12/14/2011 Before you buy a Buy To Let BACK

If you’re thinking of investing in a buy-to-let, then finding the right property is essential.

Here are our thoughts on what to ask yourself before committing to a property purchase...

1. Price check: “Am I paying the right price for this property?”

Getting the initial purchase price correct will have major financial implications throughout your time as a landlord – affecting both the annual yield and profit made on resale. Ensure you’re paying the right price by looking at the surrounding area and what purchase prices commonly are of comparable properties. It is also worth researching previous sales of that particular property and finding out what it has historically been sold for.

And, of course, if your research reveals that the asking price is too high, it is definitely worth trying to negotiate before deciding to walk away.

In the current climate it’s absolutely worth negotiating. Depending on how motivated the seller is to sell can determine the final price you agree on. Always start low and work your way up until you come to a win/win compromise that works for both of you. And, if you can’t secure the property at the right price, it’s certainly advisable to look at other options instead.

2. Costly mistakes: “What hidden costs do I need to calculate?”

There are many additional costs to the purchase price when buying a property, such as solicitor’s fees and mortgage product and admin fees. But, certain properties will have higher hidden costs than others, such as stamp duty and annual management fees. If the property you’re interested in is in a block of flats or an apartment development, it is likely that you will have to pay an annual fee to the management company who look after the exterior of the property and the grounds. Do your research before signing on the dotted line – be aware of hidden costs as they can prove to be an expensive mistake!

Similarly, additional costs can add up in terms of the Stamp Duty Land Tax (SDLT) you will have to pay on purchase. Properties bought for more than 125k will be subject to 1% stamp duty, while those over 250k will require you to pay a lump sum of 3% of the purchase price on completion. Buy a property over 500k and you’ll have to budget an additional whopping 4% on the purchase price.

3. Rental return: “Is the rental return going to cover my mortgage?”

Making sure your monthly rental return will cover your outgoings – including mortgage costs and landlord insurance – is vital. Calculate this by being informed about what rental figure you can realistically ask for.

After researching what similar properties are renting for in the vicinity landlords should be able to get an idea of what rental income they can expect.

And, while variable interest-only mortgages are often the cheapest short-term solutions, landlords must remember that they will not be paying back any of the capital on the property... and, of course, interest rates can go up as well as down.

If the rental return calculation doesn’t add up, then chances are your annual profits won’t either!

4. In demand: “What is the local demand for rental properties?”

In order to make the right choice of investment property, it’s vital to know what type of accommodation is in demand in your area... and what isn’t!

Look on the internet property portals and at the most prominent letting agents in the area and look at what they’ve got the majority of. For example, if you’re looking to buy a four-bed family home as an investment property and there are none available to rent they either all rent out very quickly or nobody really wants them. Monitoring the online activity and asking the advice of an agent will help you make an informed decision.

Prior to purchasing any property it is essential to gauge what the level of demand would be in the area for that type and size of property. Talking to a letting agent would be a good idea; the last thing they want is to be offered a property which will take a long time to let – buying something accurately focused would be a win/win for both the landlord and the agent. On our extensive 3 week training course, we teach our franchisees to become specialists in their town in Buy to Let. By doing that they can advise what is best for the landlord. Also, you find that by offering this service, landlords recommend them to other landlords – a win win situation.

5. Around and about: “Is the property in the right area?”

The old saying of ‘location, location, location’ is critical when investing in a buy-to-let property and can make a huge difference to your rental return. It’s always worth investing close to points of interest, such as schools, restaurants, roads and other amenities. If the location is desirable you’re likely to have a high demand for your property and it will ultimately increase the price that you can ask.”

Location and its amenities is an important consideration. Proximity to shops, transport links or other amenities can be vitally important to prospective tenants. It is also important to buy in relation to the predominant tenant group, e.g. 20-somethings, rather in an area that suits the purchaser’s tastes.

It is important to also consider amenity in terms of safety in the vicinity of the property, for example lighting, safe access routes, amenity value of the environment within a given radius of the property etc.

The old adage about the worst property in the best area being better than the best property in a bad (perhaps cheap) area applies.


