Buy to Let
Making the right investment
The private rented sector has grown massively in recent years. Between the censuses of 2001 and 2011, the Private Rented Sector (PRS) grew from 12% of all English households to 18% (4,100,000), representing a 50% increase, and by 2016 stood at 4,500,000. Bournemouth and many of the coastal towns had some of the highest proportions of households in PRS, at almost 30%.
The pressure for housing, the flexibility of tenure and the availability of buy-to-let finance have made the sector extremely popular with private investors, although stamp duty surcharges on second homes and tax charges have weakened growth. The PRS is here to stay, however, and it is still probable that, by 2020, one in five of households will be living in the private rented sector. by 2020, one in five of households will be living in the private rented sector.
Buy-to-let investment offers a regular income, the potential for capital gain, a supplementary pension and, for some investors, the longer-term potential of a future retirement home by the sea. But buy-to-lets do require careful forethought and regular management if they are to achieve their full earning potential.
What should I buy?
- Old or new? Character or convenience?
- Condition – from project to turn-key, how much are you prepared to do to make it lettable?
- Size – how many bedrooms? Doubles or singles? Remember, two bathrooms are better for sharers.
- Freehold house or leasehold flat? If leasehold, how long is the lease? Are you allowed to sub-let?
- Consider running costs, heating etc
- Parking- Either with the property, or convenient on-street?
- Outside space – balcony, courtyard or garden?
- Rateable Value – Which Council Tax Band is it in?
- Service Charge – a flat will mean you don’t have to deal with the external repairs, but at what price?
- Could it be suitable for holiday, student or corporate lettings?
- If the property is part of a larger block, are the common parts well maintained?
- If it’s in a multi-storey block, does it have a lift?
- In older properties, do test the services before committing – new boilers are expensive!
Where should I buy?
- Consider the convenience of the location – where are your tenants likely to work? Are there transport links close by? Are there local amenities – shops, bars and restaurants, parks?
- How is the property situated? Is it on a noisy road, what do you see from the window, how close is it to its neighbours?
- Is the area up and coming? Is it well regarded? What are the local schools like?
- Check whether there are any major developments proposed which could affect the area.
What about the economics?
- The rental yield is the annual rent achieved, minus outgoings, divided by total costs. This is the ‘ungeared’, or ‘cash purchase’ yield. In reality, most buyers will obtain a mortgage (otherwise known as ‘gearing’) which will increase the rate of return, provided interest payable does not climb to exceed the rental income received!
- The total return from buy-to-let is a combination of income and capital growth, but remember that your total return is purely theoretical until you have sold the property – and capital values as we know can fall as well as rise!
- Consider what price bracket offers the best returns. Just because a property costs more, it doesn’t automatically mean that the rent will be proportionately higher. Stunning sea views, for example, may improve lettability, but a two bed flat is still a two bed flat, and the rent will rarely be double, even if you paid double for it.
- If you are buying a flat check out the ground rent and service charges – you will be liable to pay these, so make sure they don’t knock a big hole in your net income, and check the insurance premium is included.
- If you are buying freehold, don’t forget to leave something in the budget for repairs as you will be maintaining the exterior and services.
- Hopefully you will be using a professional agent (!) and you need to make an allowance for those fees...
- Remember that whilst the tenants are liable to look after the property, they are not liable for fair wear and tear. You will have to budget for replacing items of furnishings etc over time.
- It is sensible to allow for an element of void. Professional marketing should minimise these, but if voids do occur you will be liable for the Council Tax and utilities between lettings.
- Be aware that there is a stamp duty surcharge on second and subsequent properties, which can add up. Also, the full cost of mortgage interest is no longer allowed by HMRC against rental inocme, so make sure you speak with a qualified accountant before committing to your purchase.