BUY-TO-LET GUIDE Investor's Guide to Successful Property Investment
2020
Investor's note Regardless of the political landscape, there are plenty of options for potential investors in a market that is WRITTEN BY largely geared towards buyers. A high demand for STUART WILLIAMS property in the UK, coupled with a very low level of supply, and rising number of investors, has the housing After the political roller coaster of the past few years market looking particularly steady and even projected with Brexit uncertainty, changes in tax legislation, a for growth in 2020. 2017 election that resulted in a hung parliament, the UK A post-Brexit Britain may be unsettling for some, but it doesn’t mean that Britain will lose its status as the real estate market has been largely unaffected, and 6th largest global economic power. continues to be one of the most safe and stable property markets in the world.
"Smooth sailing."
Liv Lodges, Bridlington
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NO. 1
Price growth
The average house price, as well as the cost of renting, has enjoyed a steady increase in the UK consistently for many years, especially throughout the last two years, with the exception of London,
where rent prices and those of residential properties have fallen for the first time in years. Even with this exception, the UK has still seen significant growth in regional areas of the UK, with the average house price is now standing at ÂŁ243,639, an increase of ÂŁ8,616 on 2017 figures*.
Churchside Residences, Wolverhampton
*April 2017 - April 2018 Page 4
NO. 2
Changes in Budget One of the most popular and attainable investment asset classes remains to be the buy-to-let sector, which increasing numbers of investors have been gravitating towards in the past few years, due to the ability to leverage, generate passive income, and have money locked into a safe and tangible asset versus the likes of the stocks and shares, which are typically seen as a much higher risk investment. Buy-to-let is not only popular amongst UK investors, but large numbers of international investors who see the UK as a safe haven for their funds. Looking to the future, it is sensible for overseas buyers, in particular, to plan for the changes to Stamp Duty Land Tax which were announced in the Spring Budget on 11 March 2020.
Baltic Residences, Liverpool
Non-resident buyers are currently subject to the same stamp duty as buyers who reside in the UK but that is set to change from 1 April 2021 when they will liable to pay an additional 2% surcharge on property purchases, bringing the UK market in line with many other global markets where nonresidents pay additional taxes on property purchases. Investors are already subject to the additional 3% stamp duty charges which were announced in the 2015 autumn statement and implemented from 1st April 2016.
As with the costs of purchasing a property anywhere in the world, factoring these into finances from the very beginning will allow an investor to make clear decisions. There are many excellent investment locations in the UK where property prices are low enough that this change to taxes has a limited impact on the cost of entry.
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LOCATIONS Best places to invest currently within the UK
Where to invest The best investment locations in the UK are changeable based on the dynamics of the local economy, workforce, regeneration, transport and housing supply. Certain areas of the UK present better opportunities than others and in 2020 we’re seeing a shift toward lesser-known yet very well connected locations as tenants seek more affordable yet modern and high-specification homes.
West Midlands BIRMINGHAM Birmingham is frequently reported to be one of the UK’s best locations for buy-to-let investors owing to its modest house prices and a high proportion of young professionals creating a strong and growing demand for rental property. In the past 5 years, property prices in Birmingham have grown by 27%, an impressive figure and with momentum continuing for the UK’s second city with plans for continued regeneration and further improvements to infrastructure this price growth is set to continue. The West Midlands is at the heart of the new High-Speed rail 2 and will bring Birmingham within an hour’s commute of London, Manchester, Leeds, Sheffield, York, Preston and Wigan. An established investment location, Birmingham remains to be one of the UK’s top rental property hotspots.
Water Channel, Birmingham
WOLVERHAMPTON Birmingham’s lesser-known neighbour, Wolverhampton, should not be overlooked by investors. A hidden gem just minutes on the train from Birmingham city centre offering lower property prices and arguably greater potential for price growth. Wolverhampton Canal Page 7
Renters are turning their attention to neighbouring locations across the UK as the larger cities and better-known hubs now have higher rental values. When the transport connections are as impressive as those in Wolverhampton it’s a wonder this city hasn’t been on investor radars sooner. Wolverhampton is undergoing a large scale transformation with private and public investment into the city and surrounding area amounting to over £1 billion. Not only is the city centre seeing redevelopment and restoration of key historic buildings but investment is also being poured into important enterprises such as the nearby i54 business park which is already home to the likes of Jaguar Land Rover. Wolverhampton has a bright future ahead, for investors there is exciting potential for capital appreciation and strong rental demand.
