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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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The buy-to-let market is tough going

August 8th, 2009

Whilst some may be talking of rising house prices (more on this later) the market is very tough going for everyone, and especially buy-to-let landlords.

For landlords with existing portfolios much depends on when their properties where acquired; how much equity they have in them; the rental yields; and the mortgage product. Each one of these 3 factors is going to have a big impact on the buy-to-let profitability and in some cases may even lead to property repossessions. Here is a brief summary of each of the 3 factors:

Equity – Prior to the credit crunch landlords could purchase with a 15% deposit, in some cases it was even possible to purchase with “zero deposit” using instant bridging and remortgaging (typical products available form Mortgage Express until early 2008). Many of the buy-to-let properties purchased with 15% deposits post 2005 will now have little or no equity, some will even have negative equity. This becomes a major issue when seeking to raise new finance / mortgages.

Rental yields – Many landlords have seen these falling in the last 12 months, in some cases by 15 to 20%. Additionally landlords have seen an increase in rental voids, thus the actual net yield allowing for the voids is down by up to 30% on the market peak. For most landlords they can only survive the reduced yields due to mortgages that have fallen in line with bank base rates.

Mortgage products – The days of 85% LTV mortgages seem to be “history”, today the norm is 70% LTV, thus landlords need to find 30% deposits. Lenders are also charging relatively higher rates of interest, typically at BBR + 3% along with arrangement fees of 2.5% to 3.5% typical. Whilst bank base rates are at 0.5% this may be OK, but what will bank base rates be in 12 months time? Some landlords taking out a mortgage product today could find themselves paying effective rates of 6% to 7% just 12 months from now.

Overall it is a very tough market for landlords, for many it will be a struggle to hold on to their properties as bank base rates start to rise, and for those entering the market it requires more cash than at anytime in the last 10 years. In time house prices and rental yields will improve for landlords, and mortgage funding will become more affordable, but for now it is a tough market for buy-to-let.

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Handelsbanken and Leumi Mortgages

July 26th, 2009

More foreign banks are joining the influx of banks to provide mortgages on UK residential property.  Yesterday we reported the Bank of China had entered the UK market, now we have learnt that Handelsbanken of Sweden and Leumi Bank of Israel are also now providing mortgages in the UK.

This is fantastic news for anyone seeking to buy UK property, especially for buy-to-let investors who are currently getting very poor deals from the British banks.  Here are some examples of what we understand is available from the non-UK banks:

Buy-to-let 3% over base rate tracker mortgages with 25% deposit

Lower arrangement fees, typically from £995

Buy-to-let mortgages based on 100% rental cover (most UK banks require 125% cover)

Leumi bank we understand is offering a tracker mortgage at just 1.625% above 3-month LIBOR, that is a current rate of around 2.56%.  This compares with the best UK bank rate of 2.95% from HSBC.

The fact that foreign banks are entering the UK market suggests that they now see it as very profitable to lend here, and maybe they see that property prices are at or nearing the bottom of the market – so for them, their loans are secure.

As to getting access to these loans you need to find an approved broker.  So far we have found the following can access the Bank of China mortgages:

  • Savills – 0870 900 7762
  • Legal & General Mortgage Club – 01226 230504
  • LargeMortgageLoansUK – 020 7519 4900

Maybe the tide has finally turned and we will soon see the big name banks on the UK high street offering mortgages at more reasonable rates.

Buy-to-Let investor looking for BMV Properties at discounts to todays valuation? << click here

Do you want to check tenant backround for financial risk? << click here

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Tenant Reference

July 25th, 2009

As a new private buy-to-let investor having made your first property purchase it can be a daunting time dealing with the (initially) complex task of letting your property. One of the key requirements for most landlords is an appropriate tenant reference. Think of it this way, if you are about to let a property with a rent of £750 pcm (£9,000 per year) that is a lot of trust you are placing in a tenant. 

Some new landlords may think it is not such a problem, as soon as they miss a rental payment you will ‘kick them out’ of your property.  The reality is you cannot do this without applying to the courts for eviction, the process can take months, and in the mean time the tenant could pack their bags and move out having been in the property “rent free” for several months  Worse still they may have left you with damages and other debts.

So ask yourself these questions:

  • Do I know the identity of this tenant,is it genuine so that I could later trace them if they let with debts owing?
  • Is the tenant I am about to let to encumbered with large unpaid debts and being pursued by a  third party for County Court Judgements?
  • And how can I assess what the overall risk factor is for the tenant about to take on my property?

These are just some of the questions that can be addressed with an appropriate tenant reference.  Companies such as Credit Check Services will provide a tenant reference from just £8.95 (as at July 2009) for a CCJ / Bankruptcy check based on a full linked address search. For just £18.95 (Gold report option – as at July 2009) they will provide a report including a tenant risk rating and additional identity checks.

