Before I begin, I would like to tell you that I didn’t take the time to understand everything I have listed below when I bought my first rental property. I simply had cash to invest and I went shopping for a house to rent out. You can do that to! But the idea of this article is to give you a better start to buy-to-let than I had all those years ago.
Having a general awareness of the requirements of the private rental sector, and understanding the needs of the market and how you can best serve them, is all you need to know before investing in a buy-to-let property. After reading this article, you will be in a better position than most beginners.
1. Buy To Let Is A Business
The sooner you understand this, the quicker your investment portfolio will grow, and the better you will perform as a landlord.
You have to understand that you are providing a service for your customers, and you want to ensure that the service you provide is better, or at least as good as, the landlord next door.
If you have some cash that is sitting idol in a bank, you may have considered moving that cash into bricks and mortar. That’s what I did and it’s absolutely fine and a great idea. But I can tell you from experience, that if you view your investment as a business from the start, you will succeed faster than most beginners and help raise the standards within the private rented sector.
2. Speak To A Tax Advisor
Everyones tax liabilities are different, and I am not a qualified tax advisor so I would be wasting my time if I tried to give you tax advice here.
What I will say, is take the time to speak with a tax advisor, even if you feel you don’t need to because you already have a general understanding of your financial situation.
There are several taxes associated with buy-to-let property investing, including and not limited to, landlords income tax, capital gains tax, stamp duty land tax (more on this later), value added tax, corporation tax (if investing through a company), and inheritance tax; all of which should be considered before making your first investment purchase.
If you have an awareness and understanding of the tax implications from the start, you can start to build a portfolio that will work in a tax efficient way that you and your family can benefit from.
For a fast and low cost way of getting an answer for your tax question, I recommend JustAnswer.co.uk. For a small fee you can ask your question online and receive a reply within minutes. They also offer a premium service with a 7 day free trial.
If you have several tax related questions or are simply looking for advice on the best way to start your new property business, I can recommend contacting Tony Gimple direct at email@example.com. He has many years of experience within the private rented sector and you can watch him answer some of my questions in this short video:
3. Know Your Responsibilities And Obligations
You will have several responsibilities and obligations as a landlord which you should be aware of from the start.
The property must be safe and habitable with test certificates for both the gas and electrical supply. Once tenanted, any repairs should be dealt with swiftly and promptly. After all, it will be in your best interest as some repairs can cause more damage than necessary if they are left for too long.
It’s recommended to hold a deposit to help cover any damages that may be made to the property, and cover any potential rent arrears. However, the deposit must be held with an approved Deposit Protection Scheme (DPS). You can find details of the approved DPS’s on the government website.
You will also need to conduct a Right To Rent Immigration Check and provide a How To Rent Guide to any prospective tenants. I have written an article which goes more in-depth on the legal responsibilities of a private landlord, but please don’t feel overwhelmed by it all before you start!
There are plenty of people, businesses and organisations that will help and assist you for free or for a fee. A local letting agent could be your first point of contact for advice, or if you prefer to do business online, you could try OpenRent. Their online platform will guide you through every step of the way from listing your property on the popular portals, right through to handing the keys over to your new tenant whilst ensuring you are compliant.
4. Avoid Personal Tastes
My personal favourite is currently light grey walls with white gloss fixtures, but not everyone has the same tastes as me.
I have heard many times that magnolia is the best colour to use on your walls because its the colour that many property developers use when they sell new homes. I guess there is some truth to that as they will have conducted plenty of research to find out which colours help to sell a new home more than others.
However, I believe the rental market is different and there isn’t one size that fits all. The best way to approach this topic is to think about the type of tenants you are trying to attract. (More of this on Point 6).
Are you considering marketing to young working professionals? If so, then it would be worth researching the latest trends in home decor. GoodHouseKeeping.com is a fantastic website for getting ideas and inspiration.
