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.)

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.)

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.)