Beginners' guide to buy-to-let investment
Friday, 17 June 2011 3:22 PM
The low house prices, frenzied competition for rental properties and miniscule interest rates that the UK is currently experiencing mean that, for those who can afford to, purchasing a buy-to-let property is a supremely attractive investment option.
But being a landlord isn't always plain sailing, and you may not see a return on your investment for a decade or more. We spoke to Rob Hill, director of lettings at Greater London Properties and a landlord himself, for a warts-n-all lowdown on buy-to-let investment.
Click on individual questions to skip straight down to them, or scroll past this list and read the guide in full:
What are the first steps for someone who's considering investing in a buy-to-let property?
How can you establish what the level of tenant demand is in a particular area?
During the search, how can investors make sure they find their perfect property?
Does buy-to-let investment suit a certain type of person?
Are particular types of property a safer investment bet than others?
Is it better to buy several cheap properties or one pricey one?
How common is it for landlords to manage the property themselves?
How much does professional property management cost?
How much stamp duty do you have to pay on a buy-to-let property?
Is it easy to get rich quick through buy-to-let?
What are the advantages and disadvantages of being a landlord?
What are the first steps for someone who's considering investing in a buy-to-let property?
I think in many ways it's good to go and see a bank or a financial advisor before even looking at the property portals, because people are frequently being disappointed by the amount of finance available to them at the minute.
Once you've answered your questions and established what your budget is, you need to ask, "Do we want the property to be on our doorstep so we can keep an eye on it or are we happy for it to be further afield? What do we want out of this long term, is it for us to retire to or is it purely a commercial decision?"
Then, once you've settled on an area, you should research local tenant demand and check that there is a strong demand for the type of property you're planning to buy.
How can you establish what the level of tenant demand is in a particular area?
Start your research online, looking at various portals and seeing how much two-beds or three-beds rent for – and how quickly. Go and see local agents as well; they should be able to give you a reasonable idea of the tenant market for a particular property, the sort of rent you could hope to achieve, any improvements you might need to make and any other tips on the local market that will be helpful to you.
During the search, how can investors make sure they find their perfect property?
When you've found the area that you want to invest in, go in and see the agent, introduce yourself, explain in detail what you're looking for – it's a lot better than doing it over the phone or email as you'll be at the forefront of their mind as opposed to someone who's just sent a generic message via a property portal. It's important to work closely with your agent and listen to what they say – but don't take it as gospel, do your own research as well.
In competitive markets like central London, if you see something that you like, you haven't got a huge amount of time to think about it. There are a lot of buyers out there and, if this is purely an investment property, you need to bear in mind that you probably won't ever spend a single night there. You might think it's a bit noisy, but there could be a couple in their mid-20s who are desperate to live in a busy area where it's buzzing as soon as they walk out on the street. You shouldn’t necessarily apply your own wants and desires to a property, you've got to step out of that mindframe.
When viewing potential properties, look at them from a tenant's perspective, not your own.
Does buy-to-let investment suit a certain type of person?
I don’t think so, not at the moment. The saying 'safe as houses' is very pertinent these days. The stock market is volatile and interest rates are very low so people who have squirreled away lots of money and had planned to live on investments and off the interest are now watching as their balance effectively depreciates with inflation. At work, we're seeing people who would never in a million years have thought about buying an investment property walk through our doors.
If you buy the right property, you'll just see your rent coming in, you're paying off the mortgage and ideally making a good yield as well. With mortgage-lending being the way that it is at the moment, we're seeing people in their 40s, 50s and 60s getting into it because they're the kind of people who might have a 20 per cent deposit put away in the bank for a rainy day. People in their mid-20s, particularly in London, are often struggling and relying on parental assistance.
Are particular types of property a safer investment bet than others?
There are certain areas where prices will remain stable and increase: I work in central London and we haven’t really seen any price decrease, which has been partially fuelled by a lack of stock. With it being such an international market there's also a lot of money coming in from overseas.
