When investing in a Buy-To-Let property, there are a few things you MUST do each and every time to ensure you are making the right investment for you. I thought I would put a check list together for everyone to make use of. For the seasoned pro this will come as second nature, however for people new to the game it should come in handy.
Note - If you are unsure what the term yield means, I recommend you read my post on this first.
* Do the maths, what can you afford? - Before you start to look at property you need to set yourself a budget. A lot of B-T-L mortgage lenders are looking for a 25% deposit. My advice is to see an independent mortgage advisor. By doing this you will establish your 'top end' investment price and should have an idea of the repayments. Allow leeway for rate rises in years to come.
You also need to consider void periods, if a property sits empty for a month or two can you afford the mortgage repayments on top of your current outgoings?
* Yield or Capital Growth, what is the driving force behind your investment? - Obviously, we all want both. However most property investments tend to provide one more so than the other. So initially it is a good idea to decide on the following - Do you want an investment that is going to top up your monthly income? Or is your main concern long term capital growth?
You can then base your property search on the decision you make. Areas that are already well developed with good amenities and close to universities will tend to attract good rental yields. Up and coming areas with new developments on the way (transport, education, leisure facilities etc.) will benefit from long term capital growth.
* Make a short-list - Once you have established an area and budget, it is time to get hunting! Use a web portal like www.rightmove.co.uk to pick out at least 10 properties. Once you have done this you need to look at the following:
- Is the price competitive? Use a site such as http://www.zoopla.co.uk/house-prices/
to establish this. All you need is the postcode and you can see the 'sold price' history.
- Rental estimate, ask an agent who specialises in rental (like me) who can give impartial advice without any conflict of interest.
By doing this you should be able to narrow down your short-list to maybe 3-5 properties before you even arrange any viewings.
* Think you have found a good investment? Do a final check on the sums - Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return on investment subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.
Example - £100,000 property that could rent for £500 per month:
£75k mortgage at 5% = £312.50 (annual cost £3750)
£500 rent x 12 months = £6000
Difference = £2,250
Deposit + buying costs = £27k (your actual investment cost)
£2,250 divided by 27k = 8.3% annual return
Don't forget tax, maintenance costs and other landlord expenses will eat into the return.
If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.
* Still looking good? One final check - Before making any offers, I highly recommend you arrange a second viewing on the property and take a competent contractor with you. Quite often they will spot things that your average Joe wouldn't even consider. You shouldn't necessarily be put off by anything they find (within reason), you can often use this as a tool to negotiate a bigger discount on the asking price! Ask for an estimate on the works involved to bring the property up to a good standard. Remember - Stick to your budget!
* Plan your offer - Firstly, I would attend the estate agency and build rapport with the agent who is going to negotiate on your behalf. You want the agent to be working with you, not against you! Build a constructive argument for your offer using points like amount of work involved, alternative properties sold in the area etc.
Remember, as a B-T-L investor you have the same advantage as a first-time buyer when it comes to negotiating a discount. If you are not reliant on selling a property to buy another, then you are not part of a chain. This can be a sizeable asset when negotiating a discount, especially in a tough market such as the one we have now.
MAKE LOW OFFERS AND DO NOT GET TALKED INTO OVERPAYING!
So, you are now a BTL investor! Next comes the on-going management of your investment, piece of cake? Most people think so. Keep an eye out for my next post 'Think rental is easy?' coming soon.......
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