As a property investor, ‘buy to let’ is the name of the game. Although I enjoy the rewards of the occasional ‘flip’ (which is to sell a property on before completion), the core of my property portfolio is buying properties to rent out. This increases my chances of maximising ‘property profit potential’, as any hiccups in the property market, such as price falls, should level out in the long term.

The principle of buy to let is that the investor purchases the property in order to enjoy long-term capital gains, while the tenant pays the mortgage. However, there are many factors to consider before plunging in and buying a property. This chapter will highlight some of those factors and concentrate on key issues: where to buy, what to buy and who to buy for.

It is also important to decide before choosing a buy to let property whether you are investing for yield, capital gain, or in an optimistic market – both!

THE BUY TO LET MARKET

The buy to let market has seen a large increase in the number of re-mortgaging applications. Investors understand the theory that house price increases coupled with rental income is an attractive proposition, compared with returns from pensions or other forms of investment. However, as expected, the rate of growth is now slowing. This trend is expected to continue over the next couple of years, so it is important, when choosing property as an investment, that you research the market thoroughly.

What is yield?

Your yield is basically your profit, a percentage of what you earn from renting out your buy to let property, after all the expenses of purchasing and the running costs are subtracted. For example:

£100.000 purchases an apartment.

A 10% rental income would be £10.000.

This would represent a 10% (gross) yield.

A simple formula for working out the yield

Weekly rent × 52 = annual rent.

Say the weekly rent is £150 × 52 = £7,800.

Subtract the agency fees. Agency fees of 10% = £780.

Deduct £780 from £7,800 = £7,020.

Subtract the property out-goings. Say property out-goings are £520.

Subtract £520 from £7,020 = £6,500.

Multiply the figure remaining by 100.

£6,500 × 100 = £650,000.

Divide that by the purchase price.

Say the purchase price is £100,000.

£650,000 divided by £100,000 = 6.5%.

What remains is the net return = 6.5%

Compare the net return to the current interest rate.

What are the property out-goings likely to be?

It is advisable to consider the points listed below when working out your profit margin, as these will affect your overall yield.

Voids

A void is when the property is not rented out. It would be prudent to include a six week void period when calculating the overall anticipated yield for the investment property.

Service charge/ground rent

You will be expected to pay the full service charge and ground rent, whether the property is occupied or not. Both these charges will have to be subtracted from your gross yield.

Set up costs

These will include furniture (should you chose to let the property furnished), stamp duty and legal fees.

Maintenance/repairs/redecoration

You, as the landlord, will be responsible for maintenance, repair and redecoration. You should estimate a ‘what if things go wrong’ budget, to cover any unexpected repairs, such as the boiler breaking down, for instance. It is always wise to have a contingency fund and you should subtract this from your ‘gross’ yield.

Insurance

This will be another expense to deduct from the ‘gross’ yield and you should budget for both contents and building insurance (if this is not included in a service charge).

Electricity and gas safety inspections

All rented accommodation is expected to have annual checks on its services. You will need to get safety certificates from a qualified electrician and a Corgi registered plumber, in respect of gas.

Cleaning

The property will have to be cleaned to a professional standard at the beginning of each tenancy.

Council tax

You will be responsible for ‘empty rate’ council tax, when the property is unoccupied.

Utility bills

During ‘void’ periods you will be responsible for all utility bills.

What is considered a good yield?

A good yield can range from 6% to 10%. I know of some investment landlords who would not touch a property without a minimum of a 10% yield but this is not always possible and depends on the area you invest in. If the local market is saturated, this will have a negative effect on your anticipated yield, as there will be a lot of competition to get tenants. Supply will outweigh demand, rents will be reduced and standards will have to be high, if you are to avoid voids.

Do your sums

Work out the return before you buy. In order to maximise your ‘property profit potential’, you need to base your decision on likely returns, and not on personal and emotional taste.

CHOOSING THE RIGHT PROPERTY

If you choose the right property, in the right area, you should be onto a winner. Make sure the property is in an area well suited to letting. Take advice from the local letting agents as to what types of property are in demand.

What type of person is looking to rent?

• Young singles
• Working professionals
• Groups of people wanting to share i.e. students
• Couples (married or otherwise)
• Families
• People on housing benefits
• Divorcees
• Professionals relocating
• Basically anyone!

WHAT TYPE OF PROPERTY SHOULD I BE LOOKING FOR?

This will depend on what type of tenant you are hoping to attract and where you are choosing to invest, be it city, town or country.

• Studio flats. Popular with students, as the rents required for these are often all they can afford. In inner city areas they can be used as a weekly base for a working professional whose principal home is out of town.

