Much has been written in the press over the continued rise in the buy-to-let (BTL) market. Despite recent increases in interest rates, the demand for BTL mortgages appears to continue unabated, with forecasts of this type of lending accounting for 12 per cent of total lending in the United Kingdom in 2007.
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This can be backed up by a recent survey instigated by Mintel, with 36 per cent of individuals surveyed stating that buying property was a good way of saving for retirement. While this is possibly true, it is vitally important that clients moving into this market go in with their eyes wide open.
Easy to make mistakes
Lured by the chance of making a fast buck, it is all too easy to make costly mistakes in the BTL sector. With the increased flexibility of lenders and the reduced deposits now required, it can be easy to forget that this is an investment and the client’s risk profile should match that of this type of investment.
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So, before your clients rush off and buy any property to start building a portfolio, I would like to take time to review some of the areas that potential investors should consider when looking at this market.
The most obvious are:
- Buying the wrong type of property.
- A fall in demand for rented property.
- A fall in property prices.
- Rising interest rates.
- Costly voids where the property remains empty.
- Maintenance costs.
- Taxation.
- Ending up with a sitting tenant.
- The property is wrecked.
- Failing to sell the property at the end.
Letting considerations
Is there an ideal type of property to purchase for letting purposes? The answer to this is generally no, as there’s such a wide diversity dependant on individual local trends. The important point to emphasise is for your client to do research that ensures that they familiarise themselves with local market conditions.
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Is the area one that has high rental demands, close to a university, near companies with a transient work force, an area known to have a high number of recent immigrants to the UK? Is it a place where the newly qualified professional wants to live?
These types of factors can help your client determine the type of property best suited to matching the rental needs of any given area. It is vitally important for a client to decide on what type of tenant they are wishing to target and find out if there are sufficient numbers of them in their chosen locality.
Property types
As for the property a client needs to primarily consider:
- Location.
- Price.
- Likely rental income.
- Age of property.
- Upkeep required.
- Can it be resold easily?
- Condition.
- Appearance.
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Essentially there are too few tenants in that demographic grouping wishing to rent them. A low level of demand leads to reduced yields and feverish undercutting of rents by landlords trying to fill these unwanted apartments.
A golden rule when looking at off-plan is to always establish how many have been sold to investors compared to those purchased by owner occupiers.
An apartment might be ideal in the right circumstances; though a two or three-bed terraced home for families might be better for long-term letting if that property is close to schools, shops and public transport links.
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Undertaking careful, thorough research, such as talking to letting agents or reading through local newspapers can often prevent a client seeing everything through the proverbial rose-tinted spectacles.
Preparing the property to let
The condition and presentation of a property prior to let determines more than any other factor the potential return, but also if they will run into problems mid-let. Generally, a poor property in poor condition attracts poor tenants with poor rental yields.
Should the property be let furnished or unfurnished? Traditionally, furnished accommodation can usually attract new tenants easier. Whether furnished or not, a new bathroom or kitchen, wood floors and cream emulsion on the walls can help immensely in getting tenants that will pay premium rent.
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Finding the right letting agent
More and more BTL clients see themselves as investors and not landlords, wanting to manage the portfolio from a distance. To facilitate this they turn to letting agents to find tenants and manage the property.
With so many letting agents to choose from, it is important that, once again appropriate research is conducted to ensure that the agent chosen meets or exceeds a client’s expectations and standards of service. Ideally the letting agent should be a member of a professional body which operates a code of conduct for members affiliated to it.
The typical fee for using a letting agent is between 10-15 per cent for managing the property and around £300 fee for finding a tenant. While it will manage the property, all repairs are payable by the landlord.
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As a minimum requirement the letting agent should:
- Discuss the type of tenant the client requires.
- Discuss furnished or unfurnished route.
- Check that if furnished it meets the fire regulations requirements.
- Ask for a recent certificate to show the boiler has been serviced by a qualified individual.
- Prepare details of the property and determine the rent.
- Obtain references of any particular candidate, including past tenant reference, bank reference and credit check.
- Take a deposit of normally six weeks’ rent, in advance using the Tenancy Deposit Scheme.
- Prepare an Assured Tenancy Agreement for both parties to sign.
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In summary, while the BTL market continues to move forward and flourish, brokers must make sure that clients moving into the market for the first time do so knowing what lies ahead.
While intermediaries are responsible for checking affordability and sourcing the most suitable BTL mortgage to meets clients needs a few pointers to the novice would I am sure be thoroughly appreciated.