Wolverhampton Skyline
North West MANCHESTER Known as the ‘Capital of the North’ Manchester is an established location for buy-to-let investment. Many reports show Manchester to be the second-best investment location in the UK after London. Manchester’s economy has continued to grow as large companies have moved part or all of their operations to the city. The population growing off the back of the continued creation of new jobs, those moving to the city or choosing to stay following completion of their university studies are largely skilled workers. The demand for housing in Manchester has encouraged significant property price growth of nearly 30% over the past 5 years. Rental returns have followed this upward trend and continue to rise with the growing population. For many investors, Manchester presents a more known entity and a lower risk than locations that are still in their relative infancy in terms of regeneration and economic growth. Prices remain to be less than those in the capital and yields are more impressive allowing Manchester to maintain its position as a rental property hotspot.
Manchester Skyline
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LIVERPOOL Following a period of economic growth and a surge in popularity Liverpool is a firm feature on the UK property investment scene; certain Liverpool postcodes are reported to offer the highest rental yields in the country. Liverpool has a strong student population with many choosing to stay in the city following the completion of their studies at university. Over 70,000 students attending Liverpool universities providing a reliable stream of tenants. There are many projects in the pipeline that are set to further improve Liverpool’s infrastructure, economy and housing, including the Liverpool Waters regeneration zone which is seeing £5.5 billion worth of investment. Affordable property prices and high rental yields have drawn significant numbers of investors to the city and the future plans for further development support the continued interest.
Liverpool Skyline
North East HULL Hull, or Kingston upon Hull as it is formally known, is located in East Yorkshire in the North East region of England. Hull is a port city positioned where the River Hull meets the Humber Estuary. The city has a population of nearly 300,000 and was crowned the UK’s Capital of Culture in recent years. Hull is undergoing significant regeneration and investment into the area is on the rise, several large projects have been approved and works are underway to change the face of the city. International companies are seeing the opportunity present in Hull. Siemens has opened a £310 million wind turbine factory in the city that created over 1,000 jobs.
Old Spurn Lightship, Kingston upon Hull
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For travelling across the UK, Hull offers journey times not dissimilar to several well-established investment prospects. Trains from Hull Paragon Station reach London’s King’s Cross in around 2 and a half hours, to Manchester the journey takes around 2 hours and into York the journey is about an hour. Hull has some of the lowest property prices in the UK and rental yields are high. Investors would be wise to seriously consider Hull as an investment in 2020 on the basis that prices are growing, having gone up by 22% in the past 5 years, the opportunity to secure property as such a low price will not remain.
DONCASTER A series of multi-million-pound investments are having a significant impact on this South Yorkshire town. With improvements already made and ongoing regeneration having an impact on the town’s appearance. Employment has been boosted by the continued investment from large corporations and the property market is seeing continued growth from the uplift in demand. Doncaster has excellent rail links; the journey to London is just over 90 minutes. Doncaster also has its own airport which recently announced a £10m expansion and the construction of its own train station. Companies who have offices, depots and distribution centres in Doncaster include Siemens, Next, Amazon, Lidl and the world’s biggest IKEA depot. With the ongoing investment in Doncaster and the increase in key personnel relocating to the town in the wake of large companies expanding their operations, the outlook for Doncaster is very positive.
LEEDS Fast-paced regeneration, a growing population, increasing employment levels and over 20% price growth in the past 5 years – the Yorkshire city of Leeds is a prime investment target. The tech industry in Leeds has grown considerably in recent years alongside the finance sector, manufacturing and creative industries that all thrive in the city. Several large companies have headquarters in Leeds including GHD and Asda Walmart and most recently Channel 4 opened its National HQ in the city. According to the Leeds government website the local economy has grown by almost 40% over the last decade and there are plans in place to encourage continued growth with improvements to infrastructure and connectivity. As with many locations in the UK Leeds is experiencing a housing shortage that continues to support property price growth and strong rental demand. Both important factors for any investment hotspot.
Leeds Skyline
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SHEFFIELD Sheffield is located in the very centre of the UK and is exceptionally well connected. Rail links from Sheffield offer services to Manchester, Leeds and Birmingham within around 1 hour and to London, Liverpool or Newcastle within around 2 hours. There are few locations in the country that can offer this level of connectivity. Whilst the links are already impressive, HS2 is set to improve the rail links to the capital with the journey likely to be reduced to less than an hour and 30 minutes. In recent years Sheffield has seen significant investment from multi-national companies including Boeing, McLaren Automotive, HSBC and Forgemasters. With their investment, jobs have been created and staff have relocated to the city. The growing population in Sheffield has put pressure on the local housing market; demand far outweighs the supply of homes. Property prices in Sheffield have increased by almost 25% in the past 5 years and are set to continue on this upward trajectory.
