If you’re a buy to let investor, you’ll no doubt be aware of the new stamp duty charges that are set to be introduced on the 1st April 2016. With an extra 3% of the sale price payable on all second home purchases and buy to let properties, landlords across the UK will be re-evaluating their budgets and looking at ways of making purchases as risk free as possible. Here’s some pointers…
There are few investments, if any, that are completely “risk free”.
However, there are some that bring with them far greater risk than others.
Investing a pound in the lottery each week for example.
It’s not a huge amount of investment but there is a likely chance that the pound you spent is going to be gone forever.
Then there’s property.
Depending on who you ask, some will tell you that there’s a BIG risk involved when it comes to investing in property.
On the other hand, I know many investors that will tell you it is one of safest things you can put your money in to.
So why the big difference in opinion?
Well more often than not, it’s because those who see property as a sound investment treat their purchases much more like a business than a side hobby.
And much of that comes down to looking at how much risk they can take out of the equation.
It’s true, there are lots of risks when it comes to purchasing a buy to let property.
But there is a lot you can do to take away those risks and build a great portfolio which delivers steady returns regardless of market conditions, rate rises and government policy.
We’re going to take a look at just some of the factors that can impact on your returns and what you can do to, if not completely rid, substantially tip the odds in your favour.
So the first hurdle that many would be Landlords trip up on is paying too much for their property.
This is often the case for new investors who can often get over excited at the prospect of becoming a landlord and end up paying over the odds for what they feel is the right property.
If this is a situation that you find yourself in, the only person to blame is you.
The way to reduce the risk of paying too much for the investment property you buy is to do your research.
A couple of hours looking into similar properties on the market, sold prices and researching how fast other local properties are securing tenants can save you from making a big financial mistake.
If the property you’re interested in is way above what other similar properties have been on the market for and have sold for, chances are it’s probably not going to make a great investment property and the yield you receive will be low.
Similarly, you might find a great house at a great price but if there’s loads of other similar properties on the market that are all looking for tenants, and have been for a number of weeks, it would be safe to presume that there is not a high demand for rental properties in that area and you might want to look elsewhere.
The second concern that Landlords have when it comes to buying a property is “What if my tenants don’t pay”.
Well, there are two ways you can greatly reduce the risk of this being an issue.
The first is what’s called a “rent guarantee policy”.
This is basically an insurance which means that should for any reason your tenants decide not to pay their rent, you’re covered for the full amount so you don’t miss out on payments and fall behind on your mortgage and other associated costs.
Most letting agents offer this as part of their service (for example, the Hannells Lettings department do) and considering that you’ll be able to sleep easy, knowing that your rent is covered regardless, it’s well worth looking into.
The second thing you must do before you agree to letting your property is to make sure that your tenants have been properly referenced.
This will highlight any potential problem tenants and significantly reduce the risk of you letting your property to a tenant/s that is going to cause problems.
Again, full referencing should be a standard part of the service offered by any letting agent.
I would always recommend using an agent that outsources their referencing to a third party as they will have no bias for or against any tenants and you should receive honest feedback.
For Letting agents that reference in-house, you may find that they choose letting the property and getting their management fee quickly over finding good quality tenants – but that’s not always the case.
Another factor that is certainly worth bearing in mind before making a purchase is “What happens if interest rates rise?”
Now unless you have some seriously good connections, there is absolutely nothing you can do to have an impact on rate rises.
No matter how many letters you write to your local council or Facebook protest groups you start, if rate rises are announced, chances are they’re going to happen.
So, how can you possibly reduce the risk?
The first thing Sir Richard Branson questions in any business is, “What can you do to protect the downside?” and the same should be applied to property.
With interest rates still at an all-time low, it would be fair to say that there’s a significant chance of them climbing at some point over the next few years.
With this in mind, you should factor potential rate rises in to your budget before taking out a mortgage.
For example, let’s say your mortgage payments are £500 per month and you’re currently receiving rental income of the same amount.
You’re breaking even on your mortgage whilst investing in your future and the house is paying for itself.
That’s great.
But, as soon as there’s an interest rate rise, all of a sudden you’re paying out more than you’re generating and all of a sudden, it’s not quite as good an investment as you originally thought.
So, don’t max out on your buy to let mortgage. Leave a bit of room between what you’ll be generating in rent and what your mortgage payments are so that if there is a rate rise, you’re still covered.
This leads nicely into my last and final “risk reducer” for this article.
It’s the word most Landlords take an immediate disliking to.
Maintenance.
Firstly, bear in mind that no matter how good a condition the property is, or how new it is – at some point you are going to have to shell out for maintenance and repairs.
So, what can you do?
Well firstly, it tends to be the case that newer properties will require less “structural” maintenance.
New homes come with ten year guarantees so if you’re looking for as little maintenance as possible (at least for the first few years) this might be the safer option.
Also, I’ve seen my fair share of properties over the years and it is fairly easy to distinguish between the properties that have been looked after and those that haven’t.
If there’s roof tiles missing, windows with broken seals, guttering hanging down and damp patches throughout – you can bet your bottom dollar that you’re going to be spending a lot of money on repairs, sapping all your profits and taking up all your time.
If you wanted to find out about every nook and cranny, you could commission a home buyers report which will highlight absolutely everything that’s wrong with the property.
More often than not though, it just takes a bit of common sense.
However, it’s not just structural issues that may eat into your profits.
White goods will often give up the ghost and having to replace fridges, ovens, washing machines, dishwashers etc. can soon become an annoyance.
The first step towards mitigating this risk is to buy quality white goods that will last. Over time, spending a little more will pay back dividends on not having to shell out for new equipment and also not receiving hundreds of texts from your tenant or landlord telling you that you need to get things sorted.
Secondly, you might want to look at the various insurances that are available that cover your white goods so for a nominal amount each month, it’s all covered.
That’s completely up to you.
So, knowing that at some point, you are going to have to pay for repairs or replacements – it is wise to factor a proportion of your monthly rent towards this so that when things do go wrong, you’ve budgeted for it and it won’t leave you high and dry.
Beware though, lack of maintenance can lull you into a false sense of security.
Veterans of the property game will often tell you that things can go swimmingly for months and then all of a sudden, everything goes wrong at the same time.
The fence blows down, the boiler’s gone bust and the washing machine is on the blinker.
If you’ve kept you’re maintenance fund in check, you’re safe as houses.
However, if you’ve decided to use your “fixin’ fund” for a nice new pair of shoes or brand new set of golf clubs, you might end up kicking yourself.
So, there you have it.
Property can and always will be a great investment providing that you do your due diligence.
Don’t rush in to it and research the area well before you decide on a property that you’d like to buy.
And of course, it goes without saying that the best thing you can do is leave the management of your property to Hannells Lettings.
We have a brilliant Lettings Team led by Andrew Sanderson who genuinely take pride in the service they deliver to both Landlords and tenants.
They’re more than happy to answer any questions or provide guidance on what they think might be a suitable investment for you so feel free to get in touch on 01332 294396 or simply email lettings@hannells.co.uk.
They’ll go out of their way to make it a moving experience…
So, all the best with your property investments.
And don’t let these increased stamp duty levies put you off investing.
Providing you budget correctly, there’s still plenty of brilliant buys out there that will generate some great returns.
All the best!
Yours faithfully
Benjamin Brain
Hannells Estate Agent
