Financial considerations for buy to let investors

Buy to let mortgages – unlike residential mortgages – are usually not computed as a multiple of the applicant’s income. Rather, they’re computed against the monthly achievable rent for the property (the ‘rent-to-interest’ cover). In other words, the rental income a property can secure needs to be greater than that of the ‘interest-only’ mortgage payment.

Historically speaking, most buy to let lenders try to look for a ‘rent-to-interest’ figure of 130 per cent, meaning that rental income will exceed the ‘interest only’ mortgage payment by 30 per cent. However, as interest rates have gone up, lenders have gone soft on this count. However, it is imperative that you check an arrangement fee that such products attract. Investors should also take into account the scenario of higher/ lower interest rates and whether the rent income will be enough to cover possible rate hikes.

Libor (London Interbank Offer Rate) may also form the basis of your buy to let mortgage loans. It is more common in the buy to let market than the residential property market.
New buy to let investors should also know about the tenants’ deposits scheme. Tenants’ deposits are no more held by the landlord. They are held by an independent government-appointed firm. This measure was taken for avoiding disputes between a tenant and landlord.

The things that successful buy to let investors do right

How to make out successful buy to let investors from the failed ones? Here are the steps that the former take for ensuring a smart buy to let decision:
•    Smart buy to let investors realise that it’s not a wise idea to purchase a property that you have not seen, in a locality you do not know much, and where you’ve hardly any idea of rental income & resale values.
•    Successful investors demonstrate a fairly good understanding of the locality and the type of tenant that they want to attract.
•    Research indicates that successful investors are able to make the best returns from family homes, with good schools/shops, good transport links, good medical facilities, evidence of regeneration, etc. They take this factor into account when opting for buy to let. The old adage ‘location, location, location’ still holds true for them.
•    Smart buy to let investors are well aware of legal provisions and amendments that the government introduces from time to time like a licensing scheme in 2006 for houses in multiple occupancy, making the landlord and property adhere to specific standards before it’s legally rented.
•    They realise that it won’t be possible to get funding without a licence from the local authority, and prepare themselves accordingly.

Be aware of the cost implications of a buy to let deal

With so much advice on offer to realty investors it can often get tough to make an informed and sensible decision before actually taking the plunge. With property prices now cooling and with lenders becoming more cautious – - coupled with the ‘credit crunch’ – a very careful analysis of the cost implications and potential pitfalls of being a landlord have become necessary.

What then is the way out? The answer is simple. Any individual, who is making an investment decision like buy to let, should first do a thorough research – a point that is all the more vital in the current context. For example, you should determine the maximum amount that you are in a position to spend for buying a particular property.

You will need to work out your available down payment and other expenses like the services of a solicitor, survey/valuation fees, stamp duty, broker fees etc. while considering the final purchase price.

You should also take into account after-purchase expenses, comprising loan repayment, renovation to make the structure fit for its intended use, utility deposits & agent’s fees if you plan using a letting agent to attract/vet tenants. Other expenses that you will incur are insurance coverage, routine property maintenance as well as ground rents (if applicable), and last but not the least, property taxes.

Is the market for property letting on the upswing again?

Buy-to-let mortgages previously used to be very tough to obtain. This is no more the case! Competitive lenders, especially those who work with buy-to-let mortgage brokers, realise that the market for commercial and residential property letting is on the upswing again. Indeed, now is the time to build your property investment portfolio.

Echoing the market sentiments, ARLA Operations Manager Ian Potter stated, “Undoubtedly, buy-to-let landlords are very much aware of the opportunities, but (it is understandable) they act with caution. In fact, caution has been the watchword in the buy-to-let market since its inception. It remains the sustainable option for housing.”

According to the latest quarterly ARLA survey figures released in March, average rents in the private rented sector have increased by roughly 4 per cent for houses and 2 per cent for flats. These averages have been largely boosted by a 9 per cent increase in Prime Central London plus a 5 per cent increase away from the South East. Rents fell slightly, by 2 per cent for houses and 5 per cent for flats In the South East itself. The improvement in rents received comprises a rise of over £1,500 for renting a flat in Prime Central London and £3,000 a year for renting a house. Rents have increased in the rest of the country too, to £981 from an average of £931 for houses and to £664 £619 for flats.

Why it’s a good idea to invest in buy-to-let properties?

Investing for the future is not as easy these days as it was in the past. However, in the long-run, real estate has proved to be a safe, reliable and profitable mode of investment for many people.

Following are the key reasons for putting your hard-earned money in property for buy-to-let purpose:

Potential tool of Leverage
Property lets you leverage your bargaining power. You can make use of the market conditions like housing shortage or tough mortgage conditions to make gains. The market sentiments may be positive or negative, but the recurring value of your asset will invariably rise and add up, fetching you handsome gains over a period of time.
By dividing your own capital for acquiring several properties, you’re utilising the tenants’ rents for paying for the resulting interest liability, while gaining the full capital appreciation of all of those purchased properties at the same time.

