Let’s get one thing clear from the outset. Buy to let investment in the UK is less attractive in 2019 than it was five years ago. The current government has gone out of its way to put people off buy to let with a series of draconian new rules that mainly affect small-time, personal investors, while leaving bigger corporate landlords unscathed. Despite all their efforts, it’s my opinion that buy to let is not dead, you just need to be a lot smarter in the way you make your investment.
What challenges are facing But to Let investors?
The two biggest changes that have been made are 3% Stamp Duty on all properties costing over £40,000 and the inability to claim tax relief at the higher rate of Income Tax. Both of these are an annoyance, but neither should be a major obstacle to buy to let property investment, especially if you’re a new entrant to the market, which means you can factor in the additional expenses.
One other thing you need to consider is a declining market. The rapid property price rises we saw before the Brexit referendum are now a distant memory in most parts of the UK, with London prices declining 2.5% in 2018 and many other areas stagnating or falling. This means that you can no longer rely on a buoyant market to increase the value of your buy to let investment property.
Location, Location, Location
So, what is the answer to effective buy to let investment in an uncertain market? I believe that the answer is to turn your attention from the glamour of the capital to the town and cities of northern England where property prices have remained pretty steady since the crash of 2008. This may mean they are unlikely to go up much, but it also means they are less likely to fall if there is a market correction.
When you’re looking at properties in these areas, your first priority should be to create value in your property, giving you a return on your investment and helping to minimise the prospect of negative equity. The key here is to add value through refurbishment and improvements.
Right across the UK, there are homes that need a bit of love and attention, without requiring major structural works. These are often the homes of old people who have passed away or gone into care, or they may be repossessed properties. Either way, they can typically be acquired for 30-40% less than their potential market value.
The key is to add value to your property investment
So, here is the trick. Buy a property for say £55,000, spend £10-£15,000 on refurbishment and then remortgage at 75% of the new value. You are then left with a property worth £90-100,000 and a buy to let mortgage at this level will cover all of the cash you have put up for the initial investment, which you can then use elsewhere or roll over to your next investment property.
This is not only a great way to invest in property, it also creates a 25% equity, which is now a personal asset, and which will also serve as a buffer against negative equity.
Ok, that’s all good, I can hear you ask, but will I be able to rent out this property? The truth is that, while this government has done nothing to help out the struggling buy to let investor, they haven’t done much about building new social and affordable housing either. This means that there is always demand in areas like the North East for quality rental homes at an affordable rent. Annual yields on the types of buy to let property we’re talking about will typically be around 8-12%. And remember, that’s in addition to the equity you’ve already created.
The other benefit to investment properties worth £100,000 or less is that you can afford to buy three of four for the price of a single buy to let apartment in London. This is sound thinking because if you’re single flat in the capital is empty, you’re all in for mortgage and Council Tax cost of over £1,000 a month. If you have four properties, the rent from the other three will pay the mortgage while you find a new tenant. Yes, there are a few added costs such as boiler servicing and insurance, but the benefits far outweigh the disadvantages.
Property investment success doesn't have to be rocket science
You’re probably wondering why I haven’t told you how to work around the new tax laws and Stamp Duty. The truth is you can’t, the law is the law after all, but you can play smart. By purchasing a buy to let property that requires some work, you are minimising your monthly outgoings, including the mortgage payment, and thereby reducing your tax liability. Also, just occasionally, you can pick up a cracking property for under £40,000, with zero Stamp Duty to pay.
This investment strategy won’t appeal to everyone, and it does take time to find the properties, organise the refurbishment and find a tenant, especially if you’re in London. That’s where a property investment consultancy can help.
So, here’s a summary of my advice:
Take time to find a property with the potential to add value.
Make sure that a 75% mortgage will cover your total investment.
Choose an area with good rental potential.
Specify the finish of the property to suit the local market.
Diversify your rental portfolio.
Take advice from people who know the local market.
Buy a property just because it’s cheap.
Put all your eggs in one basket.
Buy a property for buy to sell using any of this advice. It’s a different market.
Go into buy to let without doing your research.
Spend more than you have the potential to earn.