Buy To Let Resource Centre
Buy to Let Advice
This section of our website is designed to be a resource centre full of useful information for both established buy to let investors and people who are new to buy to let and are just starting to consider property as an investment option.
We’ll be publishing plenty of useful guidance and advice for investors in this part of the website over the coming months. When you’ve read through these pages please do check out our selection of UK investment property to see if any of our stock is of interest to you.
We’ll start this section with our quick introduction to Buy to Let Investment. More comprehensive articles will follow soon.
A Quick Introduction to Buy to Let Investing
What is Buy to let ?
The term ‘Buy to Let’ was coined in 1995 when it was used as a marketing slogan for a property investment finance initiative launched by the Association of Residential Letting Agents (ARLA). However, in reality, the activity of ‘buy to let’ had been in existence for centuries before this. Put simply, buy to let is the activity of buying a property as an investment, rather than as a place to live, and renting that property out to tenants.
The ARLA marketing campaign, carried out in conjunction with some of the major mortgage lenders, massively raised the public profile of property investment and was accompanied by the introduction of mortgages that took in to account rental income when assessing the borrower’s ability to make repayments. These mortgages became known as buy to let mortgages. For more information on buy to let mortgages please refer to our 'Buy to Let Mortgages Explained' article.
How has Buy to Let evolved ?
There has always been a private rental sector in the UK but in the late 1970s and 1980s the sector was in serious decline and a housing shortage was developing as a result. This was because the measures introduced in the 1977 Rent Act, aimed at protecting tenants from unlawful eviction and harassment, had failed to also offer adequate protection to landlords, meaning that renting property was often a loss making activity.
The 1988 Housing Act changed this by introducing the concept of the Assured Shorthold Tenancy, which gave landlords the power to evict problem tenants more easily and made property investment a much more attractive option.
The increase in demand from landlords, coupled with the housing shortage and growing tenant demand, resulted in lenders entering the market in large volumes with competitive buy to let mortgage products in the mid 1990s. These mortgage products were different from the commercial loans previously offered only to professional landlords. Buy to let mortgages were also made available to new investors looking for an alternative to poorly performing pensions, who were attracted by the prospects of strong rental returns, rising capital values and lower volatility compared to equities.
The Buy to Let sector boomed in the early years of the 21st century, peaking in 2008 just before the credit crunch. Mortgage lenders then made drastic cuts to their lending to all sectors of the mortgage market, but the Buy to Let market has shown greater resilience than the residential market. In 2011 there was a 20% increase in Buy to Let purchases compared to a 5% decrease in residential purchases.
How does Buy to Let work for the investor ?
Assuming that you plan to invest using a buy to let mortgage, an investor will typically put down a deposit of at least 20% of the purchase price of the property. The rest of the funding for your purchase will be provided by a specialist buy to let mortgage lender.
The lender will probably, though not always, want you to demonstrate that you have an income other than that generated by the property. However, they will focus their main attention on the property you have chosen to purchase. They will typically want to know that the monthly rental income generated by the property will exceed 125% of the monthly mortgage payments. We recommend that you should aim for this figure to be closer to 150%.
Once the property purchase is complete you need to ensure that it is let on an assured shorthold tenancy agreement as quickly as possible. If you are new to buy to let we recommend that you use an ARLA approved letting agent to find and manage your first tenancy.
What returns can you expect to make from a buy to let investment ?
The returns achieved will vary significantly, depending on location and type of property. As a starting point you need to separate the two main types of return from each other - rental yield and capital growth.
Our philosophy here at Crown is that property investment is a medium to long term game rather than a short term speculative activity. We always advise clients to invest for a strong yield and to treat capital growth as a bonus that will inevitably occur if the property is held over the medium to long term.
At present, gross rental yields of 8 to 10% are easily achievable in the UK, especially if you buy property below market value. Such returns compare very favourably with those currently available from interest bearing bank accounts and other investments such as equities and government bonds. High rental yields are much easier to achieve in the north of the country and the Midlands where rents are higher relative to property values.
Prospects for capital growth in the short term are subdued, but we believe that the long term prospects for capital growth are very good. The chronic shortage of available housing in the UK will ensure that prices will rise at rates above inflation once more normal liquidity levels return to the mortgage market. What is not clear at this point in the cycle is how soon the mortgage market recovery will come about.
What costs will I incur with a Buy to Let property?
When calculating potential profits and yields that can be generated from a buy to let investment many novice investors forget to take in to consideration all the costs that they will incur.
Your tenant will be responsible for paying utility bills, council tax, and the TV license fee but you will be responsible for maintaining the structure of the building and any fixtures and fittings that belong to you. You will also need to factor in the costs of tenant find and management fees, insurance and any service charges and ground rent (if the property is leasehold).
We also recommend that you allow for an average of 1 month’s void period between tenancies every 18 months (which is the current average private sector tenancy length in the UK).
How do I get started in buy to let ?
You may be eager to get started but don’t let your enthusiasm get the better of you and lead you to a poor or ill-informed investment choice. We advise that you spend a little time learning about the principles, advantages and pitfalls of property investment before you dive in.
There is plenty of good advice available on this site, but to get a truly comprehensive education on how to go about building wealth through property investment, we recommend that you read How to Build and Manage a Profitable Property Portfolio by the experienced property investor Angela Bryant. I can honestly say that it’s the best book I’ve ever read on the subject.
Once you’ve read a bit more on the subject you’ll probably have reached your own conclusion that the best way to get started is to buy a high yielding property at a significantly below market value (bmv) price. Buying below market value locks equity in to the property for you from day 1 and improves your rental yield.
There are many different ways you can go about sourcing your first buy to let property. If you have plenty of time on your hands you may wish to source a property yourself, either by finding properties through estate agents and making low offers or doing some advertising to find distressed sellers.
If all that sounds a little bit difficult (it is tough, even for the professionals !) you should consider using a professional property sourcing company. Take a look at some of the deals we currently have available on our UK investment property page. You may want to consider using our property portfolio building service or may be you are undecided about what to do next and just want to talk through your options with someone before taking the next step.
If you buy wisely and then manage your investment well, you will generate very good returns from investing in buy to let property.
Related Articles:
How to Finance Investment Property
Why Buy to Let is such a popular investment in 2012
Buy to Let Mortgages Explained
Buy to Let Mortgage Calculator
