to-let mortgage.
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
The Buy-to-Let Blogger
Advice on UK Buy-to-Let, Buy-to-Let Deals, and Buy-to-Let Mortgages
(Our only true advice is that you should always take professional advice before investing, treat any 'advice' on this Blog purely as information and not a substitute for professional advice.)
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