Don;’t get caught out, make sure you get an appropriate tenant reference before letting your property.

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Buy-to-let investors return

July 21st, 2009

With the low interest rates many people are seeing their savings make poor returns in deposit accounts causing investors to look elsewhere for higher returns on  their money.  Some of these investors are now turning to property as an alternative source of income.

One of the places where the increase in activity can be seen is auction rooms.  12 months ago properties could be purchased at significant discounts at auctions, but today those discounts are reduced as more investors seek to purchase buy-to-let properties.  But, when you take into account the price falls of the last 12 months then those bidding are actually picking up better deals today as the overall market price has fallen.

In many cases buy-to-let properties can now be purchased with 6% + yields in the south east, higher yields of 8% + can be achieved in the north east of UK.  Overall, even after allowing for rental voids and management costs these provide attractive returns when compared with money left in a deposit account. 

But property investors also need to be cautious with respect to capital growth.  Many analysts are predicting the the recovery in property prices will be slow over many years, some even say it will be 2015 before prices recover to their peak of 2007.  For the investor this suggests purchases should be based on rental yields, not on hopes of short term capital growth.

One last comment, if you are seeking to invest in buy-to-let, make sure you carefully check tenants to ensure they will be able to pay the rent, you can purchase tenant checks from Credit Check Services for as little as £8.95.

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Buy-to-let mortgages for investment property buyers

July 20th, 2009

Mortgages are no longer the preserve of banks and building societies.

For around one year now it has been difficult for may to obtain buy-to-let (BTL) mortgages. Private investors have seen their deposit requirements increase from a typical 15% to an average of 30% today (lowest deposit offers are 25% but fees and terms are less favourable). So for the private property buyer it means you need a lot of cash to take on a property investment. The banks are really making it tough for everyone.

But the market is starting to change. A private investment fund is now offering BTL mortgages at 85% LTV, a deposit of just 15% needed. The only catch is their fees are high at around 6% of the loan compared to 3% to 3.5% fees charged by the banks. But then the private fund is currently offering a 5.2% five year fixed rate, which seems very attractive compared with the 3% to 4% (above) base rate trackers offered by the banks.

So if private funds can lend at much higher LTVs (smaller deposits) why can’t the high street banks? There are several reasons for this. One is, according to the Council of Mortgage Lenders (CML), the banks can not raise funds at sufficiently attractive rates to pass on to property buyers. Another possibility is the bank risk profile, as many still have a lot of high risk debt including many mortgages with negative equity they need to improve their overall loan books. In effect with the banks taking on very secure mortgages (e.g. 75% LTV) they can offset the more risky loans, so overall their lending risk profile is reduced. The bank’s risk profile is a key factor for their ability to raise funds in the money markets, no one wants to lend to a bank that may subsequently go out of business.

So, overall we have good news that private funds are entering the mortgage maket. Maybe in the future the banks will see more competition, which hopefully will be better for those wanting to take out a mortgage.

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Tenant Vetting

July 17th, 2009

With the increase in credit defaults and identity fraud it has never been more important for landlords to carry out tenant vetting, a process where a professional company carries out checks to verify whether a tenant has a history for CCJs, Bankruptcy or Insolvency.  Additionally and online agency can obtain identity verifications so that you know the tenant is who they say they are (in conjunction with a passport check – see below).

There are several companies providing online services to check tenants, but their services do vary, so here are some points to check for.

1 – CCJ, Bankruptcy and Insolvency checks.  Some companies will only use the tenant’s current address as a basis for a search, in these cases they cannot guarantee to find all CCJs that may relate to a tenant.  It is imperative that a “linked address search” in conducted, such searches look for address linked to the current address and then use those address to search for CCJs etc.  By carrying out a linked address search you can have much greater assurance about your tennant’s CCJ history.

2-  Identity.  Anyone can give you a name and date of birth as “their own”, you can check it online and it may come up clean.  But, is this their real name and address?  It is essential that you check photo ID for the tenant, not a workplace ID, but a Passport, failing that a Driving Licence (but these are more easy to fake than passports).

3- Financial stress. A tenant may not have any CCJs but they could be under considerable financial stress and thus risk of defaulting.  For example, a tenant may have 20 + financial accounts with mail order companies, credit cards, HP agreements, etc.  A high number of accounts suggest financial stress, especially when combined with a relatively low income.  To check for financial stress you need ensure the tenant credit check includes Insight, make sure the tenant checking company provides this option.

These above are just some of the points to be aware of for tenant vetting.  The bottom line is though the less you check the tenant, the greater the risk of a tenant defaulting.

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