Property investment. Part 1: Buy-to-let.
“How should I invest in property?” Ask that question to 100 people and I all but guarantee that you will get 100 different answers. I still find myself asking that question to highly successful individuals in the hope of picking up some knowledge and ideas that hadn’t crossed my mind before. There is no harm in asking this question but keep in mind that every individual will have their own life plan and thoughts on how their investments should work for them.
The most common and I would argue the simplest form of property investment is through what is called ‘buy-to-let’ investment. To break it down to its simplest form, buy-to-let investing is to buy a property and rent it out for either short-term or long-term profits. I am going to attempt to address a few of the keys points in this blog and if you have any questions at all please do let me know.
I am often surprised at how little effort and research people put in to buy-to-let investments, there is much more to it than just buying a property and finding tenants that can cover your rent for you. A little foresight and research can multiply your profits over the period that you own the property.
So, let’s give the 4 W’s a look over (who, what, why, where).
Who: in this instance will be the tenants that you will find for the property. As you can imagine a family renting a house for a number of years is probably a more stable solution than students sharing a house for six months to a year. From experience, I can tell you that no two tenants are alike, and it is entirely possible that you can end up with an over demanding and careless family that could cost you more time and money than a sensible and practical set of students that care about the standards of their home. But when you are making a decision on the ‘Who’ you have to play the percentage game and look at generally who would be in a better tenant for you. So, when searching for a buy-to-let investment, make sure that you are aware of the demographic that is likely to occupy your property.
What: Probably the trickiest of the four W’s to get your head around, but because of that, it is probably the most important. Should you set your sights on a luxury apartment in a fully maintained development or stick to the status quo and choose a run of the mill family house? Do you buy a small three-bedroom flat 15 minutes’ walk from the station or a two-bedroom flat 5 minutes from the station? This is where your research must come into play and why it is helpful to become friendly with the local estate agents, especially the lettings department and managers. A lot of investors that I have worked with in the past have made the mistake of thinking that they can do all of their research online, sifting through pages of data on Rightmove and Zoopla until they form an opinion based on what is available at that specific time. There are a couple of problems with this approach, one is that the market can be extremely seasonal and what may look like a good rental property in July and August may be a very poor performing property for the rest of the year! Estate agents are still the most useful resource at your disposal. They will be able to tell you what properties are in short supply and what properties they have an abundance of. Rightmove and Zoopla may be able to tell you how many properties are online at any given moment, but it can’t tell you how many serious tenants there are looking at that property. Getting a grip on the supply and demand will prove invaluable when you come to let your property as it will minimise the chances of experiencing the dreaded “VOID PERIOD” (this is a time when the property is unoccupied, and the landlord is responsible for all on-going bills).
Why: by this, I mean ‘why are you doing this?’ there are plenty of investments that you could make and plenty of different routes that you can take in property investment. So, knowing why you are doing it is imperative if you are going to be happy with the results and ultimately make a successful investment. Most commonly people purchase buy-to-let investments because they would like a passive income, they would like an investment that is tried and tested that requires minimum input from them on a day-to-day basis. Then you have the buy-to-let investor who sees it as their first step to creating a property empire.
These two types of investors tend to approach their investments differently. The first set of investors will look for high rental yields in their investments (circa 8-10%) so that they have a cash flow from their investment monthly. Usually, these investments are in more affordable parts of the country or local to the investor’s area so that they can personally oversee the maintenance of the property themselves. As an example, let’s pretend that we have £75,000 to invest. In Peterlee (SR8) near where my dad is from, you can buy a two-bedroom house for around £75,000 and this property can be rented for around £480 per calendar month (PCM). With no mortgage that is a gross yield of 7.7% and if you were to strike a good deal, this yield could increase to 8%+. Over the past ten years, there has been an approximate uplift of £10,000 in the value of comparable properties. Using these crude figures, you can expect £57,600 in rental income and a £10,000 increase in property value over the course of ten years, which is £67,000 or 89.3% ROI (Return on investment). However, if you were to take that same £75,000 and invest in Sutton (SM1) where I was born. You could take that £75,000 and apply for a mortgage to buy a property worth £225,000. With a 30% deposit, you will be able to obtain a mortgage with an interest rate of around 3% making the monthly payments around £710 PCM. That same £225,000 property would rent for around £900 PCM (4.8% gross), which after you subtract your mortgage costs would be an income of £190 PCM. This same property has increased by approximately £75,000 over the past ten years. So, if history repeats (which it seldom does), after 10 years your investment will yield £22,800 in rent and £75,000 in capital growth, meaning a return on interest of 130.4%. So, the question of ‘Why’ really comes down to whether you would like a constant stream of money on a monthly basis or potentially more money after an extended period of time.
Where: this is the number one question that I am asked. On the micro level, as an estate agent, people ask me, “which road” and on the macro level as an investor people ask me “which town”. To answer the first question, I recommend speaking to local estate agents in the area of your choice. An experienced estate agent will know more about any pitfalls in a specific location than any amount of online research can possibly tell you. An example of this is that in my local area of Clapham/Balham (SW12/SW4) there are roads with a history of subsidence and Japanese Knotweed that I would avoid without relevant paperwork being in place. But also knowing the local school catchment areas and council boarders can make an enormous difference when searching for a tenant or eventually when you sell your investment. When searching for the right area to invest in there is always one sure-fire way to be sure of property value uplift and that is ‘infrastructure investment’. The closet and most recent example that I can refer to is the regeneration of Croydon Town Centre. A near £50,000,000 was pledged by the Mayor of London and the local council for the regeneration of Croydon Town Centre over the course of twenty years. At the same time, a raft of private institutions made huge capital commitments of around £1,000,000,000 which would see the area (in theory at least) transformed from a neglected –albeit well connected- town in the south of London, to a hub for young professionals and businesses. This announcement in early 2013 saw the average house price in Croydon rise by around 20% in the following year.
Now if you are based in the most northern peak of Scotland purchasing a property in South London may seem about as realistic to you as buying a Tiki Hut in Hawaii, but the distance really shouldn’t be an obstacle for you. Once you have identified a suitable area and carried out your basic online research you can start making calls to local Estate Agents and begin gathering more information. It is also important to begin building relationships -as painful as it sounds- with the Estate Agents on the ground as they are the gatekeepers to your investment. Once you feel as though you have enough information to make an educated decision you can take the plunge and visit the area (I would recommend on a weekday) and see as many properties as possible with your new-found estate agent friends. By the end of a day or two of viewings, you should feel comfortable enough to decide on a property and start the offer process. If all goes well you would have met an Estate Agent that you can trust and found a property that would be a suitable investment. From then on it is your choice if you choose to maintain and manage the property yourself or hire a management company to do the legwork for you….. if you are based in the most northern peak of Scotland I would probably recommend the latter.
I hope this introduction into buy-to-let investing was helpful to you. Please feel free to get in contact if you would like any further information. There is plenty to learn, so don’t stop reading and listening to opinions!