Archive for September, 2009

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Investing in buy-to-let: diversifying into commercial property

September 11th, 2009

Many experienced residential property buyers see commercial as a development of their investment business. This is due to the perceived advantages of commercial property investment; longer leases, fully repairing and insuring leases (FRI), no tenant hassles to deal with.  All of these points are generally true, but there are also downsides such as longer rental voids between tenancies and the entry point for investment usually a lot higher than residential property investment.

One key factor for diversifying into commercial is financing, not just raising the funds to purchase an investment, but also having financial reserves to cover void periods – it is not uncommon for a commercial property to be empty for 1 or more years between tenancies.  As an investor you also need to place greater emphasis on the quality of the tenant, e.g. their ability to pay, because if their business goes under you are left with no rental income.

Commercial property investment is hugely complex when compared to residential, it is impossible to cover all of the aspects in blog posts, we would probably need to write a book on the subject, and even then it would only just get you started.

If you are thinking of commercial property investment it is worth understanding some basics on the financing side, at least then you can consider if you want to investigate further. 

Without a proven history in commercial investment a bank is unlikely to lend an investor more than 60% LTV, leaving 40% deposit to find.  Secondly a bank will want a much higher rental cover than for residential, at the time of writing the best we could find was 150%, thus rental income from the lease needs to be 1.5 x the mortgage interest (this compares with 125% for residential property).

A bank will also want to know the quality of the tenant, their ability to pay, a term commonly used for this is the “covenant” of the tenant.  In today’s market the bank will most probably require the property to be tenanted before a mortgage is provided, thus making it almost impossible to buy an un-tenanted property unless you have very large cash reserves or equity in another asset for additional security.

All of this said, if you can find a commercial property with a good tenant and long lease (e.g. 10 years plus) with a rental yield of 8% or more it is a very attractive investment, continuous rental income (increasing at rent reviews) and no tenant hassles to deal with.  Such investments are out there, the bigger problem today is raising the finance.

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Investing in buy-to-let property: leveraging for growth

September 10th, 2009

So now you are an investment property buyer, you have your first one or two properties, and you want to start growing your portfolio. The key stumbling block for most investors is financing, they have insufficient private funds as deposits one future property purchases creating what appears to be an insurmountable barrier, but it does not need to be.  There are several ways in which you can overcome this issue, such as remortgaging, mezzanine finance, and  BMV properties, we will give a brief overview of each of these strategies for growing your portfolio.

Property Remortgaging.  You can remortgage one or more of your existing properties to release equity. Most lenders will have a criteria that you need to have owned your property for at least 6 months, they will also require evidence that they are being managed profitably, e.g. with interest rental cover of at least 125%. Some lenders will impose restrictions on the number of properties, e.g. if you have more than 5 or 10 (varies by lender) they will not lend for additional properties. When this happens you need to obtain commercial finance, for this you will need more of a proven track record and you will find the LTVs offered generally lower, sometimes only 60% LTV.

Mezzanine finance.  This is where you obtain secondary finance for your deposit, most lenders will not allow you to specifically borrow money to use for your deposit, but if you have “existing funds” in your accounts, that historically where obtained as loans, then it is possible to get round this issue.  The mezzanine finance can be taken as a secured loan against an existing asset, e.g. equity in your initial buy-to-let property or any other asset you may have. Note however that you will be paying a higher interest rate for this finance which needs to be considered in the overall portfolio profitability.

BMV properties.  This is where you purchase a property at below market value (see Simple2buy.co.uk), typically properties can be found at 10% to 20% or more below current values (September 2009). Once you find a BMV property that you would like to buy you can then use a purchase technique where the loan is based on valuation and not purchase price, in effect this reduces the deposit needed.  For example if the buy-to-let mortgage requires 25% deposit, and you buy a property at 15% discount, you then only need 10% cash for your deposit. Sounds too good to be true? Every day such deals are being completed in the UK, the only issue is there are more buyers for BMV deals than there are properties available, especially at discounts of 20% or more.

Whatever ever your financial strategy there is one fundamental rule to apply, do not make false statements to lenders, it is against the law.  Some investors may choose to do this, but one day it might catch up with them.  If you are going to use a creative finance strategy (such as with BMV properties) you will need the support of a specialist financial services company to ensure all of the lender’s rules are complied with.

