With all the changes that have affected the Buy to Let market, it seems that the whole idea of becoming a landlord and property investor has been getting some bad press recently. Like all things, if you want to make a success of it, it’s going to take some effort and hard work. But, with the help of Gibbs Gillespie, here are a few tips that should help you navigate the increasingly complex arena of Buy to Let mortgages.
Go back a decade or two and everyone with a little extra cash or a lump sum to invest were getting into property. The demand for housing was high, people wanted to rent as they couldn’t afford the deposit for a mortgage or they didn’t want to be tied down to a set area. Then things changed, the financial crisis caused havoc around the world and there seemed to be a view of buy to let as somehow a bad thing. So is there still a market to buy a property solely to let out to someone?
In light of recent changes by the Chancellor, it is easy to think that the chance to be a landlord is declining and that making money from it is a thing of the past. The changes to the tax system mean that landlords will only be able to offset 20% of their buy to let mortgage against their income tax, whereas previously, they would offset the whole thing.
Another measure seemed to designed to hurt landlords is putting up stamp duty for anyone with a second home, regardless of whether this is a holiday home or a buy to let property. From last month, the stamp duty will increase by 3 percentage points so if the house is worth £300,000, the stamp duty will increase from £5,000 to £14,000 a year.
While this may all sound a bit grim, the most important thing to remember amid all of this is that there is still a huge demand for rented housing. In 1985, the amount of private rent homes accounted for 9% of the entire market and another 22% was made up from council rents. Today, 22% of households use a private landlord and this figure could continue to grow as the criteria for getting a mortgage becomes stricter and stops people owning their home.
Start up tips
Those low interest rates can work in the favour of a buy to let landlord as the interest on mortgages is corresponding low. Of course, it won’t always stay like that so caution is always needed about over committing yourself for when the rates do increase. But it means starting up as a landlord can be a cost-effective measure.
Research the market in the area you are considering buying a house before you commit to anything. Are there plenty of people looking for renting houses? What kind of tenants do you want and are these the people house-hunting in the area? For example, if you want professional family tenants but are buying in a high student occupancy area, you may need to reassess your plan.
Do plenty of maths before you start. Can you make enough rent to cover the mortgage, pay your taxes and still make some money? While making a pile of cash can happen, it is often a small amount that you make from a rental property. But at the end of the mortgage period, you have an entire house to either sell or continue to make a larger amount of money from. Therefore, playing the long game can end up making you a decent profit.
Hardly a day goes by at the moment without some story announcing the demise of the buy to let market. Government legislation changes, mortgages becoming more expensive all of these and more seem to be aimed at scaring property investors away from the market. Yet the unshakeable truth beneath it all is that the demand for rental properties continues to grow as people cannot buy their own home. So can you still make money from property in London?
Understanding interest rates
If you are going to invest or continue to invest in property in London or around the country, it is important to understand all this business about interest rates and how it can affect your potential profit. Right now, interest rates are low and actually getting lower. That means the cost of borrowing money for any reason is also lower than before.
But what about when this trend changes and interest rates start to rise? Then correspondingly, the cost of your mortgage will also rise, unless you have a fixed rate mortgage. While this rise will no doubt be gradual, it starts to eat into your profit as the cost of the house increases but your rental income doesn’t.
So the first step in making money from property is to be prepared for these interest rate rises. Fixed rate mortgages are one answer, also making sure you have enough rental income to cover the cost and still make what you need.
Finding the right property
Another big element to ensuring continual income is to get the right property in the right areas of the capital. There is huge demand to live in London and rental prices are sky high compared to the rest of the country. Yet even within that demand, there are areas that are more popular than others. Of course, properties here cost more but then the return is also higher as people expect to pay more rent for these areas.
If you are unsure which area of the capital you should be focusing on, then talk to estate agents around the capital. Start with estate agents like Keatons Canary Wharf, and move around to others in other areas, then to some of the Greater London boroughs. See what kind of rental income properties are getting and what the cost of the properties are currently. This will help you decide on what area to focus on.
Make sure you look at other opportunities to get into the market or expand your portfolio such as internet sites that focus on buy to let properties and specialists in the market. There are lots of good deals to be found, including property auctions, if you are in the position to move quickly when the right property appears.
Running the property
There’s a split between landlords who run their own tenancy and those who get a letting agent or estate agent to do it for them. The latter costs more money but if you have another job or don’t live near the property, this can be money well spent. Otherwise you could have to take an unpaid leave day every time there is a problem with the property and this costs you money.