6. Size matters: “Is the size of the property appropriate to the local market?”

Again research is the key. There’s no point buying a large house in an area where demand for smaller properties dominates. Similarly, buying a one-bed in a family-dominated environment would not be wise. Look at what properties are up for let in the local area – and see how long it takes for them to rent too.

As far as finances go, though, size is all relative. Anything smaller is going to be cheaper to buy but command a lower rental income. You could buy a five-bed 500k property but the rent received divided by the monthly outgoings will be the same percentage. The thing to think about is how much it’s going to cost you if the property is empty – a void on a more expensive property is going to be more painful on the purse than having a smaller property left vacant between tenancies.


7. Long-term planning: “Is the property sellable?”

Don’t buy an investment property without having a plan. How long you’re going to hold on to the property, whether or not it’s sellable and how much it will rise in value are all questions you should ask yourself...

It is what it is: it’s an investment property – and, as such, it should be seen as an investment. Many landlords don’t see the rent as an income to live off, they see that as just paying the bills and covering the overheads. It’s the property itself that will eventually rise in value and release a profit.

Yes it’s important to buy the correct house in the right area, but it is also important to buy at the correct price. The rise in capital is essentially where the money is. You don’t want to buy a property for 50k, keep it for ten years and then sell it for 50k. The resale value is where the ‘investment’ part of the property is. Always look for something that will be easy to sell and hasn’t already achieved its ceiling price for the area.

8. Critical condition: “Will the property be expensive to maintain?”

All investors should weigh up the condition of the property with the costs of necessary renovation and on-going maintenance.

While renovation projects can often be bought at a fraction of the price of properties already modernised, investors need to factor in the renovation costs and the amount of rental revenue that will be lost during the time renovations are taking place.

9. Buying cheap – if the property needs an expensive upgrade – can be a false economy.

The problem with buying a renovation property is that you’ve got to be prepared that your property will not give you a return straight away. If you buy a property at auction, for example, you’ve got 28 days to complete then you’ve got to start work on it before you can start renting it out – so it could be a good two or three months before you get a return on your property.

And it’s likely you’ll have the odd teething problem with a house you’ve renovated too, as there’s always a leak here, a drip there or something doesn’t fit quite right. We do have some landlords that do it very successfully but I wouldn’t advise it for a first-time investor – renovating properties is for the more experienced landlord who knows builders and has got tenants waiting to move straight in on completion.

It’s definitely worth looking at new property developments in your area, as we’re increasingly finding that new properties rent out very very quickly. We do find a lot of our investors buy new properties (not necessarily off-plan but as soon as they’re finished) and these get snapped up by professional tenants in the area.

Always check the age and condition of the property and look at similar properties nearby. Go in daylight and look at the external components starting with the roof, gutters, downpipes and windows. Next look at the heating (age and type), plus make a risk assessment of any bathroom and kitchen leaks. Look for evidence of condensation too. And also find out if there are any maintenance obligations on the owner, plus hidden costs etc.

10. Room for improvement: “Will there be scope for me to improve my investment?”

Before investing it’s certainly worth thinking about whether there will be any scope for building on your investment at a future time – some properties lend themselves to ‘home improvements’, while others don’t.

Adding a conservatory, extension or en-suite bathrooms at a later date will add value for your tenants and inevitably increase the property’s resale value too.

Think about the plot of land that the property sits within and the property’s versatility in terms of long-term vision. Find out what planning laws apply in that area and check that there are no restrictions on work that can be carried out – listed buildings and those in a conservation area will have limitations on the changes you can make.

Finally, ask the experts: “Should I get a second opinion?”

If you’re in any doubt as to the quality of the investment you’re thinking about, it’s definitely worth getting a second opinion from someone in the ‘know’.

We teach our franchisees to become that buy to let specialist so you can ask the advice of a letting agent before investing. We can give an idea of rental income in that area and by we also drive around to the house and have a look at it from the outside before giving feedback to the landlord.

Ringing up an agent and asking how much you’d get for a property and how long it’d take to rent out is definitely a good indication of whether it would make a good investment.

There is no point in buying property types, of a certain age and in specific locations, that aren’t in demand – an agent will be able to guide you. Also, ask about lengths of tenancy, levels of turnover and comparative times to let.