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Investing in buy-to-let – managing the property

September 9th, 2009

Having successfully purchased your buy-to-let property the next step is managing the property for long term profitability … as an investment property buyer you have to be involved, otherwise your profits will fall and worse still you may lose your investment and end up in prison!

There are several areas of focus to consider, there are legal issues, tenant management and property management.  We will focus on each of these separately.

Legal issues

As a landlord you will have legal obligations, these are more than your responsibilities to the tenant under the terms of your tenancy agreement, and failure to comply can result in a criminal offence being committed.  The most important issues are those relating to safety, as a landlord you will need to ensure periodic gas safety checks and electrical safety checks carried out by approved gas and electrical contractors. Then there is tenant deposit protection, as a landlord you have to arrange for an approved third party company to hold the tenant deposit.  More recently energy performance certificates are required for any property before it is let. 

All in all there are quite a few legal obligations on the landlord, ignore them at your peril!  All of these issues can be organised by a letting agent, alternatively you can save costs by arranging directly with approved companies, a quick search on the internet will reveal a plethora of choices.

Tenant management

Most tenants will respect your property, but much will depend on your relationship with them.  An absent landlord who never checks up on their property is at greater risk of a tenancy going wrong.  We suggest periodic visits to the property, check on its condition and that everything is satisfactory for the tenant – let the tenant know you are there to deal with any problems, either property or tenant related.  It is also advisable to maintain business-like communication with your tenant, be polite, avoid misunderstandings as these can soon deteriorate and create problems later in the tenancy. 

Before letting to a tenant you should also carry out adequate reference checks, these should include tenant credit checks to ensure the tenant does not have any major financial issues, otherwise you could end up with unpaid rents later in the tenancy. We recommend www.Credit-Check-Services.co.uk for carrying out these checks.

When using an agent or managing the tenant directly, always ensure a full inventory check is carried out.  The inventory check must be signed and agreed by the tenant at the start of the tenancy, otherwise you will find it difficult to claim for any damages (should they occur) when the tenant moves out. The inventory list should not only document the items within the property but also the condition of everything from windows and walls to carpets. 

Property management

Ensuring the property is maintained is fundamental, ignoring a missing roof tile, a small leak, etc, could result in higher costs in the longer term, properties need to be maintained.  When carrying out any decoration or refurbishment go for durable quality appropriate to your rental market.  Think to yourself, how will this look after 3 years of letting, will it need replacing, are there more cost-effective options.  You need to expect some wear-and-tear, the property will need redecorating from time to time, so the lay out and materials used need to be chosen for minimal maintenance costs whilst ensuring tenant appeal for your target market.

Overall managing the property is a mix of good business sense and compliance with the legal obligations of a landlord, if you ignore these you will at best lose money, at worst end up in prison.

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Investing in buy-to-let property – financing

September 8th, 2009

So you have found the type of property and location you are interested in, next you need to review the finances.  There are effectively two separate components to consider here, one is the financing for the mortgage, the other is the cash flows and ultimately profit form letting.

For the mortgage you will need (in most cases) a buy-to-let mortgage and a quick google search will produce a seemingly unending list of mortgage brokers offering their services here.  But you need to know the numbers will work, so here are the key metrics mortgage lenders will require:

LTV, the Loan-to-Valuation (or purchase price whichever is the lower).  In the current market most products are either at 70% or 75% LTV, which means you need to fund a large deposit.  You can raise the deposit from releasing equity elsewhere, but you cannot have a “second loan” for your deposit on a residential buy-to-let (it is different for commercial property, we will discuss this later).

The second metric used by lenders is the “rental cover”, typically this will need to be at least 125% of the mortgage interest payments.  This is best explained by an example:

  • Assume a £100,000 mortgage on your £135,000 property purchase price.
  • Mortgage interest rate on the lender’s SVR of 5%
  • With 125% cover the lender requires you to have 1.25 x 5%, e.g. 6.25% rental income on the mortgage of £100,000, thus you need to have rent of £6,250 per annum (£521 pcm)
  • Thus for the £135,000 property you are buying you will need £35,000 deposit and a market rental income potential of £521 pcm.

One factor we do not mention here is that for any mortgage you will also need to show some proof of income and you will also need a good credit rating.

