Q: What should I be thinking about before deciding whether or not to get into buy-to let?
A: You should start by looking at your own character and circumstances and try to determine whether you are going to become either a high involvement landlord or a low involvement landlord. Low involvement is where you hire a letting agent to look after the property for you. That will make it a lot simpler if your situation and temperament do not allow you the time to look after your property.
Q: How much time do you need to be a high involvement landlord?
A: That really depends on the type of property that you choose, how close it is to home and so on. But it means advertising, meeting prospective tenants, interviewing them, following up references, showing them the property and then working your way through the process of getting the deposit, the first month’s rent, setting up the standard order, changing all the bills over into their names, arranged a moving-in date, get them into the property, inspect it a couple of times, arrange for repairs as and when, gas inspections annually, then when they leave, sort out the cleaning, make sure it’s back in good condition and returning their deposit etc. You will make appointments and people will not show up, or you feel that certain people are not right for your property. These things happen. To start with, you can engage an agent to just find you a tenant. A tenant-find service could take some of the hard part out of it, give you an introduction to it, and then later on you could move on to doing the whole thing yourself.
Q: Are you saying that it’s not a good idea to become a high involvement landlord straight away?
A: No, you can do it all yourself and save lots of money that would otherwise go in the agent’s pocket – up to 15%+VAT of the rental income. But you have to be aware of the responsibilities that you will undertake. There may be more to it than you imagine. It’s a job, though be it a part-time one.
Q: How can you spot a potentially good tenant?
A: Look at why somebody would want to live in that area or live in that property. It may be to do with work. It may be to do with family ties. It may be that the pricing is right for their income. Transport links is another reason, especially in the big cities. If you have a property near a tube station or a bus route, you will find that will attract people. There will be a reason why they want to move into your property. People do not just move to a place at random. Look for a legitimate and logical reason for their enquiry. Look for someone who will stay and pay your rent for a long time because the circumstances are correct. But you should only deal with people you can get along with. This is a people business. The relationship with your tenant is, hopefully, going to last, so they must be people you can do business with. Remember you have got to manage the relationship right through to giving the deposit back and their leaving your property in a satisfactory condition. Q: What makes a good buy-to-let property?
A: Location is important, but affordability is paramount. Research is the key. Can you actually afford to buy something there? What are the rent levels in the area? Are the rent levels high enough to cope with the mortgage or give you a reasonable return on the capital you have invested? Can you handle void periods with ease? You also need to research likely tenants. Is it a community where there are lots of working people, or is it commuter belt territory? If you are entering a student market, is it within the catchment area for the university? Does the university bus pass that part of town? Is it an area with high unemployment? If it is, you are likely to get tenants on housing benefit. In that case you must find out the levels of rent the DSS pay in that area.
Q: What do I have to do to be a good landlord?
A: First, the house must be clean and tidy. You will find that women, especially, will look at the bathroom and the kitchen. If they are not clean, the property will be much more difficult to let. If the house looks tatty or decoration is very old fashioned, you will struggle to find tenants for it. People expect a good standard from the private rental sector these days and competition is rife. People are looking for a property that is neutrally decorated so that it will match with any furniture they may possess (presuming it is unfurnished). The basic neutral white ceiling, magnolia walls, white paintwork, very simple and plain is most popular, but pretty uninspiring. You can be bold and experiment, but variations on cream and white are probably best. Put curtains in the windows, because most people do not own curtains. Add lampshades, because that makes it look like a home.
Q: Is there demand for unfurnished properties?
A: In places like London, the rental market is almost completely furnished. In other areas it’s up to you. It depends where you are and what the market is. Unfurnished can mean a better class of tenant because if they have their own furniture they probably have more money, and those going to the trouble of dragging their furniture with them are less likely to up sticks and decamp in a hurry.
Q: If I furnish, what about the quality?
A: The better the quality of furnishings, the better quality tenant you are likely to attract. It’s as simple as that. Don’t go over the top, but don’t skimp either.
Q: What are my responsibilities for the property on a day-to-day basis?
A: One thing you need to provide is a tenancy agreement which sets out the responsibility of the tenants, such as to return the property to you in a clean state, that the property is vacant possession, that they return the keys to you, which is the act of surrender to terminate the tenancy. Also that you do not want them to paint the house purple inside, they are not allowed to part with it or assign or sublet it. It’s a two-way street and the agreement will also set out your responsibilities as a landlord.
Q: What happens if you do not have a tenancy agreement?
