Checklist for BTL Investors
Research the Market.
If you are a first time property Investor, understand the risks and the benefits. What type of Investment are you looking for? Do you want a hands on approach, looking to add capital value through refurbishment or would you prefer a more managed portfolio with a guaranteed return on investment. The more research you do about the location, property types and price trends coupled with your own investment approach will ensure that you leverage the best return for your money.
Location, Location, Location!
The best area to invest in is not necessarily the most expensive or the cheapest. Are you looking for an investment that is close to you in an area you are familiar with or are you looking for the potential of short or long term capital growth? Whilst it’s handy to think “would I live or rent this property”, more meaningful questions would be along the lines of; are there any infrastructure upgrades coming to the area? What would be my target demographic? Is there a University or Hospital nearby? What are the transport links like? Is it commutable? What are the schools like? Sometimes budget will determine whether you are looking at a 5 bedroom student sharing house or a 1 bedroom flat for a nurse working at the local hospital. But it is worth keeping these things in mind.
Look at your likely budget and then the rent of properties in your target area. Have you taken mortgage advice and accounted for maintenance costs and potential void periods when the property will sit empty between tenants? What is the net yield? Do this exercise in different target locations to get a feel for variances between local areas. The same 2 bed apartment may yield a higher net return just a few miles away.
The right buy to let mortgage.
Look at comparison websites, speak to your own bank, look for recommendations of a good independent broker. Don’t just accept the first deal placed onto the table. You may also wish to research the difference between specialist BTL interest only mortgages and repayment products. Choose the mortgage that best fits with your exit strategy.
We mentioned this earlier but instead of choosing your property on the basis of would you live there, instead, understand the benefits it would have for your target demographic. What are they looking for? Family home or ultra modern? Furnished or unfurnished? Armed with this information you will be less likely to suffer void periods. Remember, once you have a good tenant it is worth holding onto them!
What type of landlord are you?
Once you have bought your property, what type of approach will you take? For the DIY’ers, yes you can increase the yield with no management fees but be prepared to have your compliance in order. You will also need to give up your time for viewings, maintenance issues and advertising. For a hands off approach, speak to a number of agents, find out what they are offering for their services, remember they will be representing you to the tenants. Don’t forget that if you look after your tenants they will look after yourproperty!
Whilst we all hope for massive short term capital growth, a more balanced approach is to invest for income. Compare different properties by yield (the annual rent received as a percentage of the purchase price), for example a property costing £100,000 and returning £5,000 in rent has a gross yield of 5%. You can mitigate further by working out whether you will have lettings agents management fees, predicting annual maintenance costs, taxes, void period between tenants and then subtracting this amount from your rental figure. This will give you a more accurate net yield. If this income is higher than your mortgage costs then overtime you will build up cash reserves and may also benefit from any capital growth.
Can you negotiate? As a BTL investor you’re not part of a chain and therefore in a better purchasing position. Use this to your advantage. But remember to understand the localised price trends in your target location. If the market is weak then larger offers may be accepted. If houses are selling quickly then a low offer may push you off the negotiating table.
For many BTL investing has been an extremely profitable venture but it is important to understand the various risks of any investment.
Could house prices fall? Will interest rates rise? What is my exposure to the market? Will the property need work? Will my property sit empty?
Planning ahead and buying within a buffer will negate many of these scenarios but once again, do your research!
This can’t be stressed enough, know your market. Location, location, location! Who is likely to be your tenant and what type of tenant would you prefer? What type of landlord will you be? Understand the pitfalls, finances and mortgages to ensure a robust long term financial forecast.
Good luck with your Investment journey!