Next, the key part, the financials need to generate monthly cash flow and a rental profit. All too often newbie landlords focus on the gross rent and mortgage interest and assume that providing it generates a positive difference that it will be fine, wrong!  There are key costs and loss of income to be considered in your financial calculation, these are as follows.

Rental voids, it is very unlikely you will rent your property for 12 months a year, every year.  You need to budget for times when it is empty (rental voids), we suggest 1 month per year, or 8.33% of the rent.  Next you need to budget for letting agents, even if you manage the property yourself you will need an agent to find a tenant (you could do it yourself but the agent will normally find a tenant much more quickly thus reducing rental voids).  Letting agents will typically charge 10% (or more) + VAT, so that is another 11.75% of your rent.  Finally there are maintenance and insurance costs (including service charges for flats which can be higher), it would be prudent to budget another 10% of your annual rent for this.  In summary:

  • Rental voids 8.33% of rent
  • Letting agent 11.75%
  • Maintenance 10%
  • Total costs around 30% of the annual rent.

Now to make all of this work together, our example above suggests that you need to budget for at least 130% rental cover on your mortgage interest costs, and remember, today mortgage interests costs are quite low, so you are better off using expected future mortgage interest rate costs, no one knows for certain but a rate of 6% + seems more realistic. Thus you need to achieve a minimum market rent of £7,800 p.a. (£650 pcm) for a £100,000 mortgage on your £135,000 property investment.

Our next post in this series will cover managing the property and tenants.

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Investing in buy-to-let … selecting the property

September 8th, 2009

This is where many investment property buyers go wrong, choose the wrong property and it will become a headache, but if you choose the right property you will have a profitable property for the future. The key factors to consider for selecting the property are the location and the type of property.

Location of the property –

This is all to do with market supply and demand, you need a property in a location where there is a current and (expected) future demand from tenants.  A property in a small rural village is unlikely to have much demand, likewise an over-developed city or town centre with excess supply of flats is not going to be good either.

Ideal locations are near to public transport or good road access for getting to work.  Local facilities also need to be considered such as schools, shops, and leisure.  Ask yourself the question, “could I live here?”

You may also be interested in student multi-lets, locations near universities and colleges.  Make sure that the location is in an area where the university campus is going to remain for many years to come – some universities have campuses in multiple locations, if they consolidate locations you could find yourself with no students to rent to.

Consider the local economy, is there a single major employer for the area such that if they were to close down there will be high unemployment?  This is difficult to gauge but it is really important to factor in, get it wrong and you may struggle to let out your property.

Type of property –

Many landlords have been taken in by builders in recent years offering flats with rent guarantees for 2/3 years, then finding out later there is an over-supply of flats and market rents fall.  You need to assess the local market and ensure your type of property is in more demand for renting.  Note that over the last few years many flats have been built, often creating an over-supply, thus you may find small 2/3 bed houses in greater demand.

If you choose a flat, which can be a great investment in locations such as London, then you need to consider the costs for ground rent and service charges.  Sometimes these costs can be disproportionately high when compared with the equivalent sized house, thus eating in to your rental profits. On the positive side flats require less hand-on maintenance by the landlord as all main buildings work is covered by the freeholder’s management company.

This is a very brief overview on selecting a buy-to-let property, but equally it highlights very important factors, choose  wisely and you will have a profitable buy-to-let property for the future. Our next article in this series will cover some of the key financials for proeprty buyers.

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Investing in buy-to-let property – part 1

September 7th, 2009

There have been many casualties with buy-to-let investors making poor decisions when investing in property, sometimes the result has been bankruptcy.  Our short series of articles about investing in buy-to-let property is intended to offer some helpful information to those considering this type of investment.

After this 1st introduction we will be covering the following topics for interested property buyers seeking to become landlords of the future:

2 – Selecting a property

This will cover how you should consider choosing a property, covering aspects from location through to the type of property to consider purchasing.

3- Financing

An overview of buy-to-let financing, some of the key metrics banks look for, and how to better prepare yourself.

4 – Managing the property and the tenants

This is fundamental, you cannot just buy a property and watch the cash come in, it only makes a profit if you manage the property correctly, we give some helpful insights on this.

