How To Buy To Let
Get a Buy to Let Mortgage Lined Up
Of course I would say that but if you want to be successful at buy to let then you will have to buy the right investment property and that takes time and effort (see step 2) so there’s no point investing all your spare weekends meeting estate agents called Giles until you know exactly how much you can borrow.
And the only way to be sure is to get a lender to give you a Decision in Principle (DIP or sometimes AIP for agreement in principle) in which they are saying that, based on the information you’ve supplied they would be willing to lend to you and how much. With your DIP in hand you won’t waste your time looking at a basement flat when you could be viewing the penthouse and you will also find Giles and his colleagues will take you more seriously as a buyer if you’ve gone to the trouble of speaking to a lender and getting an agreement to borrow in place.
Buy the Right Property
By far the most important thing when buying a buy to let property, or any property for that matter, is to get the price right as the idea with any investment is to earn as much profit as possible whilst exposing yourself to as little risk as you can. Should you end up paying too much for your investment property you could find yourself paying more than you should each month to service the mortgage and worse still may find you can only sell for a loss should the local housing market stall or decline. On the other hand if you buy at a competitive market value, or even better below market value, you are almost certain to recoup your investment and could even turn a profit if you sold the day after completion.
There’s no easy way to do this. If you want to do it right you will have to get out and see every property that comes close ticking your boxes and make friends with the estate agents because they are the gatekeepers. They know about every property before everyone else and you want them to call you to arrange a viewing before the rest of their prospects.
Make an Offer
When you are buying a home to live in the only thing you need to consider is how much you think it’s worth and how much will the people you may want to sell it to think its worth. But with a buy to let property you must also take into account the rent you expect to achieve as well as the property’s value. Most buy to let mortgage lenders will insist the rent is 145% of the mortgage payments but even though you may be taking a fixed rate deal at 2.4% the rate for the rental stress test is way higher at 5 or even 5.5%.
So should you wish to buy a £100,000 flat with a mortgage of £85,000 (an 85% Loan to Value LTV) the monthly interest payments for the stress test would be £354 per month (This is worked out by taking the loan amount and applying the annual interest payable, 5% in this case, and dividing the annual figure by twelve months 85,000 x 5% / 12 = £354). The rent achieved should then be 145% of this mortgage payment (if you are a lower rate tax payer it is possible a lender will work on 125%) meaning you will need to achieve a rent of £513 per month to satisfy the lender’s criteria.
This means you must take into account the expected rent when deciding how much a property is worth as there’s no point offering £100,000 for the flat mentioned above if the rent you expect to achieve is below £513. And in fact many properties on the market just don’t stack up as a rental investment for this reason but a savvy negotiator will use the rental income as an extra negotiating point when offering.
Preparation, Preparation, Preparation…
The people who make the most money from buy to let are those who minimise their void periods. A void is the term used to describe any time the property is empty or ‘void’ and is therefore not earning any money. In order to reduce the potential void period immediately after you complete the purchase you should use the time leading up to completion to do as much preparatory work as possible so you hit the ground running the day you get the keys.
Before Exchange – in the time before you exchange contracts it is wise not to invest too much money or commit to anything as there is the chance you won’t buy the property and so may lose any money you spend. But you can still do plenty of research in order to get a plan in place.
Speak to any contractors and get quotes, decide what refurbishment or redecoration, if any, you will carry out and get your shopping list ready. Likewise with furniture and other things you intend to do, get it all ready so all you have to do when the time is right is push the button.
After exchange – With all the prior research you have done you will know how long an exchange period you will need to get workmen, furniture or anything else in place for the day you complete. The period between exchange and completion is extremely useful as you are guaranteed to buy the property but still don’t have to worry about paying a mortgage so it is free time if you will.
Use it wisely! Four weeks is usually long enough to line everything up so that the moment you get the good news from the estate agent your guys are on it and the place is ready to let as soon as humanly possible.
You can also use this period to start marketing it to let. If you’re buying through an estate agent they may already have some interested tenants but if not speak to some agencies and try and get renters to move in as soon is its possible.
Be a Good Landlord
Once you have completed the purchase of your buy to let property you must then turn your attention to looking after your tenants whom you should really treat as guests. If you are refurbishing or redecorating at all remember to be objective and think of what your guests would want and not what you would want as they may not be the same thing.
The size and location of a property are far more of a determining factor than finish when it comes to the rents you can achieve so cater to the local market and don’t build Buckingham palace in a council flat. Again, to make money from buy to let you must be objective and there is probably more profit in an average fit out than a luxury one.
If you are managing the property yourself then make sure your tenants know what you expect of them by giving them a set of (friendly) house rules as well as their contracts and any other paperwork (don’t forget to sign up to the tenancy deposit scheme). Carry out a thorough inventory together and take photos of anything of note for future reference and make sure you give the property to your guests in as perfect a condition as possible as this will hopefully show them how much you respect them and their home and you can highlight that is the condition you expect it to be returned to you in.