• One bedroom flats. This type of property offers the best rental possibilities in an inner city area. They are more popular with young professionals than studio flats. The one disadvantage of this type of property is that it often comes without parking.
• Two bedroom apartments. This type of property is popular with young couples or two people sharing. It is preferable for this type of property to have two bathrooms and parking.
• Small terraced houses. If they are located in a city they could appeal to couples or sharers. They could also appeal to a family with young children but would need to have a garden.
• Large houses. If situated near a university, this type of property would be ideal for student sharers. It could also be suitable as a family home, if it was situated close to schools and transport links.

Renting to young professionals

If you are aiming to rent out to young professionals, you will want a property close to office blocks, shops or industry. Young professionals are preferred by many buy to let investors, as they are generally in stable employment. Reference checks will indicate whether they are able to pay the rent, although this does not mean that they necessarily will. They also tend to make fewer demands on a property, as they will generally only be using it as a base.

However, such tenants are in great demand, so make sure the market isn’t saturated with similar types of properties sitting void because of over-supply, before you decide to invest. A lot of young workers tend to rent in the month of September, which is partly due to starting work after the end of the academic year. January is also a busy time for rentals, as people often try to change their lifestyle at the start of a new year.

Key factors to attract young professionals

• Job opportunities in the area.
• Easy transport links.
• Restaurants/nightlife.
• Proximity to shops and food stores.
• Apartments with leisure facilities.
• Stripped wood floors.
• Neutral decor.
• Modern appliances.

Corporate lets

These are the most desirable kind of lets, as you are actually renting your property out to a company, rather than an individual. There is, however, no guarantee that a company won’t get into financial difficulties, but you are less likely to get a ‘default’ on rental payments than you are with an individual. Corporate lets can come through location agents, whose job is to find accommodation for company employees who are coming to work in the area. Their first port of call will be to the more established letting agents in the vicinity.

These lets can last from six months to three years and will generally have a pre-negotiated rental increase built in for each year, depending on the length of the tenancy! They can be the most hassle-free lets but you will probably have to agree to have the property professionally managed. Together with the 10% letting fee this can cost you anything up to 16% of the gross rent.

Key factors for corporate lets

• The property will have to be professionally managed.
• The property will need to be well presented.
• It should have a ‘power’ shower.
• Leisure facilities and 24-hour concierge will be an advantage.
• The property needs to be in the best location.
• Fixtures and fittings need to be of a high standard.
• The kitchen needs to be fully equipped with modern appliances.
• The property will need secure parking.

Letting to students

If you are considering letting to students you will want an investment property close to the university or college. It is unlikely you will want an upmarket property for this type of let, as students have limited incomes and a lot to spend it on. Rent is not generally something they will want to spend too much on! A house with several rooms that can be let out to a group sharing is the best type of accommodation for this market. It may be a group of friends or a group of individuals, so expect parties.

Key points when letting to students

• It should be a large house (preferably four bedrooms) with proximity to a ‘learning’ centre.
• Durable furnishings.
• Preferably no garden.
• Good appliances and white goods.
• Heavy duty carpets in dark colours.
• Washable covers and curtains.
• Gas central heating (to avoid condensation problems).
• Outside space ... to park bicycles!

What are the benefits of renting to students?

This type of accommodation can often be very good for yield, as the properties do not incur expensive service charges.

What are the disadvantages?

These properties can often be void during the summer months, after the academic year has ended. There will also be regulations, particularly regarding fire precautions, that will need to be adhered to when renting out a property to students or any multiple occupancy households. Consider these estimated costs when calculating the yield.

What defines a multiple occupancy household?

Under the Planning Act, ‘multiple occupation’ is quantified as eight or more unrelated people, living in a single dwelling unit, whether under a single tenancy agreement or as a number of tenancies, i.e. bed-sits. Under the Housing Act, it can also mean two or more unrelated people living in the same house, even if they are a couple! However, when the tenants are a couple and where there is no evidence of separation between the occupants, the regulations are not as stringent regarding fire safety issues. This is because the bedrooms are used, in principal, for sleeping and not for living in. In bed-sits, where a room is used for sleeping, living and cooking, the risk of fire is increased. Safety measures have to be put into place and are legally enforceable by your local authority.

What kind of safety measures will I need to put in place?

Your local authority will be able to offer you guidelines but basically you will need to consider installing:

• fire doors
• self closers on all doors

• integrated smoke and heat detectors
• emergency lighting
• fire escapes.

Will installing safety measures add value to the property?

These safety measures, can, of course, work out to be very expensive and there is no guarantee that you will recover these costs when you choose to sell, unless it is to another landlord. If you choose to sell to an owner-occupier, the safety measures you have been forced to comply with could actually devalue the property.

Letting to housing benefit claimants

This type of tenant can be anyone from the unemployed, to the single mother, to someone who has just lost their job or been made redundant. It does not necessarily mean someone who is dishonest and it is worth remembering that anyone can fall on hard times, even property investors who don’t do their research! If you want to rent to this type of tenant you would be advised to contact your local authority’s Housing Benefit Department, as the rules about claiming this kind of benefit can be complicated and you will need to know what conditions apply.