Are you considering marketing to students? Then perhaps magnolia is the way to go. It will be much quicker and easier for you to freshen up the walls each year, or every other year, when the students vacate and remove their posters from the walls.
Avoid personal tastes at all costs and do your best to put yourself in your customers shoes.
5. Set A Budget And Stick To It
It’s very easy to overspend in the property business. It’s imperative that you set a budget at the beginning and stick to it. There are so many pitfalls including spending too much on the initial purchase and underestimating improvements or renovation costs.
In my free guide, I walk you through how to calculate the numbers before you make your purchase, so you know what your monthly income and expenditure will be before you start. If you deviate from your budget after setting it, it will ultimately affect your bottom line.
The first thing you should do, is take the time to calculate how much you can afford to invest comfortably with the associated fees that come with purchasing a buy-to-let property.
Budgeting obviously gets easier with experience, especially when calculating potential repairs and renovation costs. But remember, there are plenty of people and organisations that can assist and guide you.
If you are looking to purchase a property for £125,000, stick to it and don’t be tempted to pay £130,000 because another person is interested in the same property and has made a higher offer. Stick to your budget and walk away. You will soon find another property that meets your criteria which could possibly become an even better purchase.
6. Consider The Type Of Tenants You Would Like To Accommodate
This consideration is more important to some investors over others. Personally, I start by looking for the best ‘value’ property within an area that has a strong rental demand, and I take it from there. I’m not particularly swayed by the demand for a particular tenant type, although my view on this could change in the future.
There are a number of ‘tenant types’ including:
- Working Professionals
- Department of Social Security (DSS)
- Housing Association
- Asylum Seekers
You may have a preference for a particular tenant type over another, which is why I have mentioned this topic.
Consider whether you have a particular tenant type you would like to target, as it will not only have an impact on the area in which you buy your property, but it will also have an impact on the types of fixtures, fittings and furnishings you may need to replace or provide.
All tenant types have their own pros and cons and I have written a separate article here if you would like to know more.
7. Finding The Right Buy To Let Mortgage
Whether you are already a home owner or not, or whether you have a mortgage or not, I always recommend approaching your bank first. Banks often have buy-to-let mortgage products which are only available for their customers and they can often have competitive interest rates.
However, don’t stop there! After talking to your bank it is worth taking the time to shop around to see if the rates they have quoted can be beaten.
I have a section within my Resources Page, which I continually monitor, that gives details of Buy-To-Let mortgage brokers which I have used and am happy to recommend to friends and family. Feel free to have a look.
Also, if you have time, it is worth networking either online or in person to meet with mortgage brokers who specialise and who work solely with buy-to-let mortgage products AND who are property investors themselves.
I say this because there are plenty of them out there in the industry, and they will have a far greater understanding of your goals and what you are trying to achieve. Of course, these people are in high demand and relationships take time to build. But as your portfolio grows I would recommend narrowing your sights on a reputable broker whom you have been able to build a rapport with.
8. Consider Buying With Cash
One of the greatest perks of investing in buy-to-let properties is that you are able to leverage your investment. In other words, you are able to earn an income from the deposit you have saved hard for PLUS the loan amount from your mortgage.
Try asking your bank if you can borrow £100,000 to invest in the stock market or to buy some precious metals. Your chances will be slim, or next to none, and I expect the conversation will be a short one!
However, ask your bank if you can borrow a £100,000 to buy an investment property, and they will be all ears and will be willing to engage with you further.
So why am I asking you to consider buying with cash? Well, two words – speed and certainty. Having the cash to buy a property will give you a huge advantage. Informing an agent or vendor that you are a cash buyer will make you their preferred prospect.
Mortgages take time to arrange and speed in completing a sale or purchase as a cash buyer can be very appealing to some sellers. Cash buyers also provide certainty as there isn’t a risk that the funds will not be approved further down the line.
Many investors know how appealing a cash buyer can be to a vendor and they also use this position to negotiate a better price on the property too. There are many reasons why people accept lower offers to increase the speed of the sale of the their property.
