Is ‘Buy-to-Let’ a good investment?
‘Buy to Let’ offers two distinct temptations to potential investors: a steady and perhaps rising income and the potential for capital gain. In these days of low interest rates and stock markets at elevated levels investors may be attracted to investing in property.
Why this brief guide?
Investing in property for income and capital gain is not a new phenomenon and for many professional investors it has been an investment target for generations. In this guide we are not advocating it as a good or a bad investment. We have found over the years that the inexperienced investor has thought carefully about all the upsides, but sometimes is unaware of the downsides, many of which are not fully explained by agents.
How to avoid trouble in the first place
Establish that you can you afford the investment – What happens if you cannot rent the property for a long time, interest rates go up substantially, you need to realise cash (a property is an illiquid investment), property prices fall (as has happened on the Isle of Man)?
Find a good prospective tenant – Finding a good tenant is not dependent on using an agency. If you do use an agency then seek recommendations, look to see how often they advertise, ask them how long they expect to take to rent it, check what reference checks they make.
Know your tenant – Your tenant is not necessarily your best friend, even if they start out that way. This means:
- You obtain proper references. Even these may not provide a safeguard. The reference may confirm ability to pay but a good reference from an existing landlord may be so because they want to get rid of them. You need to know if they pay regularly, are there or have there been rent arrears, has the property been treated well? You may also like to seek bank or employer references or use a reference checking agency.
- Do you know why they want to rent – does their story make sense? If they rented one property for a long time before applying to rent yours then perhaps they haven’t left a trail of havoc.
- Do you like them? If you can meet them (if you have used an agent), then first impressions can count for a lot.
- Can you obtain any other form of comfort? For example you may know people in common.
- Will a well-heeled relation sign a guarantor agreement?
- Should you take out rental insurance?
Know your lease – The lease you give your tenants must comply with all aspects of the law.
- You should be clear whether or not, for instance, you are happy for your tenants to have pets. If not then ensure a clause not permitting it is included in the lease.
- Think of all the things that can go wrong, all the things that you want and don’t want to happen and see if they are in your lease or not. Check of course what you are asking is legal.
- Ensure you know what the termination arrangements are.
Determine the length of lease – A longer lease gives your tenant security of tenure, potentially greater security of income for you, but less flexibility should you decide to rid yourself of the tenant or to reoccupy yourself.
- In England you can give a 6 month Assured Shorthold tenancy. After 6 months, if not renewed, it becomes a periodic tenancy. This gives the tenant the right to give one month notice and you as the landlord 2 months. Beware however that the notice dates must reference dates in the lease.
Looking after the condition – Your property is a valuable asset. You should therefore look to:
- Regular inspections to ensure it is being well looked after
- Presenting a clean and well-decorated property at the start of the tenancy, taking an inventory and photographs and getting the prospective tenant to sign for each
- Ensuring the tenant informs you immediately there are problems and getting the problems fixed quickly
Keeping the money rolling in – An obvious, but often forgotten list:
- Check your bank statement every month
- If not using an agent send a statement every month
- Chase your tenant immediately there is a shortfall in rent
- Do not be afraid to resort to legal means (if renting in England ensure you know the process for issuing a Section 21 for instance)
- Plan ahead when a tenancy ends, advertising in advance and ensuring a clause in the lease allows you to take a tenant around the property.
Finding a profitable property
Many of these points are obvious:
- Small properties normally command a higher yield and you should have an achievable yield in mind
- Construct a budget – what do you expect in rent versus expenses, will void rental periods or interest rate rises cause you a problem?
- Newer properties cost less to maintain but may incur service fees
- Choose your area carefully – is there rental demand or a surplus of properties?
- Are there good transport links?
- Gardens add cost and headaches
- Is there parking or are their parking restrictions?
- If there is an ongoing service charge? How is the building being looked after?
- Are property prices rising / is the area improving?
Things that can go wrong
The list of things that can go wrong is almost endless. Here are a few of the major ones and others you may not have thought of:
- Void periods
- Interest rate rises
- Redecoration – you may have to redecorate every 3-4 years if the tenant change regularly – they will not treat the property as you do
- Unpaid rent – you may end up evicting a tenant, but if they cannot pay then you end up with no rent
- A ruined property – sadly this happens too often and you can be left with a wrecked property, a property full of left possessions, a property you cannot clear of possessions, redecorate or re-advertise until you have gone through the legal process of evicting the tenant. Even if you eventually find the tenant they may not be able to pay
- Untaxed vehicles and other things left at the property
- Fights between tenants – often about noise. You can then be called in to intervene.
And not forgetting
- Gas safety certificates
- Local Authority Licencing affecting some parts of the UK
- Electrical PAT tests are required for electrical items supplied
- Rates payable (Payable on empty property in the UK after 1 month of vacancy)
- Water rates may be payable in the UK if the property is empty
- Tax returns and accounts if a limited company
- Capital Gains Tax on gains made on UK property
- You should have adequate insurance
- Your mortgage should be appropriate and if you let your house you will need to inform your insurer and mortgage provider.
- Deposits in the UK must be placed with a Deposit scheme – failure to do so can give rise to large fines
- Renting a property can be a very time-consuming in administrative activities
- Political interference should never be forgotten if rents or rental periods become regulated
Buying a ‘Buy-to-Let’ property is a major decision, done properly can be highly rewarding, we hope this brief (and by no means comprehensive) guide, helps.