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Mortgage interest rates set to rise in 2010

January 7th, 2010

Market analysts are now predicting that even if the Bank of England base rate is not increased in 2010 many lenders are likely to increase their rates. Some analysts such as Stephen Noakes, Lloyds Banking Group, are looking at the market consensus on bank base rates, the view was “Bank of England will first raise interest rates in the middle of the year and that base rates will end up at 1.5% by the end of 2010”

So either way it would seem that all those with variable or tracker mortgages will see increases before the end of 2010.

One of the issues for lenders is that they are currently making losses by lending on low rates when their true cost of borrowing is much higher.  This is a situation that cannot last.

For those with buy to let tracker mortgages at rates of 3% to 4% over BBR this could see them paying as much as 6% by the end of 2010 with further increases in 2011.

It looks like 2010 is going to be an interesting year for the property market!

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Buy to let gold rush, or road to ruin?

November 26th, 2009

In many Northern cities of UK developers have been offloading new build units at discounts of up to 15% or more.  The discounted properties have resulted in much interest from new landlords and existing landlords, but are these properties good investments?

Firstly it seems the developers are only giving the big discounts to those with cash to invest, so one view could be that if you have a large amount of cash sitting in a bank account earning 3% or so then maybe the rental yield is more profitable.

But there are some real risks.  Some city areas have been “over developed” and thus creating excess supply over demand.  The upshot is that it may take a considerable time for some areas to see a recovery in property prices.  Combined with this is a potential over supply on the buy to let market, thus depressing rental yields and increasing rental voids. 

The advice for anyone considering investing in new build units being offloaded by developers is:

1 – Research the local rental market, be realistic about rental yields and rental voids when calculating your likely rental income.

2 – Take account of ongoing service charges that will apply to some new builds, these can sometimes be a significant proportion on rental income.

3 – Do not take the developer’s word on valuation, use an independent RICS valuation surveyor to understand what the “true” open market valuation is.

4 – Don’t expect short term capital gains, focus on cash flow and net rental income as the motivation for investing.

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Shortage of properties to rent

October 26th, 2009

October 2009 seems to be what could be a turning point for the property rental market.  In 2008 rents started to fall across most of UK with rents in some locations, such as within central London, seeing rents achieved fall by 10%. But now the supply-demand is starting to change.

From 2008 there have been many factors causing a fall in rents:

  • Properties not able to be sold placed on the rental market creating over-supply
  • Some young adults moving back in to live with parents to save money
  • East European immigrants moving away from the UK
  • Affordability, the recession was hitting everyone’s pocket.

But in 2009 new factors are starting to play into the supply-demand equation:

  • The initial impact of properties for sale coming on the rental market has largely been absorbed
  • New build has slowed down dramatically, leading to an increasing shortage of properties.

The impact has seen the rental market start to recover with companies such as Findaproperty reporting a reduction in properties available to rent by as much as 10%.  Additionally increases in rents have been reported, averages across UK are up 0.1% in October and 1.2% in London.

It is early days to see if this is the start of a recovery in rental prices but it is looking like positive news for landlords in the months ahead.

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1Vision Investment Properties – Charlene Heaney

October 1st, 2009

IVision Investment Properties is a company owned by Charlene Heaney which specialises in sourcing investment properties at below market value.

The company operates by sourcing properties from developers and motivated sellers, securing an option to buy, then passing on the investment property to other investors at a large discount to market value.

We will be publishing further information  on the services provided by 1Vision Investment Properties and their benefits for property investors …watch this space in the next 2 weeks.

Update 16 October 2009.  We have been trying to contact 1Vision Investment Properties but as yet no one answers the phone or returns calls. If you have any recommendations please let us know.

Update 24 December 2009. We received contact from Charlene Heaney of 1Vision Investment Properties Ltd who asked for comments to be deleted.  As a result the comments have now been deleted but we have left the contact details of individuals should you wish to contact them directly for feedback.

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Buy-to-let property investment: property buyers summary

September 14th, 2009

The short series of posts we have made are each just a brief overview for the small investor / property buyer seeking to build a portfolio of properties.  Whilst there is no doubt great potential for long-term gains equally losses can be made if there is inadequate preparation and focus on property management. Below is a brief summary of the points we have made in previous posts:

Property location

As a property buyer, select with care, consider areas where there is most likely to be a good tenant demand today, and in the future. Consider locations near public transport and a strong local economy not dependant on one employer with shaky future prospects.

Type of property

Choose a property most in demand for renting.  In some areas there may be an over-supply of flats, thus making the opportunity for letting a 2/3 bedroom house much more attractive.  If you choose a flat, remember that there are often high service charges to factor in to your profitability, but equally flats require less of your management time for property maintenance.

Financing

Apart from the property buyers credit rating there are two key measure used by lenders, one is the LTV (loan to valuation), the other is rental cover.  LTVs are currently at around 70% to 75% of valuation, and rental cover (a ratio of gross rent divided by mortgage interest payments) is around 125%.  Remember however that allowing for rental voids and other costs then rental cover of 130% or more maybe needed to ensure profitable letting.

Managing the property

Legal issues relating to gas safety, electrical safety, and tenant deposit protection must not be ignored, in particular ignoring safety issues could result in severe punishment (prison) if anyone is injured.  Managing the tenant is also key to profitable letting, maintain a good business relationship with them, and avoid being an absent landlord that never visits the property. 

Leveraging for growth

There are several approaches to raising funds to buy addition properties.  One is a straight re-mortgage of a property to release equity, another is mezzanine finance, and a third option is BMV properties.  The BMV (below market value) property approach can reduce the amount of deposit needed as well as providing a capital gain from day one.

Commercial property

Many residential landlords are attracted to commercial property, mainly due to the more hands-off nature of the investment, and also because tenants can be long term (5, 10 or more years).  However financing is a lot tougher to get with lower LTVs at around 60% meaning a higher deposit is needed.  A big issues to be aware of is tenancy voids, when these happen then can be years as opposed to months experienced for residential.  It is essential to have the cash flow to cover tenancy voids.

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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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