Fancy making your investments a real-life version of Monopoly? Plenty of people do at the moment and ‘buy-to-let’ mortgage lending is booming. Here’s why, writes Jamie Langley, MD of Red Key Property Services.
A week is a long time in politics, so they say. But it’s certainly not a long time in property. Neither is one year, or even five.
And that’s one of the key messages I always try to get across to anyone asking advice on whether or not they should become a residential landlord.
My journey in residential lettings began in the late 1990s – at a time when the property sector was just emerging from a traumatic few years. Some people who had bought at the “wrong time” were only just getting back into positive equity. After that, it seemed the only way was “up” in terms of capital value and rental incomes, and a lot of money was made, but the last five or six years have shown us another side of the coin.
Yes, a lot of money is still being made, but you have to be much cannier.
Above all, this is a cyclical market. Lose your nerve, buy poorly or and sell up at the wrong point in a cycle and you could lose money on your investment. You HAVE to take the long view. If you want to have a safe return on your money AND be sure that you’ll get all your capital back at the drop of a hat, property investment is not for you. In that way it is no different from the stock market – except that values have certainly not been on a rollercoaster like the FTSE!
So if you are still reading this, here are my five reasons to consider buying to let – and what we tell anyone who comes to ask our advice.
1 It’s not big bucks to get started
Properties in some parts of the country can be snapped up for as little as £50,000. In my neck of the woods, you can get into the market with a tidy two-bed property for just £80,000 if you know where to look. That means that with a typical 75% buy to let mortgage at your disposal, you can start off with a mere £20,000 initial investment (although we do always advise having additional back up funds to allow for void periods, repairs and so on).
2 BTL is all about supply and demand…
…and there are simply not enough houses and apartments being built at the moment to cope with increasing demand, fuelled by the fact that getting a mortgage is still very tough. The private rented sector is growing rapidly and set to continue growing apace well into the future. Buy the right property in the right place, market it properly, and you will have people queuing outside to rent.
3 BTL combines cash flow and (hopefully!) capital growth
Once the income is up and running, you can use it to start adding to your investment fund, take out an income or pay off your BTL mortgage. Capital growth is not guaranteed – so treat that as a bonus; but bear in mind that, over the past 20 years, the value of the average property in the UK has grown by over 5% per year.
4 BTL represents a good ROI in today’s marketplace
We recently carried out an analysis of the properties from client portfolios across all our branches, and the current (net) return on investment after all charges, fees and costs are taken out is between 5 and 6 per cent. That’s very handy compared to other investment rate – unless you’re prepared to go for the riskier stocks. The fact that mortgage rates are so low enables you to borrow and still see a return.
To maximise your ROI, research your market carefully and see what the demand is locally, buy with cash if you have it (or at least have your finances lined up), and be prepared to go “off piste” sometimes – the best value is not always to be had in fashionable areas. Splitting larger properties into smaller ones can really see a big return – again, if you do your research on local demand.
5 You can make BTL very tax efficient
Once you get started on the road to building a property portfolio, you will need to think about the tax implications. This is where expert advice is needed, but there are plenty of options – including setting up as a company, sharing ownership of the portfolio between family members and establishing a trust – enabling your children or grandchildren to benefit and minimising capital gains and inheritance tax. Bearing in mind that – properly managed – your investment could well be returning well into double figures, taking advice early on is always recommended.
So what next?
Naturally, you’d expect us to say that having a good property manager is an essential weapon in your armoury, and yes, our role is to make all the essential things happen smoothly and stop the preventable things from happening. Agreed, it’s an addition to the cost base, but (like having a good accountant) a seasoned and qualified professional property manager will make or save you more money than they cost.
Of course, being a buy-to-let landlord is not for everyone. And even if you venture into the market, there are plenty of “bear traps” awaiting the unwary.
But that’s the subject of another blog…
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