Once the purchase is complete, and you own the property, you can then apply for a mortgage in slow time to release some funds and use leverage to your advantage. The only question that remains is, what will you do with those funds? Buy a second investment property?
9. Stamp Duty Land Tax (SDLT) Surcharge
Legislation introduced on 1st April 2016 means that anyone who buys a second home needs to pay an additional Stamp Duty Land Tax Surcharge of 3% on top of the standard SDLT rate.
Properties up to £125,000 are exempt SDLT, so investors would be required to pay the additional 3% of the total cost, and properties purchased between £125,001 and £250,000 have a 2% SDLT rate plus the additional surcharge of 3%.
Properties purchased for less than £40,000 do not attract a SDLT Surcharge.
For up to date information on SDLT and the Surcharge, and the fees associated with properties costing more than £250,000, you can visit this page on the gov.uk website which also includes a helpful calculator.
10. Calculate The Net Rental Yield
Many investors talk about calculating the rental yield of an investment property. However, I say you need to calculate the Net Yield. That means deducting your running costs from your rental income before calculating the yield.
The method used to calculate the net rental yield is as follows:
Net Annual Rental Income ÷ Property Purchase Price x 100
11. Calculate Your Return On Investment (ROI)
If you are going to invest your hard earned cash, it’s important that you take the time to calculate your potential ROI.
There is a risk with any investment, but with a small amount of the right knowledge in property investing, you can reduce that risk significantly! You can download my free ‘Getting Started Guide’ which will walk you through each step of the way to help you purchase a property which has a good rental demand.
In summary, the ROI is calculated using the following method:
Annual Net Income ÷ Cash Invested x 100
For a more detailed explanation of calculating the potential ROI and Net Yield, you can watch this short video:
12. Learn To Negotiate
If you feel that you lack negotiating skills, take the time to learn whilst you are shopping for an investment property.
In my experience, effective negotiating boils down to a few key areas:
- Good Verbal Communication
- Problem Solving
Here are some pointers to get you started.
First of all, let me help you by reminding you that when looking for a second property to let, you don’t have a property to sell. This fact alone will place you in a stronger buying position than a homeowner who is looking to move and has another property to sell. Make sure you communicate this fact with the selling agent or vendor. If you are using a selling agent, ensure they relay this fact to the vendor.
Ask questions about the property you are looking to purchase and the reasons for the vendor deciding to sell. Listen carefully to the answers you receive and do your best to relate to their needs. By doing this, you may be able to assist the vendor with additional help which will make your purchase offer more attractive than any others they may receive.
For example, the vendor might be emigrating overseas and needs to sell fairly quickly. Perhaps they also need to clear out a lot of furniture and have the additional task of trying to sell that furniture. You could offer to take that task on for them by including an agreed price for the furniture. You may also decide to use the furniture if you are considering letting the property furnished.
By communicating your buying position well, and by listening and helping to solve any problems, you will become a master negotiator.
13. Location Location Location
It’s a very popular phrase in the property industry and there is a TV program with this title too, so I guess you are already aware of this statement.
But I would like you to think about it on two levels.
Firstly, the location of the area you have selected to invest, in terms of your comfort. Would you prefer to purchase a buy-to-let property near your home town so that you can visit and check on things easily? Or have you identified an area further away which will be more difficult to get to at short notice but you have friends or family that could help if needed?
Or maybe you’re considering taking an armchair approach whereby you will make use of a reputable letting agent who will do ALL the work for you for a fixed monthly fee.
Secondly, you need to make plenty of time to research and select a location within your desired area that has a strong rental demand for the type of property you would like to buy. You need to be aware that a 2 bedroom apartment maybe in more demand than a 2 bedroom house within a particular postcode and vice versa.