5 – Leveraging for investment growth

After successfully managing your first property you would like some more? Here we will suggest methods on how to increase your portfolio successfully.

6 – Diversifying into commercial property

For some they see commercial property as much less hassle, “easy money”, the reality is that it is higher risk, but equally if you have a good strategy it can prove very profitable.

7 – A summary of pitfalls to be aware of

Finally we will be summarising the pitfalls, is not that we want to be negative, but every investor needs to have the risks in the back of their mind at all times when making investment decisions, in that way hopefully the most profitable decisions can be made.

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Is buy-to-let a good investment?

September 7th, 2009

Over the last 10 years there has been a huge increase in the number of private buy-to-let landlords who have seen property investment as a key part of their “wealth management strategy”.  For those who invested in the late 1990s it has proven to be an excellent investment, but what about those who invested in the last 3 years, most are sitting on a loss.

Clearly there will always be peaks and troughs in property values, some will get their timing right, others will not.  And despite what many will think, it is not always clear when is a good time to buy, or sell, even some experienced investors get their timing wrong.

If you are a property investor who only invests for the short to medium term then you have the greatest exposure to losses, and likewise gains, both of which can be spectacular.  Some of these property buyers are now starting to view 2009 / 2010 as the time to start investing again, getting ready for the next lift in property prices, but are they right?

Our research has found that most analysts are talking of more modest growth over the next 5 to 10 years, we have yet to find any credible economist forecasting a UK property price boom in the next 5 to 10 years, but economies can change, and with it the forecasts of economists!

The key message for buy-to-let investors is this, if you want to reduce risk and realise long-term profits then invest for the long term.  Select your property wisely, in a location where tenants will be easier to find, and you will minimise rental voids, maximising the future profitability of your property.

Our own opinion at the house4sale blog is think long term with buy-to-let investments, also do not place all of your financial resources into buy-to-let, diversify your investments to mitigate risk.

For those who want to start investing in property, and also the novice landlords, we will be publishing a series of posts about how to be successful with buy-to-let properties, an essential guide for anyone who wants to build a property portfolio.

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Property buyers nightmare

September 5th, 2009

If you purchased a property at the peak of the market you are certainly in negative equity, but at least you are probably living in your home and have a low interest mortgage.  But for some property buyers it has become an absolute nightmare ….

The property prices in Belfast have fallen further than the UK average, price falls of 30% to 40% from the peak in 2007 are typical. Now picture this situation, you found a new build development early  in 2007, whilst prices were still rising, you paid your 10% deposit, and sat back waiting for completion.  Today your new built flat is completed, but the value has now fallen by 30% to 40%, what do you do?

Do you buy at the peak price  and accept a 30% to 40% loss on your money?  Do you accept you will lose your deposit and buy somewhere else at today’s lower prices?  Maybe most of us would accept the lost deposit and buy somewhere else, but a company called PBN Property Ltd is reportedly taking up to 10 property buyers to court for refusing to go ahead with their purchase at the originally agreed price, they are trying to force buyers to complete at the agreed purchase price.

PMB Property Ltd’s action raises some interesting issues, and one in particular.  As property prices have fallen by 30% to 40% most of the property buyers will not be able to get mortgages, or at least they will only be able to borrow based on “today’s valuations”, in effect this could leave buyers needing to find around 50% for the deposit, e.g.:

  • Original agreed price in 2007 was say £300,000
  • Then a 35% fall in prices giving today’s value of £195,000
  • Then a 20% deposit (£39,000) needed to buy a property valued today at £195,000.
  • Thus there would be a maximum mortgage of £156,000 on the original agreed purchase price of £300,000, the buyer needing to find £144,000 deposit.

For most property buyers they will not have the money to pay for such a large deposit, so lets hope a compromise solution is found, or hopefully there will be a get out clause in the legal agreement to buy at the 2007 prices. 

If you purchased a property at the peak of the market you are certainly in negative equity, but at least you are probably living in your home and have a low interest mortgage.  But for some property buyers it has become an absolute nightmare ….

The property prices in Belfast have fallen further than the UK average, price falls of 30% to 40% from the peak in 2007 are typical. Now picture this situation, you found a new build development early  in 2007, whilst prices were still rising, you paid your 10% deposit, and sat back waiting for completion.  Today your new built flat is completed, but the value has now fallen by 30% to 40%, what do you do?