Investing in property has long been a good idea if you have spare cash or resources to allow you to take out a second mortgage. Renting out that property can earn money on top of paying for the mortgage and other bills, but only if you invest in the right property. So how do you choose what will be a good rental property?
Laying the groundwork
The first step towards becoming a landlord comes with laying your groundwork, doing research and budgeting. The best piece of advice most landlords will give you is to go with your head, not your heart when it comes to buying a house. Don’t choose a house because you love it, choose it because it will be a good house to rent out and will be popular with your target tenant market.
Look at your budget next, both for how much you can spend on the house and what kind of rental yield it will provide. A buy to let mortgage is a different type of mortgage to that on your own property, so make sure you get a few quotes about rates and payments. How much you can borrow or how much you want to spend on a house will also give you an idea about where in the country you can afford to buy.
Tenants and houses
The next questions are about type – the type of tenant you want in the property and the type of house you want to invest in. The type of tenant can often be dictated by the type and location of the house. For instance, families with school age kids want to be near schools, preferably good ones. However, if you are aiming to let to students, then proximity to the campus or good public transport links to it is important.
The type of house also impacts the tenant type. Families with kids won’t want a first or second floor flat and older, retired couples might not consider it unless there is a working lift. Students on the other hand might love a flat and could share it with a friend or two. The age of the property can also play its part – older properties have more character but might need more work while newer ones lack gardens that often draw in families.
As a landlord, you have certain responsibilities and part of your preparation should cover dealing with these. They include handling any maintenance and repairs, including annual checks to gas, electric and appliances. You need to insure the property on a proper landlord insurance policy, as a normal home insurance doesn’t cover a house you yourself don’t live in.
When you find a tenant, references will need to be taken and a tenancy agreement drawn up. Also a deposit needs to be taken and put into a government-approved scheme. Some landlords use a letting agent for this aspect of things to ensure everything is done correctly. Finally, you need to ensure you meet your tax obligations for any money you are making.
While being a landlord may seem like a solo job that doesn’t require a team as such, this isn’t the whole story. Being a landlord involves certain responsibilities around your property such as annual maintenance checks and dealing with any break-downs. Unless you are a qualified electrician, plumber and a few other trades as well, you will need a team of professionals on your speed-dial to deal with these responsibilities.
What tradesmen will you need?
Finding the right team to work with you starts with knowing what kind of work you will need doing and who will need to do this work. One obvious one is an electrician who will be needed to conduct the annual checks on all the electrical appliances in the property as well as checking the electric mains and fuse box.
Plumbers can often do a varying range of jobs. This can range from something as simple as stopping a dripping tap to carrying out checks and repairs on the central heating systems. They need to be registered with GasSafe in order to carry out any checks on the heating system and to be able to conduct the annual maintenance checks needed as part of health and safety regulations.
In London and other big cities, there can be a lot of competition between plumbers, particularly in areas that are seeing a lot of development of rental properties, so if you’re looking for Wandsworth plumbers, plumbers in Fulham, or a Clapham plumber, you should have plenty of choice – just make sure you vet them properly and choose the right one.
Other types of workmen can do other odd jobs around the house and sometimes finding an odd-jobs specialist is ideal. This is the kind of guy who could come and put a new door on after an accident, replace a kitchen unit door or repair the bannister going up the stairs. Handymen is another name for these tradesmen and they are often qualified in various trades.
Choosing the right people
There are lots of ways to find the right people to work on your property. There are the old ideas, such as word of mouth – talking to people you know and finding tradesmen that they have had positive experiences with.
There are also internet versions of this idea, websites where people can leave their feedback for companies or individual tradesmen. These websites are impartial and show the good as well as the bad, whereas a company’s own website will only normally show positive feedback, for obvious reasons.
There are also a number of schemes to help people find the right tradesman. The Local Authority Assured Trader Scheme Network is one example, run by trading standards around the country. Businesses need to comply with relevant legislation and laws to be on the list as well as having an effective complaints procedure and good customer service.
Booking a job
Whether an annual check or a one-off repair, when you come to book a job with the tradesman who have chosen, make sure they give you a quote upfront, or at least an idea of costs depending on the work needed. Tradesmen giving a price over the phone can be a bad thing on some jobs, though many will have standard prices for standard jobs like servicing. If they are carrying out major work, such as renovating a property, then you might put a penalty clause into the contract if the work isn’t done on time, depending on how time sensitive the repairs are.