I met up with an old friend last week. Alan, a school teacher has been in Qatar for a couple of years teaching in an English school. He’s just returned to England and is in a quandary as to what to do next.
During his Summer sabbatical he, by his own admission has got addicted to the BBC's Homes Under The Hammer.
One of the ideas he’s being toying with is to have a go at a little property development & property investment.
Now, Alan, who is already a landlord with one property that he rents out is typical of many newbie landlords.
He is looking at property investment in a very general way and it was only by us having a chat over a coffee did it become clear to him what his aims and intentions from his property investment ideas were.
Anticipating that there are a lot of newbie landlords in a similar position to Alan I’ve listed some of the main points of advice that I gave to Alan when considering buying a property to let out:
1. Firstly, decide what type of tenants you want to let to.
This is critical. Do you want to be dealing with professional tenants, tenants on benefits, student or post grad tenants. They all require different skill sets. A single professional couple should require less management input than a house of students.
However you should get a higher rent if you let rooms separately, say to students as a HMO.
The question is work vs reward. You should be clear what you want.
2. To find a bargain property define your area of search and type of property.
Use Rightmoves new drawing feature to set a parameter for searching for potential investment properties by selecting an area of search and then setting values and size of property. Most landlords tend to buy a property in or close to an area that they live. This gives you a great advantage of knowing the area intimately, the best streets, the bits to avoid, the prices. Never underestimate the power of local knowledge. It also means that should you end up managing the property yourself. Something I would generally advise on the grounds of costs; it’s much easier when your buy-to-let property is nearby.
3. Look for motivated sellers.
Many landlords look to buy a property bargain at auction. There are some available, but remember the auction rooms are often full of other landlords and investors who are thinking at doing exactly the same as you. Never believe the guide price that auctioneers put on a property. That’s just there to draw potential buyers in by making them think. Wow that's cheap! For more information on buying at auction have a look here.
You are to be honest just as likely to get a bargain property either as a repossession or because the owners really need sell in the private sales market as many lenders are choosing to sell here rather than resorting to going straight to the auction rooms. Remember, drive a hard bargain. It’s a buyers market. The mantra is that a property investor always makes a profit when they buy not when they sell. The inference is that if you get a bargain initially that will set you up for excellent long term investment returns.
4. Target gross rental yield
Look to get a gross rental yield of 8% and above.
This should put you in a strong cashflow position even when interest rates start to rise. Remember if you are buying a leasehold with a management company then the chances are your net rent could come down considerably.
You will need to factor that in to your investment appraisal.
5. Make sure you do a thorough financial appraisal of any potential investment.
With any appraisal ensure that you have a clear separation between revenue and capital costs. Capital costs are a one off. Revenue costs are recurring financial items. Look at your return on equity employed ( the amount of cash you are putting into the investment) Is it good enough? Does it warrant all the additional work? Use our property investor appraiser.
Avoid the need for property finance where possible. Since the financial melt down banks have been doing their best at trying to claw back their losses by charging most borrowers relatively high rates of interest, but more annoyingly it’s the large set up fees just for getting a loan that can make getting property finance so detrimental to a landlords long term returns.
6. Don't bank on capital growth, especially over the next couple of years.
Growth will return, but as we have always said this probably wont happen until we have gone through some more pain after the cuts. Look at the London 2012 to symbolize a more buoyant economy, more consumer confidence and a more generous lending environment resulting in a return to growing house prices.
7. I always go for a part furnished rental.
That way you don't have the extra hassle of managing an inventory of furniture as well as the property. Since the introduction of the Tenancy Deposit Scheme (TDS) it is also much more difficult for a landlord to cover themselves against the damage to furnishing as they will have to prove before an independent assessor the state of the furniture before the tenant took occupation.
8. Concentrate on getting good tenants in.
This will have the biggest impact on the ease and profitability of your rental business. Think of the letting process as a bit like choosing a partner. If you don’t feel you can trust and work with them. It’s best to walk away. However, don’t rely completely on gut instincts. There are things that you can do to minimise your risks on taking on a tenant. The most important is always reference your tenant.
Where the results from this aren’t satisfactory then make sure that you get a decent guarantor for your tenant.
9. Remember you are running a business.
This is one mistake that many newbie landlords make. Firstly, they start to think of their rental property as their home or an extension of their home. It’s not. It is a business asset. Expect that the tenants will not look after it in the same way as you might.
However, this is the cost of somebody else occupying your prize residential asset. Remember, you should be getting a shed load of rent for the inconvenience. As long as they don’t wreck the joint then a lick of paint is going to cost you no more than a few hundred of quid. A fraction of a months rent in most cases. The other thing in managing your rental properties is that it is a business. This means that you are in charge, make sure that you keep your finger on the pulse and don’t fall into the trap of thinking that the business will look after itself. If you don’t want the responsibility of running a small business then think again about being a landlord. It might be better for you to just stick your cash in the bank if you are not prepared for the odd bit of hassle and work.
10. Don't look to make a quick return.
The days of ‘Property Ladder’ are over unless you are looking at the top end. It's all about buying and holding and looking at long-term returns. Bank on at least a 10 year time frame before exiting. Now is not the moment to look at doing a ‘property ladder’. Remember most of those only worked because house prices were going up anyway. A chimpanzee buying and selling property would have made money back then.
Conclusion on my discussion
The conclusion with my little chat with Alan was that he wasn’t that keen on managing property or the concept of tenants. A bit of a problem when you are running a rental business! He was keener on the concept of buying a residential property, doing it up and then selling it on.
My advice was in the current climate this is going to be difficult. Potentially falling prices, still relatively high construction costs and charges together with the transfer costs associated with buying and selling would mean that you would have to make a significant gross profit of around 25% to make it worth while. With all the other landlords and property investors out there this is going to be a tall order.
However, landlords prepared to be investors, focused on income and the medium to long-term can still find plenty of residential investment opportunities out there. Just make sure you have a clear business strategy before you take the plunge. The current investment market is no place for newbie landlords looking to 'dabble' in property investment.