However, you need to be careful: in good times you might get a phenomenal rent on your penthouse, but when the bank bonuses disappear and the economy slides you'll have to reduce your rent in order to get a tenant. For that reason, I often advise clients to go in at the lower end of the market: people always need somewhere to live and even if rents decrease, it won't be on the same scale.
As we've seen over the past few years, if prices have increased drastically over a period of time, the bubble has to burst unless there's a reason for them to continue going up, and you don’t want to be the person who buys a year before that happens. Look for areas where new transport links are set to open up in the near future – that tends to make for a good investment.
Is it better to buy several cheap properties or one pricey one?
I would say that it's better to buy a few small units and build up a bit of a portfolio rather than buying one expensive property – that way, if one's empty for a while, you're not feeling it as much in your pocket because your eggs aren't all in one basket.
Having said that, I've met many people over the years who own numerous properties but they've remortgaged them to such a level that they probably own the door knob on the front door and nothing more. I would personally rather have three properties where I hold most of the equity than ten where the rental income was barely meeting the mortgage payments because they had been remortgaged so many times.
Interest rates may be at a historic low at the moment, but that means they can only go one way. There's nothing to say you can't draw money out of one property and put it into another property, but it's advisable to always make sure you own a decent proportion of the property so that it's not entirely the bank's.
How common is it for landlords to manage their property themselves?
Some people are happy to manage the property themselves – if you're a bit of a handyman and you've got the time then great. However, other people don't want any more involvement than seeing the rent come into their bank account, so they hire the services of a professional property management company (often provided by their estate agent). It's a personal decision. Management can be very easy for six months then all of a sudden everything goes wrong – which is a nightmare if you have a full-time job and need to take time out from that.
How much does professional property management cost?
You're probably looking at between three and five per cent of the annual rent, but if you combine your letting agent fees with property management, it will usually be around 11 or 12 per cent in total.
How much stamp duty do you have to pay on a buy-to-let property?
You pay one per cent on properties costing below £250,000, three per cent between £250,000 and £499,999, four per cent on properties costing £500,000 to £999,999 and five per cent for anything over a million.
What are the tax implications of owning a buy-to-let property, both in terms of the tax you pay and tax breaks that you get?
You should be paying tax on any rent that you receive above the mortgage. You can deduct your costs, from estate agent fees to new washing machines and maintenance work, from the tax you pay – you can usually put enough cost against it that there isn't really much tax to pay when all's said and done. It is advisable that you pay something though; the last thing you want is to get investigated.
If you're buying the property as a couple, it might be worth having the rent paid to the lower earner if one of you is close to the 40 per cent income tax bracket and the other isn't.
Is it easy to get rich quick through buy-to-let?
In a nutshell, no. In the current market, the amount of money you have to put down makes it incredibly difficult to buy your first, let alone your second, home. I'd say that over a 25-year period, yes, you could probably earn more through property than in a standard job purely because at the end of that period you'll own the property outright and you might have an asset that's worth a million or two million pounds, particularly if you've done it properly.
But it's not a 'get rich quick' scheme – in reality, if you're seeing a ten per cent return on your money, it's not going to be enough to retire on in a few years. If people tell you they know a landlord living in the Seychelles and driving a Porsche I'd take it with a pinch of salt in the current market.
What are the advantages and disadvantages of being a landlord?
The main advantage is that, provided you don't have to work particularly hard once you've made the initial purchase, you just see money coming in month by month. Even if property prices in the area are going down, you're not selling so it doesn’t matter – and while prices are depressed at the moment, over the next ten years we'll see a real capital growth.
The disadvantage is that owning a buy-to-let property is a responsibility and if you want the easy life it might not be for you.
On the whole, though, I'd recommend that anyone who can afford to purchase a buy-to-let property should do so, as long as they're properly advised and going into it with their eyes wide open.
Rob Hill is director of lettings at Greater London Properties. For more information, check out GreaterLondonProperties.co.uk.
Interview by Ele Cooper
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