A: Then you might have to resort to the courts to terminate the tenancy and regain possession, and, of course, if you do not have a written agreement, it is your word against theirs. Without an agreement, the process of eviction is very, very slow. It can take two to three months to get even so much as a court date. All in all, you should not even contemplate a tenancy without a legally- binding written shorthold tenancy agreement (AST).
Q: What other responsibilities do I have as a landlord?
A: You will need an annual gas safety certificate, which is a legal requirement. Get the electrics tested by someone who is registered with one of the professional bodies. You should have proper buildings insurance. Look for a comprehensive policy that covers things like loss of rent if it has been burnt to the ground. A lot of policies do not cover that, so you could actually find yourself servicing a mortgage and it might take three to six months to rebuild a property. Add cover for malicious damage and things like students and people who are claiming housing benefit, because some policies do not cover those types of tenants. Further, if you have furnishings, you must make sure they comply with the furnishing fire regulations.
Q: Should I ask for a month’s rent up front, or would it be better to go for two or three?
A: If you can find somebody who will pay you three months’ rent in advance, then that’s great, but you may put some people off. If you take six weeks’ rent as a deposit and then the first month’s rent on top, that should be enough. Don’t be greedy.
Q: So how does one actually research the rent value?
A: Most areas have a local property paper, so consult that for comparable examples. Also check with local letting agencies and get their advice (you don’t have to use them). If you have employed an agent, they should be able to set a rent that is in line with the market, rather than trying to squeeze the last penny out of it. You will often find that if you charge an unusually high rent, you may get away with it once, but remember tenants also have access to local papers and can gauge the market possibly better than you. If the tenants see that their rent is substantially more than everybody else’s for a very similar property, yes you will get your money but you will probably find that they will not renew the tenancy and go and live somewhere else. Your primary aim is to keep your tenants for as long as possible. Remember that for every week your property is empty - say for example, a house that is rented for £500 a month - you are losing £125 a week in income and you may only be asking for £20 a month more, which will take you a long time to recover.
Q: What do you do if you have a tenant and want to raise the rent?
A: Always work on the basis that most people’s wages only go up once a year and you should only review the rent once a year.
Q: Is it important to factor-in void periods?
A: Yes. You should budget on about 5% of the year for voids. Voids are periods when the property is unoccupied. If you get a nice long-term tenant, no breaks in tenancy and the person stays for two, three, four years, then that is a nice extra bit of income you are going to get. But you need to budget for changes every six months, in a worst case scenario.
Q: What value properties should I buy?
A: If you go for great big expensive house, say £100,000 £200,000 £300,000, you will actually find the rent on that is not the same as perhaps the rent from three cheaper houses. A house of £300,000 will not fetch three times the rent of a £100,000 house. Indeed the three £100,000 houses will not be able to achieve the rent of six £50,000 houses. Smaller properties tend to give the better yield.
Q: You would have thought having more properties meant more risk?
A: The bigger the portfolio you have got, the less chance you will have them all empty at once. The important thing is being able to spread your risk.
Q: But are you not piling up mortgages here?
A: Yes, but if you are doing capital and interest then eventually you are paying them off, and ultimately they will all be completely yours, mortgage free.
Q: What if there is a further property slump and rents also decline?
A: Remember the private rented sector in the United Kingdom is the smallest of any developed country in the world. Germany is 40% privately rented, Switzerland is the highest at 60%, Britain it is only 10% of the entire market. 70% of the market is owner- occupier (although that is no in decline) and 20% is registered social landlords and state. There would have to be an awful lot of properties bought from and rented out to make much of an effect on the market place.
Q: What sort of mortgage would you advise me to get? I can potentially borrow twice as much on an interest-only mortgage. Do you think they are a good idea?
A: The interest-only option really has become an innovation in the market place. The danger with taking interest-only is that you are working on the property market actually continuing to rise. If it falls back, then you will be harnessed to those properties if you cannot dispose of them for at least what you paid for them. But there is no reason why not, especially if you are trying to operate in an area of very high property prices and you want to get some income now, then that might be the way to do it.
Q: If the market crashed further, that would that not necessarily mean you should be panicked into selling. Surely if you have got a tenant that is paying the mortgage via the rent, then you are okay.
A: You are quite right, you could weather the storm because, if anything, if there is a property crash some people will get repossessed. They would require somewhere to live and there is a fair chance they will go into private renting.
Q: So, buy-to-let is still a good proposition?
A: Absolutely. Yes! We know of dozens of property investors who have now retired on their rental income, some under 40 years of age.
Essential Buy-To-Let Tips
1. Use the Internet and local papers to compare prices in areas before you buy. An agent may tell you it’s a bargain just to sell it to you.
