According to recent figures released by the UK Land Registry, house prices in England and Wales increased by 7.1% in the 12 months to November 2014, bringing the price of the average house to £176,581. This rise in the property market is a result of the greater availability of mortgage products for consumers as well as the introduction of the government’s Help to Buy scheme, which has enabled more people to get on the housing ladder. While a rising market can be good news for landlords who already own a property portfolio, rising prices can make life difficult for aspiring landlords.
If you are thinking of purchasing a Buy to Let property in 2015, read on to find out how you can make the most of a rising market.
Get Your Finances in Order
In a rising market it is particularly important to get your finances in order before you look for a Buy to Let property. You should have at least 40% of the value of any property as a deposit, and in addition you must be able to cover costs such as stamp duty, solicitors fees and the price of a survey. Make sure you get an Offer in Principal from a Buy to Let mortgage lender before you start your property search so that you know what you can afford and can move quickly when the right property comes along. Having finances in place will mean that vendors take your offer seriously, which could save you money in a location where property prices are rising all the time.
Invest in the Right Location
When looking for the right Buy to Let property, you should pick a location that will be attractive to your tenants. Your budget will determine the kind of property you can afford, so think carefully about the type of tenant this property is likely to attract (professionals, students, families etc.) as well as the area those tenants want to live. Most tenants want a home near transport links and local amenities, so try to find a property you can afford as close as you can to attractive locations.
No matter where you intend to buy, visit the area and look online at available properties. Think about the property’s value in the long term. Is the area a desirable place to live? Does it feel safe at night? Is it near schools or workplaces? These factors will be important if you need to sell the property in the future. Find out about any plans to improve local infrastructure: if a train line or bus service is extended into a new area this could make it more attractive to tenants and future buyers.
Use property websites such as home.co.uk and the UK Land Registry to find out the average house price or rental income for the type of property you hope to buy in your chosen location. This will ensure you don’t pay over the odds and will know a good deal when you find it. Finally, find out the proportion of rental vs. residential property in the street or area where you would like to buy. A high proportion of rental homes could mean that property values fall quickly if investors seek to liquidate their assets in a downturn.
Know Your Potential Rental Yield
The golden rule of property investment is to buy low to achieve the best yield. In a rising market it is more difficult to find cheaper property, which means you will have to do your homework before you buy. You should know the average price for properties in your chosen location, the rental market for the type of property you hope to buy, and the annual rental yield you can expect.
You can calculate the rental yield of a property by taking its yearly rental income and expressing it as a percentage of the price of the property. For example, if you charge £1500 per month in rent for a property that you bought for £200,000, your yield would be 9%:
£1500 x 12 = £18,000 per year rental income
£18,000/ £200,000 x 100 = 9%
Remember You Will Have to Cover Costs
While 9% is a very good yield, this figure does not represent the amount of income you will actually receive. You will have a number of additional expenses that will be deducted from your rental income, such as insurance, maintenance of the property and the costs of advertising the property and finding the right tenants.
Void periods are another major consideration. The National Landlords Association has recommended that landlords factor in 2 months each year when their properties will be empty. However, according to their recent survey, 90% of UK landlords have not made provision for void periods, and those without income from a property portfolio often cover these periods from their working salary, savings or overdraft facilities. It is very important that you consider how you will pay a Buy to Let mortgage when your property is not let, because you could quickly fall into mortgage arrears.
Find a Good Deal
Even in a rising market it is possible to find good deals on property at auctions, or through local estate agents where there are ‘motivated sellers’ (i.e. people who need to sell quickly and might consider selling at a discount). If you make contact with estate agents in your chosen location they should contact you when the right opportunity comes along.
In addition, buying repossessed property can be a way to buy homes below market value, because mortgage lenders will often sell at a lower price in order to recoup their investment quickly. Remember that every pound you save adds to your rental yield and takes you further away from negative equity should house prices fall.
Play the Long Game
Remember that buying property works best as a long-term investment, and this is especially true in a rising market. Don’t be tempted to stretch yourself financially in order to buy something you might not be able to afford in the future. Things can go wrong, interest rates can rise and problem tenants can derail your plans. If you haven’t thought things through from the beginning you could lose your investment and find yourself in a lot of debt.
As time passes, save some of your rental income as a contingency fund for a rainy day. With the right money management, you should benefit from the rise in the capital value of your property, as well as enjoying profits from your rental income.
Good luck with your investment!