Who will set the rent?

Should you decide to rent to this type of tenant you will be visited by a rent officer, who will inspect the property and inform you what rent the local authority is prepared to pay, taking into account the claimant’s personal circumstances.

What are the disadvantages of this type of let?

If you have a two bedroom property and the Benefits Department consider the claimant needs only one bedroom, they will only agree to pay a proportion of the rent and it will be up to the tenant to cover the rest. If the tenant has no means of income, this could be a risky undertaking for a landlord.

Is the rent the local authority agrees to pay guaranteed?

Yes and no! The local authority will pay the rent that has been set but not necessarily directly to you or your agent. Even if the method of payment has been agreed between all the parties concerned, the tenant can change this arrangement whenever they wish to do so. The local authority will not inform the landlord of this change. If the tenant decides not to pay the landlord, then it is up to the landlord to chase the tenant for the arrears. If this results in court proceedings and the eventual eviction of the tenant, it is unlikely the landlord will be able to recover any of the lost rent.

You may also have to pay back some of the rent you have received

If the claimant has been receiving benefits that he is not entitled to and has been making false claims about his circumstances, the local authority can demand that you pay back the rent you have received from them. This condition can only be applied if the rent has been paid directly to you and not the tenant.

What happens if the tenant has already left the property?

Even if the tenant has left the property, you will still have to repay the rent overpayment, or part of it, for the period when the tenant was in residence. If you are housing another benefit tenant, the local authority can deduct the repayment debt from that rent! It may not be fair but the local authority can do it and they will.

What if the rent is paid directly to the managing agent?

The landlord is still obliged to pay back to the local authority the overpayment. However, if the landlord cannot be traced, the responsibility will fall to the managing agent. Many agents refuse to accept payments made directly to them and will make provision for the landlord to receive direct payments only. This way, they absolve themselves of any repayment responsibilities.

RENTING OUT YOUR FORMER RESIDENCE

Should you find yourself in a position where you are re-located for any length of time or for any reason you choose not to live in your property, make sure you tell your mortgage lender. Strictly speaking, a domestic property should not be rented out. Inform the lender and, if it is to be short term, six months or so, the lender may decide to let you keep the same mortgage. Some lenders, however, may take the view that the property has become a buy to let and adjust the interest accordingly.

If the rental period is liable to be longer, you will almost certainly be required to change your mortgage, as your property will be seen as a designated buy to let. If you choose to return to live in your property, you will have to change your mortgage back again when you take up occupancy. There will also be tax implications. If you are making money from your home, you cannot claim tax relief as you can with a buy to let mortgage.

TAXATION

If you become a private landlord, your tax position may be affected. Any profit you make on the rent of your property will be taxable. If you sell your property, you will be subject to capital gains tax. Taxation can vary according to your individual circumstances. Consult your accountant or financial advisor for more information. If you do not have an accountant, get in touch with your local tax office or visit www.inlandrevenue.gov.uk for advice. Tax issues will, however, be covered in greater detail in Chapter 6.

INVESTING IN BUY TO LET FOR CAPITAL GROWTH

This is when you invest in a property, where the anticipated yield of that property will not cover the mortgage or make you any income. In fact, the property could be termed as a liability, rather than an asset because it actually costs you money to rent it out. This situation is common in inner city areas, where rental markets are saturated.

What are the advantages of buying a property like this?

If you are buying a property that is costing you money to run, it will be because you believe that property will increase in value enough to cover losses and net you a handsome capital gain when you choose to sell it. There is no reason to suspect that this will not happen in a rising market. If the market falls, however, you could end up in a negative equity situation, with the cost of the property being more than it is worth when you want to sell it. Obviously, if the market is falling, it is better to hang onto the property if you can but this will be entirely dependent on your own personal circumstances.

LET TO BUY

This can be another way of building up your property portfolio. It is the reverse of buy to let – instead of selling your own house when you re-locate, you re-mortgage, refurbish and then rent it out. This way you own two homes, one which you are living in, the other which you are renting out, ideally for enough money to cover your mortgage and net you an income. It also means that when you come to sell either property, you will be entitled to Tapered Capital Gains Relief, depending on how long you have lived in each property.

SUMMARY

Buy to let, in my opinion, still represents a good investment opportunity, as long as you do your research and follow a few simple rules:

• Only purchase in areas where there is strong rental demand.
• Buy in areas next to ‘hotspots’.
• Buy near amenities, schools, shops, restaurants, offices.
• Buy near good transport links.
• Speak to estate agents to find out what kind of properties are in demand in the area.

• Find out if they are busy. How many vacant apartments do they have on their books?
• Read the local papers and get property rental lists from all agents in the area.
• Get agents to send you details of properties that match your requirements.
• Work out the returns from home and if everything stacks up, then you can confidently go ahead with your purchase.