Is there real money to be made in buy-to-let?
If you are considering buy-to-let as a serious investment, then you'll probably want to know one thing: is there real money to be made? Well, the simple answer is yes there is. It's just you have to put in time and effort - and hone your research skills.
Some people dip their toe in the water by buying one investment property and try to manage it while holding down a demanding day job and soon realise that in spite of a strong market for rentals that it's too much hassle. But, on the other hand, there are plenty of private landlords who own hundreds of properties, who make money and have no intention of selling - one recently told us his largely Manchester-based portfolio is worth £1 billion.
"The essence is that most people who make money in buy-to-let hold it for a long time, which means 15 to 20 years or more," says property expert Kate Faulkner, managing director of Propertychecklists.co.uk.
They regularly scrutinise their investments, looking at whether there are better mortgage deals they can switch to, whether it's time to release some equity from the property and re-invest, and whether they are running their investment in the most tax-efficient way possible, she adds.
"They strip all emotion from the equation, which means they buy only what makes sense mathematically, often have little or no interaction with the tenants and run it purely as a business."
The success of your investment will depend as much – more, arguably – on when you buy as when you sell.
Is the market at its peak or heading towards one, falling or stable? "Those who got into the market at the recent height of the market in 2006 and 2007 will typically have seen falls of up to 25% or more in their property's value," says Faulkner.
"Some who bought overpriced new-builds in city centres are still suffering, with some city-centre flats in cities such as Nottingham selling at half the price they were six years ago. Some are even selling for what they would have cost 10 years ago," she says.
Land Registry figures show the average house price in Nottingham of £84,683 in 2012 was the same as in 2003. Cardiff is another city whose new-build prices have been badly hit. In Cardiff Bay's Galleon Way development, two- bedroom flats cost around £200,000 at their peak – and some sold for up to £300,000. Now a two-bedder is on sale for £118,500.
Timing is crucial
The trick to buy-to-let success is to choose your timing, area and property type carefully. How do you do that? First, seek advice from agents who specialise in lettings. They can advise on what type of properties rent well locally, what rental yield you can expect – and the better their advice, the more business they'll get from you. Estate agents, on the other hand, are incentivised by making a sale.
However, whether a property is a good investment for you or not is of little interest to either type of agent but websites such as Propertychecklists.co.uk have free information on how to analyse your local market or a buy-to-let property's returns. There are also property investment specialists you can contact but you will have to pay for their advice.
Choose the right property
Trying to make money from capital growth and rental yield has typically been difficult since the credit crunch – so you also need to work out which you want. Generally in London, where high entry prices make high rental yields unlikely, you'll be looking at capital growth. Buy a house in Middlesborough for £45,000 that you can rent out to six students and income is your priority.
By determining which you are looking for, you can decide where and what to buy. "Most buy-to-let investors will start close to home, buying either in their home town or another location they know well, such as the place in which they went to university," says Phil Spencer, the TV property expert and buy-to-let investor.
"It's a sales and rental market you understand, you'll probably know the nuances between one street and the next and plans for upgrades in transport and infrastructure – and being within a 30- to 60-minute drive of your property is preferable in case of emergencies."
Still, you will be left with a wide choice of what to buy: resale versus new-build, one-bed or two, modernised or in need of an uplift.The only way you can decide is to compare several properties on price, rents and potential maintenance costs and financial returns.
Stick to your numbers
As professional landlords always say, it's all about the numbers and nothing else. A pretty garden or great view may appeal to your sense of aesthetic and add to the sales price, but it won't necessarily pay back in terms of the rent you can charge. Proximity to a station, on the other hand, for just about any type of tenant, or an outstanding school if you're looking at family houses, most likely will.
You will pay a premium to buy a new-build property as that's the way the developer makes profit. And you will pay extra for add-ons in the building such as a lift, concierge or swimming pool – yet prospective tenants may feel they're not worth paying extra rent for.
"Beware of overpaying because you personally like some feature of the block. A serious investment like this shouldn't be guided by anything other than hard financial numbers," says Peter Armistead, who runs Armistead Properties and personally has 80 buy-to-let properties.
However, buying new may still work out more cost effective than an older property in need of attention (for which the costs will invariably escalate beyond what at first seems likely). Flats come with their own problems in the form of leasehold and management issues.
"High service charges can easily wipe out your profit, particularly if there is a sudden hike one year to cover some overdue maintenance work for which there is no sinking fund," says property solicitor Nicolas Shulman, who specialises in leasehold issues.
"Renting out flats can be a more challenging and frustrating experience for landlords. One remarked to me that because of this, he sold all his apartment investments and now just rents out houses."
Manage your investment
Once you have established what property to buy, you then need to work out how best to manage your investment. Buy to let is far from an investment you can buy into then leave alone – and, as a relatively illiquid investment, it's not one you can backtrack on cheaply.
Letting/management agent fees are a hot topic at present, with various calls for greater transparency and accountability to put an end to agents double-charging tenants and landlords for the same service - or simply charging over the odds for simple services.
Tempting as it is to cut costs by managing the property yourself – either advertising it privately on websites such as Gumtree or using a basic tenant-finding package through an online lettings agency – there is much you need to know as a landlord. "There are more than 100 pieces of legislation which are ever-changing, and landlords can be prosecuted for all manner of things, even for something like damp," says Kate Faulkner.
Among the latest laws to apply is the need for landlords who advertise their own properties to state any additional costs the tenant will face, such as for referencing or inventories. From April 2014, new capital gains tax rules apply to landlords who rent out properties they have previously lived in, with the current 36-month capital gains tax (CGT) relief to be cut by half.
And there is talk of landlords needing to do immigration checks in the future - something that 55.2.% of landlords lack confidence in doing, according to research from the Association of Residential Letting Agents (Arla).
Ideally, you should know when you plan to sell from the moment you buy. It's important to have a notion of what you are trying to achieve, such as a certain amount of capital growth or income, so that you can decide when it's time to retire and live off the proceeds.
"If you have more than one buy-to-let property, your exit strategy will be partly determined by your tax situation. If you have 10 properties, it might be starting your exit 10 years in advance to take advantage of tax breaks on capital gains," adds Faulkner.
As with all investments, you need to work out what is right for you as no two investors' strategies will ever be identical.
Risk and reward
The risk and reward of any investment is a relatively intangible quality, with nothing ever guaranteed – but as a property investor, you can get a good idea by looking at the sold property prices on the road in question since the credit crunch. "See what similar properties sold for at the height of the market, the bottom and now – and that will tell you the maximum and minimum you can expect and whether you are now getting a relative bargain versus the 2007/08 peak," advises Kate Faulkner.
Every investor will have a different idea of what yield they want to make. Low returns are around 3 to 4%, average around 5 to 6% and high returns of 12 to 15% are feasible for some property types such as houses in multiple occupation (HMOs), "all of which roughly equate with the returns you can expect from a pension," Faulkner says.
"If you are looking at a 5.5% yield with a 75% loan-to-value mortgage, then you will see zero net income. To secure a good income, you need a yield of 7 to 8% or more."
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The right to hold or use assets (generally property, but also vehicles) for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract. Leasehold ownership of a residential property is simply a long tenancy, the right to occupation and use of the flat for a specified period – the ‘term’ of the lease, which is fixed at the beginning and so decreases in length year by year and the property can be bought and sold during that term. When new, leases are for 99 or 125 years until its eventual expiry, whereupon ownership of the property reverts to the landlord.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.