There is far too much ‘misinformation’ about buy to let in today’s news, commentary and on-line.
I’ve been working in property for over 25 years now – to begin with as a ‘consumer’ and ‘investor’ and then as a property professional.
What I’ve learned about buy to let is there are some ‘rules’ to understand about investing in it:-
It is successful versus other financial investments because you can gear it – ie put down a deposit and borrow via a mortgage
It works versus other financial investments over a LONG PERIOD OF TIME, for example, 15-20 years (unless you get a bit lucky)
You can boost your returns by buying an property which can’t be mortgaged with cash and then adapting the property so a lender will lend
Depending on the age and condition of the property, over 15-20 years you will need to pay for 2 new boilers, 3 new kitchens and bathrooms and possibly a new damp proof course, new roof and wiring. That’s tens of thousands of pounds.
You will get a bad tenant, probably in 1:5 lets
Many companies will try and sell you the idea that there are ‘secrets’ to investing in property and that you need ‘mentoring’ or ‘creative finance’ to make sure you are a success.
In my view these aren’t required – especially at the thousands or tens of thousands of pounds they charge for their ‘secret’ or ‘mastermind’ information.
The key to buy to let returns isn’t complicated:-
You sell for more than you bought it for
You rent it out for more than it costs you to run
The ‘secrets’ or ‘mastermind’ things you need to know about come from the experts you should work with:-
Tax expert who will ensure your HMRC is mitigated – but you pay the right level of tax on income and capital gains and avoid fines. Read - Will your property deliver a retirement income?
A good will and inheritance plan via a tax and STEP lawyer is essential to keep the money ‘in the family’ and ensure your property can be passed over without a glitch. Read - Buy to Let Tax.
Good local agent / auction specialist. Read - Buying at Auction.
Great RICs and/or RPSA surveyor. Read - Choosing a Surveyor.
Please be aware that ‘signing over your house’ ‘or houses’ to your kids, surviving them by 7 years does not work as a ‘inheritance plan’! There are lots of myths about what you can do to reduce your tax bill, it is possible, but you must do it legally and not base it on what you, your friends/family ‘think’ is OK!
Why you should gear
If you invest £100,000 in financial products, on average you can secure a 4% return, so around £4,000 a year - take a look at his Telegraph Article.
In many expensive areas across the UK, like London, you would struggle to get a 4% return via the income stream.
If you gear (or leverage) your investment, then it’s possible to increase your return via capital growth.
For example, if you invest a £100,000 to buy a property outright, it goes up by £5,000, then that’s a 5% increase.
If you invested £25,000 via a deposit and let rental income pay the cost of mortgaging, then that £5,000 increase gives a return of 20%.
So the trick is to find a ‘break-even’ between investing with cash which gives enough income for you to build up a pot to pay for costs you incur when the property is empty and tens of thousands of pounds maintenance your are likely to pay out over the years you let it.
You need to invest in BTL for the long term
Many other financial investments can give you decent returns because they are either tax free, or actually pay you tax, for example a pension.
Secondly the cost of buying a property and selling is quite expensive. To buy a £100,000 property is likely to cost you around £1,500 to £2,000 in legal, surveying and finance fees. It will then cost around £2,000 to sell the property and cover legal fees.
So the purchase and sale is effectively a 4% cost in and out, albeit these costs are tax deductible.
But your property, if bought for cash would need to grow by at least 4% just to ‘break even’ and then the property, if owned with cash, will need to keep up with inflation, normally 3%. So your property has to increase by 7% before you make anything capital growth wise.
In the past that would have been holding the property for one to two years, now it’s more likely to be two to three years as recent trends suggest that property price growth will be slower than it was in the past.
That’s why you need to invest for some years to ensure all the costs are covered.
It’s also why gearing boosts your returns versus investing with cash.
Boosting your returns by buying initially with cash
Relying on ‘natural property price growth’ to make money from capital growth isn’t a ‘strategy’. It’s investing and essentially ‘keeping your fingers crossed’.
To find out more about why this is a bad idea, go to ‘sold property prices’ on the likes of Rightmove or Mouseprice and put in these postcodes – they will show you properties which were bought some time ago and are now worth a lot less than paid for, some by 50%!
Postcodes of failed property purchases:-
Nottingham: NG1 1AP
Leeds: LS11 9BE
Manchester: M3 7BT
Ashford: TN23 5LS
Birmingham: B1 2EJ
What’s better is to get expert help buying a property for cash. For example one which has so much work needing doing that lenders won’t lend on, or a property which has a short lease or needs buying quickly so the seller sells at a discount.
Maintenance and void periods
Many people who invest in buy to let are totally underestimating the cost of maintenance.
As a 15-20 year let, you will need two new boilers, that’s likely to cost around £6,000 (which could be a whole year’s rent) and a new kitchen could be £2,500 and £2k to £3k. A re-wire could be £5,000 and a new roof similar or more.
If you buy a new build, you might save on these costs, so it’s worth weighing up the difference over the ‘lifetime’ of the property, not just the purchase price.
In addition when you work out what the rent is, you need to include an average of 3 weeks voids (ARLA Buy to Let Review).
So if your rent is £5,000 / 52 weeks x 49 weeks = £4,711.
You will get a bad tenant, it will cost you money
Unfortunately with 1.6 million landlords and over 9 million tenants, there will be times that despite your efforts, a bad tenant costs in many ways:-
They may stop paying rent
It is likely they will cause damage which they/insurance company may not pay to fix
You could incur huge costs in legal fees to evict your tenant
Insurance is where you can save a fortune and cover yourself, but you may still have to shell out cash in the meantime.
Make sure your insurance covers the likes of malicious damage and things like cannabis factories (unfortunately criminal tenants set out to build these in unsuspecting landlords!)
What returns can you expect from Buy to Let?
For some reason, the media and others seem obsessed with ‘selling’ you BTL as an income generating investment.
This isn’t, in my experience, correct unless you are doing specialist Homes in Multiple Occupation like student lets.
Buy to let has always worked as investment to deliver great capital growth. To secure a good income you need anything from 5-10 properties.
The majority of investors have only 1 property.
Of these, according to Shelter, 21% make no income at all, meaning they will have to put tens of thousands into the let during the investment in maintenance.
Where you can make your money though is if you gear your investment, hold it for a long period of time to cover costs of buying/selling, then it can deliver some great returns.
But there will be times when you earn nothing and make a loss, that’s just the nature of the investment.
As such, the idea that you can rely on one or two properties for an ‘income’ in retirement is, in my view, ludicrous. It’s fine as extra ‘bunce’ money, but rental income is no replacement for the safety of properly secured pension income.
For more help, visit our buy to let expert checklists.