2. Perform an area check. upmystreet.com will provide neighbourhood guides by postcode. There are also free flood and landfill checks on the ‘net.
3. Parking is important for some tenants, consider this when you buy.
4. It is always a good idea to think: “If you had to live there yourself …” but … at the same time always put yourself in the shoes of your tenant.
5. When viewing, look at other properties in the area to see if they are well kept or not.
6. Ch eck to see if there are lots of For Sale signs in the area. Could be a bad sign if everyone is moving. If in doubt, phone up the agent on the boards, in case they are old sale boards.
7. When viewing inside, try only to look at the space, windows, size of rooms, storage etc. Then look at the property to cost works. It may be best to take a builder with you. Ignore clutter and dirt, as it is easily cleaned.
8. If you can’t afford a survey, do your own. It will only take a bit longer than a normal viewing, and if you don’t do one you could be in for lots of costly surprises.
9. Bargains are important, but it’s not a bargain if it is not in a desirable location for potential tenants.
10. Look at it as an investment or pension, and don’t get too personally involved.
11. Buy close to public transport - maximum 10 min walk in city areas.
12. Have an electrical survey done on property over 30 years old. It may not reach NIC standards for a landlord certificate. You could be looking at a hefty rewire bill.
13. Try and get your building quote when you view the property - could save you money.
14. Avoid bad conversions to rent out, unless you’re going to refurbish it. Tatty conversions will have low rental income and attract lower-earning tenants.
15. Aim high. If you have cash, don’t use it to buy outright. Put down a deposit, get a self-certified or buy-to-let mortgage, then refurbish. Then, if you have funds left, do it again.
16. Never sell to release equity. You may have to pay Capital Gains Tax. Re-mortgage instead.
17. Equity is dead money with no use. Re-mortgage and reinvest.
18. Buy in your local area, but spread out. If there is a local disaster, you won’t have all your eggs in one basket.
19. If buying ex-Local Authority, check for shaping up programs, or you could get a surprise bill.
20. Double-glazing is not necessary when buying to let - it won’t make much difference in rental income.
21. Tell your mortgage company, leaseholders and insurers when you let or you may not be covered by insurance.
22. Check that leases allow you to rent your property out.
23. Check if the property is due for new meters for utility supplies. The old ones may be faulty.
24. Look for danger in the property, like electric trunking, exposed gas pipes, sockets on skirting boards, loose switches etc. These will cost you in electrical and gas repairs
1. Use an agent when letting, it keeps a professional distance from the tenant, who could try and get out of paying, and want favours. This is a business, not a charity.
2. Always use Letting insurance if you need to protect your rental income, especially if you have a mortgage. It can be costly to evict, or have to cover payments yourself.
3. Aim for 5-8% yield or more; this is the percentage you make per year after deducting costs.
4. Look at the property as an investment and don’t get too personally involved with individual places or you may be upset if anything happens to the property.
5. Use an agent that guarantees rent included in their fees.
6. Keep two sets of spare keys once the agent has some, one for you and one for the plumber. Store them labelled, or you could forget which keys are for where.
7. When decorating, consider that Magnolia paint is applied in most rental properties. This is quite dull, and shows no thought on the Landlord’s part other than that of saving money. How will you make your property stand out from the rest?
8. When dealing with letting agents make sure anything you tell them gets put in writing. Then, you can’t be told that they didn’t know. Fax rather than phone.
9. Keep receipts for anything related to your investment to perform your tax return.
10. If you have builders and tradesmen you prefer to use for your property, inform the agents in writing.
11. If your property has not let within 4 weeks it is possibly overpriced or has something that is putting people off. Don’t just sit and wait, investigate. You could be loosing income because the agent has been over ambitious and overpriced it. It’s your income, so get it working for you.
12. If the property has awful views out of some windows and is putting people off renting, consider spraying frost effect on the glass to disguise this. It will still let light in and look more attractive.
13. Get the property ready for letting before you give it to the agent. If you hand over responsibility of finishing a job, they could take longer than you, loosing you rental income.
14. If you use the same agent for more than one property, negotiate a sliding scale in their commission.
15. Three strikes and your out. If an agent in the early days promises to send you things or call you and fails to do this three times in the first month, change agencies. It is likely that they will always be like this and you will never know where you stand. Also, you may find they do it with the tenants as well.
16. If an agent tells you they are advertising your property, get a hold of the publications. Check you are happy with their marketing.
17. Declare all your rental income to the taxman and use all the available legal allowances to your favour. You could be fined if you don’t and loose your investment profits.