By Daren Cope.
We speak with lots of landlords who have completely different individual circumstances.
Some individuals find themselves being landlords not necessarily through choice, but rather through necessity. Perhaps they are homeowners looking to move and, rather than staying put and hoping for a sale, decide to turn their home into a rental property and use the rent to pay the monthly mortgage repayments thus freeing them up to make their next move. These are often referred to as ‘accidental landlords’.
Then there are first time landlords who are taking the first step into property investment and are looking for their first buy-to-let property.
Next are ‘portfolio landlords’ with, perhaps, three or four buy-to-let properties. Finally, there are the more ‘professional landlords’ who treat property investment as more of a full time job, or as a significant proportion of their overall income.
The important thing is that, whichever landlord type we look at, they all need a destination, an end game, a plan as to what to do with their properties in the future.
Our 6 Stage Road Trip
We’ve found that the most successful landlords are the ones who squeeze the most out of the potential investment, and to enable us to do that, we break down the buy-to-let process into a six-stage journey, or ‘road trip’.
1. THE DESTINATION
Now, every journey has to end with a destination and when it comes to property investment, that is the most important thing.
What is the individual’s goal? What does the landlord want to get out of the buy-to-let investment journey?
Is it to earn extra income?
Is it to have debt-free properties that they can sell for cash in the future?
Is it to hand down the property to the children?
Is it to supplement a pension upon retirement?
It’s really important to know and understand what the goal is. So, effectively, you start at the end and work backwards, because with the buy-to-let road trip, you know where you’re going but you’ve got to decide how to get there.
Last week I spoke to a landlord, we’ll call him Richard. He had a very detailed plan. He wanted to retire at 55. He wanted six unencumbered, i.e., mortgage-free properties, which he then wanted to sell one every four years to provide him with an income over the course of his retirement, and obviously benefiting from rental income on the ones that he kept. That’s a very specific plan. He wanted a value of 1.2 million, which is £200,000 per property. That was his plan, that’s what he had worked out.
2. THE JOURNEY
You know where you’re going, now you need to get there.
It’s a bit like putting your parameters into a Sat Nav – do you avoid motorways and take the scenic route? Do you opt for the quickest route, or are you happy taking a more relaxed approach?
With your buy-to-let journey, you need to take into account of the amount of cash you can put down. What’s your attitude towards risk. Do you want HMO properties and open it up to the student market or do you just want to go down the traditional way of letting?
It depends on the type of properties you want. Do you want two-bedroom terrace, three-bedrooms semis? That all depends on what’s selling in the local area, so when you come to sell, you haven’t got a problem. It also depends on what type of properties offer the best potential growth and also the best rental returns. Again, it depends on the area that you’re in. It depends on what you actually want. So the research side of it is really, really important.
Next, you have to source the properties.
You can’t go and buy just any old property. Again, as I’ve said, the research is really important. A two-bed terrace might be cheaper than a three-bed semi, but the three bed-semi might give a better rental return and it might give a better potential capital growth.
What’s your target tenant? Long term, short term, professional couple, family, student – again, it’s an individual choice.
When it comes to sourcing the property, we have a number of investment properties that are already tenanted where existing landlords are always looking to move on and update their portfolio. Or, you can obviously go into the open market, look what type of property you’re after, register with the local estate agents, scour the major property portals or, let us do there sourcing on your behalf.
When you’ve sourced a property to suit your requirements, it’s time to buy it!
A mortgage broker or a financial adviser can come in really, really useful here due to their ability to search lots of mortgages that are available at any given time.
It’s down to the individual requirements again. Is a fixed term better? Is a tracker mortgage better?
The buy-to-let mortgage market is bigger now than it ever has been. Do you want one property, two properties? How much cash have you got to put down? Have you got enough cash to buy two properties with a deposit? If you go three or four properties, you’re potentially going into a different kind of borrowing, which is the portfolio lending, which is something that you need to look into as well.
You could buy at a property auction, which is another way of obtaining property. If so, then bridging finance is also an option. Bridging finance is a short-term solution. If the property needs refurbishing, once refurbished, the bridging loan is then paid off and a normal standard buy-to-let mortgage is then obtained on the property moving forward.
Talking of refurbishing, that’s the next step.
You may buy a property that doesn’t need to be refurbished at all, maybe a quick lick of paint is all that is required.
There is also the option of potentially buying a rundown property that may be worth £100,000 or £120,000 when it’s completely done up, that you may actually pay less for, say £80,000 or £90,000, and only spend £10,000 on. If you do that, you could achieve a £120,000 property that you’ve actually only spent £110,000 on. Again, refurbishment is all part of your plan. It’s an individual requirement that some people want to do, some people don’t.
If refurbishment is a requirement, think carefully on how to go about it. You could spend months doing it yourself in your spare time or you could bring in professionals who will get the job done much quicker. Admittedly, it may cost more, however, if you are receiving rent 3 or 4 months quicker, it may be beneficial in the long run.
6. LETTING & MANAGING
So you’ve got your property, it’s been refurbished and it’s ready for tenants. You need to let it and you need to manage it.
The private rental sector has changed enormously over the last decade and a professional letting agent is will take the burden away. I would say that, but it is really, really important.
There are now over 150 pieces of legislation that you need to abide by as a landlord. Failure to do so can bring all sorts of penalties, fines, banning orders, and in some cases, jail. So, pass the stress on to a letting agent and let them deal with it on your behalf.
We do put out a lot of legislation videos, which gives you more of an insight into the problems and issues that you have to contend with going forward.
Let, Manage, Repeat
Once that first tenant gives notice, you basically repeat the letting process over and over again. You let your property again, you manage it again, right up until the point where you actually reach your destination.
A six stage process, starting with establishing your goal. You then need to plan. You need to source, buy, refurbish and let.
That’s basically the journey that we take each of our landlords on that come to our one-to-one meetings, and look at all their requirements. It’s advisable to get a mortgage arranger and a tax adviser on board early in the process as a lot of these plans need to be put into place very, very early to mitigate tax. There is capital gains tax, possibly inheritance tax, income tax. There are ways of mitigating that and a lot of them require an awful lot of planning.
If you see property investment as a journey, then think of your letting agent, your mortgage advisor, and your tax specialist as a bit like the AA. If you do break down or have a problem, they’re always there to help you sort it out.
If you need any further information on the one-to-one landlord, buy-to-let things that we offer, then please give us a ring on 01332 300172.