Do you buy at the peak price  and accept a 30% to 40% loss on your money?  Do you accept you will lose your deposit and buy somewhere else at today’s lower prices?  Maybe most of us would accept the lost deposit and buy somewhere else, but a company called PBN Property Ltd is reportedly taking up to 10 property buyers to court for refusing to go ahead with their purchase at the originally agreed price, they are trying to force buyers to complete at the agreed purchase price.

PMB Property Ltd’s action raises some interesting issues, and one in particular.  As property prices have fallen by 30% to 40% most of the property buyers will not be able to get mortgages, or at least they will only be able to borrow based on “today’s valuations”, in effect this could leave buyers needing to find around 50% for the deposit, e.g.:

  • Original agreed price in 2007 was say £300,000
  • Then a 35% fall in prices giving today’s value of £195,000
  • Then a 20% deposit (£39,000) needed to buy a property valued today at £195,000.
  • Thus there would be a maximum mortgage of £156,000 on the original agreed purchase price of £300,000, the buyer needing to find £144,000 deposit.

For most property buyers they will not have the money to pay for such a large deposit, so lets hope a compromise solution is found, or hopefully there will be a get out clause in the legal agreement to buy at the 2007 prices.

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Is it a good time to sell property?

September 4th, 2009

The now quite famous former maths teachers, Fergus and Judith Wilson, owners of a 700 buy-to-let property portfolio, are selling up.  They say that now is a good time to sell up – in reality I am sure they would have rather sold 18 months ago when their portfolio was worth 20% more!

So why are they selling?  The main reason given is they really think the longer term prospects for properties is not good, and in particular flats which they say will do far less well compared with smaller houses.  They do not say how many flats are in their portfolio, maybe this could be the reason?

But another reason could be that the couple are both in their 60s and the work involved in managing such a large portfolio is not what they want as they move into the “retirement years”.  An example of the way in which their property management consumes their time is a recent situation where they were reported to have taken a tenant to court for a broken cistern lid, demanding £3,000 for a new bathroom suite as they said they could not get a replacement cistern lid of matching colour.  It is reported they lost their court case, the question is why take the tenant to court for this in the first instance?

Anyway, back to is it a good time to sell property.  We believe the real reason for selling is the expected future capital gains from the portfolio are less favourable than other investments.  It is not that they do not see a future profit in their properties, but more likely they see a bigger profit from an alternative investment.

As an investor buying today, there are growth prospects in future property prices, but no one is forecasting spectacular growth, more of  a steady recovery over many years.  If you are buying a property as a home this is great, but maybe as an investor in residential property you really need to focus on the long term.  So back to the headline of this article, as an investor, now could be a good time to sell IF you have an alternative investment for your money that will provide a better return.

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Posted in UK House Prices

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Mortgage rates falling – HSBC and others

September 3rd, 2009

Great news for property buyers, mortgage rates are falling. 

Just as we were all starting to criticise the banks for their taking excessive profits by increasing their margins on mortgage interest rates we now see a surprise move by HSBC who announced a 1.99% mortgage offer.

But you have to read the detail that goes with this…..

  • There is an arrangement fee of £1,199
  • You need a massive 40% deposit. 
  • The rate tracks HSBC variable rate with a discount of 1.95%, so as rates go up in the next year or two then so will the 1.99% mortgage rate.
  • The discount of 1.95% is offered for 2 years, after that the rate reverts to HSBC’s variable rate (currently 3.94%). 

Overall though this is still a great deal from HSBC, and one that will certainly shake up the market. Already a number of other lenders have improved their mortgage offers, these include:

Woolwich (part of Barclays) trimmed their 2 year fixed product by 0.2% to 4.09%.  You need 30% deposit and there is a £999 arrangement fee.

Cheltenham & Gloucester trimmed their 2 and 3 year fixed products by 0.2% to 4.19%.  You need a 40% deposit.

Apart from the HSBC offer the reductions are still quite small compared with the falls in the cost of wholesale money (e.g. 2 year swap rates and LIBOR), but it is a move in the right direction.

Please note – we are not mortgage advisors, we simply publish what we find for your information, please speak to a regulated mortgage broker for advice.

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Posted in Mortgages

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