Sheffield, South Yorkshire
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GUIDE How to build and grow your portfolio
Success in the real estate market is achievable... ...but is far from a given. What’s more, building a successful property portfolio is no easy task. It takes vigorous planning to achieve a long-term revenue stream and continued success as a property owner. Once a building is purchased, there should be attainable goals set first.
Once one property is a success, an investor can move on to their next goal of buying more property and improving and expanding their business. A full and successful portfolio will set the tone for continued success, and all the planning will be well worth it if done properly.
Baltic Residences, Liverpool
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How to grow? SET ATTAINABLE GOALS, AND PREPARE TO ACHIEVE THEM When a property investor sets out to make a profit, they will need to know what area is most advantageous to their continued success, i.e. buy in an up and coming neighborhood or a region that likely guarantees a return on investment. Real estate investments especially call for a realistic vision of the property’s future to make sure that there is enough capital and profit to work with later.
If appreciation isn’t the only goal, however, an investor will want to ensure that the property will garner sustainable income from continued rental. Both goals are indeed attainable; an investor will need to set realistic goals to achieve them.
DON'T FORGET ABOUT CASH FLOW Once a property is bought in the area of the investor’s choosing, rented to the desired tenants, and a property manager is hired, the real work for the investor will start. Depending on the overall goals, the property owner will need to keep a close eye on the ROI and KPI aka their key metrics to deduce what their projected cash flow will be.
The cash flow numbers are essential to the portfolio in that mortgage payments will need to be considered as well as other expenditures that could affect the profit margin of the building’s income. Staying on top of key numbers will guarantee few oversights and combat against negative outcomes.
TENANTS KEEP THE PROPERTY AFLOAT Although there could be a property manager to help tenants with their day to day functioning, the property owner should also know what their tenants expect in addition to what they expect from the tenant. Satisfying tenants is key in keeping them as renters, thus a vital part of the property business.
With more long-term tenants, comes more assured revenue. Long-term renters also eliminate the number of vacancies, which can negatively affect profits. Aside from the business, any good businessperson knows that keeping their clients happy is a tactic in continued success for both parties.
DON'T GROW TOO FAST While a successful first few months or first year can have an investor anxious to begin another project, it’s most advantageous to carefully analyze any more investments until the first is a success. Having too much to take care of will bring the focus off the initial plan, and could end badly.
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Buy-to-let defined: Mortgages With more options than ever when it comes to the best ways to invest in the current housing market, investors have taken to several different avenues of gaining the most revenue from their chosen ventures. Investors who want to go above and beyond just owning their own property now have the buy-to-let scheme to help them generate passive income in the short term and capital growth long term, and with few negative repercussions for their efforts. A buy-to-let mortgage enables an investor to purchase a property for the purposes of renting it out, without the need of the entire purchase price to be available in cash. Usually an investor is required to put down a 2530% deposit, with the balance provided by the mortgage lender. The lender will then charge a monthly interest payment for the service, which will need to be covered but the rental income. Most lenders like to know the monthly mortgage payment is equally to 125-150% of the monthly mortgage interest payment. If the income will not cover the rental income it is unlikely the bank will lend, and in all honesty the investor should also follow suit and not attempt to purchase the property.
Excelsior Works Castlefield, Manchester We advise all investors to speak to an experienced mortgage broker before commencing their journey into the world of buy-to-let. Page 15
Buy-to-let defined: Returns The surplus funds after paying the mortgage, taxes, and any running costs associated with the property will be the profit to the investor. With the right property in a good location, and favourable mortgage interest rate, it’s not unreasonable to expect an annual return on investment of up to (and sometimes over) 10%.
Then every few years, once the value of the property has risen, investors can return to the mortgage lender and either remortgage with them to release some of the equity in the property, or go to another lender and do the same. If you can pull out your initial deposit, then technically your return on investment for this particular property is infinite as you have zero of your own funds left in the investment.
ONE BHM, Birmingham We advise all investors to speak to an experienced mortgage broker before commencing their journey into the world of buy-to-let. Page 16
Buy-to-let defined: Smart financing Those best suited for a buy-to-let mortgage are investors who have purchased property before, that is, those who have an existing mortgage or a fully paid off mortgage. Investing in a buy-to-let property could potentially be more difficult for a first-time buyer, however not impossible.