14. Buy Or Make The Property Modern
This doesn’t mean you need to spend a fortune on either purchasing a modern property, or modernising it once you have purchased it and have control. There are a lot of improvements you could make for relatively little cost.
For example, you could improve the security of the property and the usefulness of the doorbell by fitting a Ring Video Doorbell or equivalent. They are very popular, easy to install, convenient to have and retail for under £200.00 for their professional model and under £100.00 for their basic model. You can see more details on this and other tech devices which I recommend here.
As a minimum you should focus on the two key rooms of any property; kitchen and bathroom.
Are the taps in both rooms modern and do they function easily and well? Are the colour schemes homey for most, or a bit less appealing for most? How about a shower? Is there one installed or is there room to install one?
Spending some time and capital to modernise your new rental property will pay dividends in the future.
15. Letting Agent Fees
A crucial component in your new business when first starting out.
Letting agents are a great resource because they will not only market your property for you, but they will also ensure that you are compliant as a landlord.
In my experience, no two letting agents are the same. Make time to meet with and speak to the local letting agents and get to know the packages they offer and the fees that they charge.
If you are investing in or near your home area, and you have the time to meet prospective tenants, conduct viewings and meet the requirements of operating a buy-to-let, I recommend using OpenRent. They will market your property, provide a tenancy agreement and walk you through every step of the way to ensure you are compliant, for a very low fee compared to the traditional high street letting agents.
16. Landlord Insurance
A requirement if you have a mortgage on your buy-to-let property and a necessity if you don’t. Insurance will protect your investment going forward.
Landlord insurance comes in two key parts with some optional extras:
Buildings Insurance – This will protect your investment against unpredictable events such as flooding, fire or vandalism.
Landlord Liability Insurance – Will protect you against claims from tenants, or visitors to the property, who injure themselves and you are found to be at fault.
Optional extras can include landlords contents insurance, tenants content insurance, damage from rodents … the list goes on!
I have written an article on Recommended Landlord Insurance For A Rental Property, which goes into more detail.
17. Learn From Others
Property investing can appear to be a lonely business at times, but you are not alone! With a reported 2.5 million landlords in the UK, there are plenty of people with experience and many are more than happy to share their knowledge and expertise.
I have attended several meet-ups, shows and events, and met many people. I always learn something new and feel inspired after attending events and meeting other investors. If you have time, search online for upcoming events near you and prepare some questions if you feel stuck or unsure about a certain aspect.
Alternatively, I would recommend PropertyTribes.com. It’s the largest property investor and landlord forum in the UK, and there are hundreds of members who have been landlords for years and are more than willing to assist first time landlords and experienced landlords alike. There is also a huge library of historical questions that people have asked that you will have access to, and the platform is completely free to use.
And on the subject of learning from others, I have to mention books. Reading or listening to books is a fantastic way to educate yourself whilst on the move during a commute or when you have some downtime.
I set a goal for myself every year to learn something new each day. And I do that with the help of books. It’s the best habit I have formed and I don’t intend to ever stop.
If you want to glean the knowledge which other people have accumulated over years, and sometimes decades, take a look at my recommended books here.
18. Just Do It And Get Started
Please DON’T fall into the trap of ‘analysis paralysis’. If you know you should invest in property; if you know you have an interest or even a real passion for property, just do it and get started!
I have met too many people over the years who have shown a real interest for property investing in the past, but have dissuaded themselves from ever starting. Most of these people have immersed themselves too deep in data or have waited for all the planets to align perfectly before starting. Which of course, will never happen.
You can read and consume content about investing in property forever. But you will only truly learn by doing.
Do your research, and by all means ask questions along the way – but get started.
Will you make mistakes? Probably.
Will you lose your capital? Unlikely.
Will you learn and grow from your experience? Definitely!
The perfect buy-to-let property doesn’t exist so don’t start searching for it. Your goal is to find a ‘good’ property within an area that has a ‘good’ rental demand.
Do it – get started, and I hope to hear from you one day.