Is now the right time to invest in buy-to-let?

Most industry experts expected property prices to plummet during the height of the coronavirus crisis, but this turned out not to be the case.

Related topics:  Landlords
Craig Upton - UK Property Finance
1st September 2020
Question 709

Instead, they have continued to climb at a slower pace than normal and this recent spike is an early sign that some semblance of ‘normalcy’ is returning over the coming months and years.

New research from The Halifax reveals that UK house prices set a new record after four months of falls, with a 1.6% rise in July up from £237,834 in June, raising average property values to £241,600. House prices have risen 3.8% year-on-year in a surprising spike after the market was put on pause earlier this year. This mini-boom has pushed average property values up by 1.6%, or £3,770, month-on-month in July.

Lower property values than what would have been expected at this juncture in 2020, combined with extremely low-interest rates, rising rent prices and excellent capital growth prospects, is providing landlords and first-time investors alike, with a golden opportunity.

The last 20 years have seen an explosion in buy-to-let investors, the vast majority owning one or two properties, powering a significant part of PRS growth. Figures from 2018 show that the Private Rented Sector provides homes for over a fifth of the population, more than 4.7m households, making it bigger than the Social Sector and it’s doubled since 2002.

For several years now, the UK has been widely regarded as a haven for buy to let investment. From casual investors with just a single rental property to those with extensive portfolios spanning the British Isles, skyrocketing rent prices have attracted investors from near and far.

It’s also widely predicted that impaired job prospects and economic uncertainty for many will drive up demand for rental properties. It’s likely to be some time before the British public has the financial confidence needed to make major purchase decisions, further increasing demand for rental properties.

Whether investors are considering their first buy-to-let venture or looking to expand an existing portfolio, the aftermath of the Covid-19 pandemic could be quite beneficial for some. Many experts across the UK are expecting a boom in demand over the coming weeks and months, which will result in soaring demand for rental properties and a spike in average rents.

So what should investors consider if they are looking to buy their first buy-to-let property or expand their portfolio?

Location, location, location

It’s a big mistake to buy a property in an area you know little about. Investors need to research the local area and understand market conditions. Rent yields vary from town to town and it’s important to buy in an area with strong rental demand.

Think about the potential of the town for buy-to-let eg Is the town in a commuter belt, are there good transport links? Are there good schools for young families? Where do the students want to live?

In most cases, investors tend to invest in property close to where they live. This is a great advantage as they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property

Contingency fund

Many investors do not factor in the costs of owning a buy-to-let property with contingency funds. If you do not have a contingency fund in place to cover unforeseen circumstances, then they could fall into financial difficulty and potentially lose their property.

As a general guideline, 30-35% of one year’s gross annual rental income should be put aside to cover rent arrears, void periods, maintenance, repairs and refurbishment, white and brown goods replacement and the ongoing rental costs, such as gas safety certificates and letting agent fees. This contingency may not be used and should not be seen as an additional annual cost, just part of the investment business plan from the outset for investment protection.

Cashflow

It’s vital to do the maths before investing, or you could be seriously out of pocket. You need to buy an asset, not a liability and it needs to put money in your pocket every month. Before you think about looking around properties, sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.

Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. Ensure you know how much the mortgage repayments will be and if it is a tracker, allow for the rates to fluctuate in your calculations.

Once you have the mortgage rate and potential rent sorted, then you must do the numbers carefully and work out how your investment will perform. Ensure you factor in maintenance costs and work out how you will cope if you have void periods between occupancy? These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker, allow for rates to rise.

Don’t’ be emotional

It can be easy to follow your emotions when purchasing a property. The golden rule is don’t buy a house because you love it and would like to live there yourself. You need to love the deal and not the property. Any property you invest in must deliver on the financials.

Have a great team to rely on

Property is a team sport. Investors need the support of a good mortgage broker, lawyer, accountant and builder.

Find unbiased professionals and source recommendations from other investors. Don’t rely on portfolio building companies for unbiased advice. Often, they are trying to sell you something. Leverage your time and don’t try to do everything yourself.

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