As with residential mortgages, the criteria for lending is always based on affordability and if the borrower can afford the repayments in the event the property is unoccupied. In addition, the lender would prefer the borrower to have a relatively clear credit score, however even for the trickiest of circumstances there are lenders who will lend. The minimum deposit necessary for a buy-tolet property is 25% of the property’s value, though the average range is between 20-40%. Do not plan to invest in property that transcends beyond your financial means; that is the first mistake in a faulty housing investment. ONE BHM, Birmingham
Because most buy-to-let mortgages don’t require monthly capital repayments, it may seem like this scheme is more attainable than that of a private residence, however, once the terms end, the investor is expected to have enough capital left to pay the mortgage back in full. Those who plan to invest in buy-to-let need to look to the future of their investment, not the now, which could mean remortgaging onto a new mortgage product, or simply selling the property and cashing in the profits.
We advise all investors to speak to an experienced mortgage broker before commencing their journey into the world of buy-to-let. Page 17
Finding tenants and managing the property Finding the perfect property and buying it is only the first step in a real estate investor’s journey. Once the property is bought and the business is ready to run, there will need to be a mode in which to find suitable tenants and manage the property efficiently. Managerial and communicative skills will be absolutely vital in becoming a successful property owner.
There are several methods in which real estate investors also become successful landlords, thus improving the likelihood of a long-term profit. There are techniques in the managing of real estate that require knowledge, marketing and networking, and simple people skills to ensure a job well done and a smoothly running business.
ONE BHM, Birmingham
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Leave the management of tenants to a professional If the property owner and/or investor plans to create an investment that is beneficial to all, and most importantly, will function normally and efficiently, the best mode of action is to hire a property manager to manage the daily functioning of the property.
Managing a property in addition to owning one will be an enormous amount of work. Hiring a skilled manager whom will be available to tenants regularly, has a grasp of how a property is managed, aside from the tenant's grievances or wishes, will create a harmonious work and living environment for all involved.
Liv Lodges, Bridlington
Before tackling the management oneself, consider hiring an expert property manager to avoid a tedious workload. According to the desired business plan, a property manager should not only be skilled and professional but also the right choice for the property’s future.
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How to find the perfect tenant? Finding the perfect tenants is not an easy task, and it is up to the building owner as well as the property manager to find those who will fit the property’s long-term needs. With so much technology at our fingerprints in the digital landscape, it’s easier than ever to find tenants that will suit this vision. Some property managers opt to use social networks to get an idea of the tenant’s overall lifestyle and general profile. Some of those can be via Facebook, specialty housing match applications, roommate finders (if a shared space is available), advertising online or in the local newspapers, or the more old-fashioned method of advertising outside of the property with signs and flyers. This might not garner as much traffic, but will be efficient in connecting with tenants in person and with relative ease.
Baltic Residences, Liverpool
THE RIGHT TENANT Once there is a roster of potential renters, their financial and rental backgrounds should be taken into account before making a choice. The best kind of tenants have a steady job and income, a good credit history or some sort of cosigner to ensure that rent will always be paid in full and on time, as well as the general idea that they will not destroy the property in any way. Deposits are a vital tactic in ensuring that your tenant will respect the property and the investment will be protected, but it is essential the deposit is protected through one of the numbers deposit protection schemes available. Failure to protect the deposit could result in a hefty fine. You will also be required to request copies of the tenants passport and residency status if a tenant from outside the UK.
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In Summary Although 2018 has been a tough year politically for the UK, the economy and property market still remain strong with the fundamentals still the same. The UK is one of the largest global economies, an attractive place for investment, and in terms of demand versus supply has a colossal housing shortage with the deficit sitting well over 4m and no signs the demand for new homes will be met anytime in the next decade.
Average prices and rental yields have continued to rise, inward investment from both private individuals and companies based overseas has been extremely high – largely due to the poor performing pound sterling, and investors are seeing this as an opportunity to make 20-30% over the next few years purely on currency growth.
Regent Plaza, Manchester
Our predictions for 2019 are that the Midlands and North West regions will continue to flourish due to consistent high levels of investment, job creation, and a genuine need for more properties to be built to meet the ever growing demand. These areas are where investors will benefit from the highest yields, but also highest capital growth, both in the short term, and for the foreseeable future.
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