Appreciation of Assets
There’re very few business firms that harness assets for them to grow in value – year after year. The capital assets in most businesses happen to depreciate in value over subsequent years. In other words, as your investment continues to generate reasonable cash flow on monthly basis, the underlying asset (or the property), is rising in value at the same time, thus adding to your precious personal net worth.

Seeking mortgage for a buy to let property? Understand finer points…

Essentially there’s little difference between the processes that are followed for a buy to let mortgage deals in the UK than there’s for any other kind of mortgage.

The lender needs to consider following aspects:

• Your credit worthiness or overall credit profile
• The value of the property
• How much down payment you can actually afford and all such considerations

In addition, the lender will generally be interested in what the real estate market is for letting properties in the same area as the one, which you’re considering to invest in. The lender will also look at property taxes as well as average rents for properties falling in the same bracket.

A buy to let mortgage can be arranged for either residential or commercial property. Terms can range between a span of five to forty-five years. There’re variable and fixed interest plans available. A lender will largely consider your projected cash flow from rental income while working out your repayment ability.

Since not every lender considers buy to let mortgage a risk worth taking, another option can be to select a mortgage broker who specialises in buy to let mortgages. This way you’ve the best chance of getting you application scrutinised by a large number of lenders who are willing to take a decision in your favour.

Check the profile of the area or locality where you wish to invest for the purpose of letting

It’s essential that you check the profile of the area or locality where you wish to invest for the purpose of letting. Select property that matches the area, as well. For example, you might find it difficult to fully let any office building in a locality primarily used for light manufacturing. Similarly, a warehouse might not be a good idea if it’s surrounded by an office complex.

On other hand, if you’re thinking to buy residential property with your buy-to-let mortgage, you should ensure that you look in neighborhoods where there’re already properties for letting purpose. It may be very tough to let a residential property in a neighborhood that’s populated mostly by high-income home owners.

After you have managed to identify your prospective tenants, it’s essential you carry out detailed field research on locations. This is required to ensure that it matches your property to your prospective tenants’ needs and also to make sure that each property is well suited to your investment portfolio.

An important aspect of the location research is to consider the future growth in the price of realty. An estimate should be made of local & national trends by location and type (commercial/residential). One way of defining the local rental market is surveying the area, and do some research at the local level. Try to find out the profile of prospective tenants. Then you will come to know as which properties, in that particular location would be let easily. You should also check out the prevailing market rental values.

Precautions to be taken before you buy a property for letting

When you intend to buy a house for purpose of letting, you should take certain precautions. Here are some prime considerations and care to be taken when looking for a buy-to-let deal:

Precautions 1: Work out first whether you are looking to buy either residential or commercial property. Depending upon the type of property transaction, you’re looking for, the budget and scope of the same can be worked out.

Precautions 2: Always work with a renowned and credible resource. Thankfully you’ve come to the right platform, which will serve as a perfect launching pad for your prospective buy-to-let deal.

Precautions 3: It makes sense to seek advice of experts and analysts who understand real state market – especially those who understand the buy-to-let market in the area, which you are considering to invest. Choose an agency that is bonded and that has a solid portfolio of potential properties for you to choose from.

Precautions 4: Seek proper help and advice in choosing areas, which are well compatible with the kind of property you wish to buy. Choose property, which matches your requirements.

Investment landlords keen on buying more property during the next one year

The findings of the quarterly ARLA Review & Index – the largest survey of its kind – offering clues and concrete information for the Review & Index that was carried out during February & March among 439 letting agents and 288 investors has just come up with its findings.

According to the survey, close to 50 per cent, of all investment landlords surveyed have talked of their intention to buy more property during the next one year. Importantly, the average life expectancy of their respective investments stays unchanged – at close on 17 years.

Irrespective of house prices, nearly 18 per cent of landlords will dispose some or all of their property investments in the coming year. Retirement as a reason has more than doubled this quarter whereas others cited the buying of other properties & realising gains.

Landlords report an average ‘Loan to Value’ ratio of around 57 per cent across their portfolios. The proportion with ‘Loans to Value’ of over 75 per cent has dropped quite a bit over the last two quarters, going down from almost 30 per cent in the last year’s autumn to 23.9 per cent this March.

Buy-to-let investors register good increases in their returns from property transactions during the 1st quarter of 2008

Buy-to-let investors have witnessed good increases in their returns from property transactions during the 1st quarter of 2008. The trend is evident in the latest quarterly ARLA Review & Index that has just been published.

The average return, according to the report, on a geared or mortgaged investment is 21.7 per cent, up 0.27 per cent. Returns on cash purchases average close to 11 per cent, 10.91 per cent, to be precise. Flats show a slightly higher return than that from houses – except in the North. All returns on rental investments comprise capital appreciation as well as rents.

The number of buy-to-let investors who have reported a considerable effect on the rental market owing to immigration has increased by almost 10 per cent this quarter or since the query was last raised (i.e. at the end of 2006).

Unsurprisingly, so to say, given this rise in immigrant demand as well as the domestic demographic trends, almost nine out of ten investment landlords surveyed continue to say that they’ve no intention at all of selling their investment-driven properties should house prices fall further. This majority proportion is almost unchanged on the last quarter.