The ultimate guide to buy to let property investment - Total Landlord Insurance

The ultimate guide to buy to let property investment - Total Landlord Insurance

If you’re thinking of investing in rental property, it can be difficult knowing where to start. Property investment is ultimately about making a profit, so it’s important to do your research and put together a business plan. This will allow you to set goals and develop a strategy that will get you to where you want to be.

Here, we take a broad look at property investment and outline some of the key factors to consider that will help you decide whether buy to let is right for you: from whether buy to let is still a good investment and how to create a buy to let investment strategy, to who to secure help from to start investing in property.  

Is buy to let still a good investment? 

The first question you might be asking yourself is whether buy to let is still a good investment. 

Fuelled by the property boom of 1996 to 2007, many of today’s landlords bought their rental property as a long-term retirement investment. In the Government’s most recent English Private Landlord Survey, published in May 2022, 40% of landlords said they began investing in property to boost their pension pot and around a third said they wanted to supplement their income. So, property is an important investment that a great many landlords are counting on to support their lifestyle, either right now or in the future.

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English Private Landlord Survey 2021

However, over the last 15 years or so, the market saw a whopping 20% wiped off most property values during the credit crunch, with some property values still struggling to recover. Then there have been a huge number of regulatory and tax changes in the market that have had a significant impact on landlords’ profits. These have included: higher rates of stamp duty for additional properties, cuts to mortgage interest tax relief and multiple new laws around standards for rented accommodation and increased protection for tenants. 

On top of all that, the various economic challenges brought on by Brexit, the COVID-19 pandemic and rising interest rates, have seen landlords’ costs spiral further. And now that the Government has published its White Paper, ‘A Fairer Private Rented Sector’ (June 2022), we can expect more legislation to be put forward in the next year or so. Two key proposals that landlords need to know about in England are:

  1. All tenancies becoming ‘periodic’, essentially scrapping ASTs and enabling tenants to give two months’ notice from the start of their tenancy 
  2. The abolishing of Section 21 notices,

The proposed changes mean that landlords will always need to provide their tenants with a reason for ending the tenancy, as defined by law, while tenants will be able to choose to end the tenancy at any time, as long as they provide two months’ notice to the landlord. Read more about what the changes mean for landlords and tenants in Goodlord’s guide to the proposed changes

In response to a recent government consultation on these two proposals, Tim Frome, Associate Director of the HFIS group said, “This quick-fire consultation on the impact on homelessness from the proposed Renters Reform Bill just shows that the Government is looking to move quickly this year and that it is concerned about the impact of the reforms on local authority resourcing – and also that all references to Section 21, assured shorthold tenancies and fixed term tenancies are due to be removed. Whether they have listened to the industry and allow fixed-term tenancies in certain sectors such as the student market remains to be seen. 2023 is going to see the biggest change in tenancy law in a generation so all landlords and agents need to keep themselves updated with what is going on.”

Is it true that many landlords are selling up?

It’s true that some landlords have exited the buy to let market over the last few years, with many citing increased costs and regulation. And, according to the English Private Landlord Survey, 10% are currently planning to sell off their portfolio – which represents eight per cent of tenancies.

But the same survey found that 11% of landlords, representing 15% of tenancies, were planning to expand their portfolio. That suggests those landlords with multiple rentals are still seeing the financial benefit of property investment – and they’re also recognising upcoming opportunities in the market.

The 2023 market may be positive for landlords

While average property prices are reportedly falling month on month, many are still reported to be rising versus the previous year and these falls aren’t reported for each individual property. And, investing in property is a long, not short term investment. Looking back over the last few years, many landlords will have seen a decent rise in the value of their investment over the pandemic – particularly those that let houses. According to Zoopla, while flats went up by an average of nine per cent between March 2020 and August 2023, house prices increased by an average of 21%. So, some landlords may be looking at releasing and reinvesting that additional equity into another property.

And with average prices predicted to fall by somewhere between five percent (Zoopla) and 10% (Savills) and some homeowners potentially being forced to sell and either downsize or rent due to the cost-of-living crisis, there are bound to be opportunities for investors to buy property at below ‘true’ market value. 

Even if prices fall further in the short term, they are expected to recover well in the medium term and be higher in five years’ time than they are now. As an investor, you should always view buy to let as a long-term investment and plan to hold property for at least 15 years. That will allow you to ‘ride out’ the natural peaks and troughs in the market and, if you have done your research well and bought a property in short supply, you should see capital growth returns over that time, if that’s your objective. 

Meanwhile, the income side of the rental market is looking strong. Over the last few years, we have seen very high demand from tenants versus relatively little available rental stock. That’s been down to people moving around less, as they always do when there’s economic uncertainty, combined with some landlords selling up. The result has been high annual rental growth – 12.1% in the year to November 2022 (Zoopla) – with demand 46% above average and supply down 38%. Although rents are expected to continue rising, an affordability squeeze is likely to bring annual growth back to between four and five per cent by the end of 2023.

For more on the economic and property market outlook for 2023, read our separate article.

Overall, the outlook for landlords whose properties are let and managed professionally is good. However, whether buy to let is a good investment for you, personally, ultimately depends on your own individual circumstances and expectations. So, the first thing to do is take the time to put together a property investment strategy, setting out some clear aims and goals.

How to create a buy to let property investment strategy 

No matter what’s happening in the property market, there are four key factors to consider when weighing up the pros and cons of buy to let and deciding whether it’s the right investment for you:

  1. How do you want to use your investment? 

The first thing to be clear on is how you want to use your property investment, because that’s one of the things that will affect what you buy. So, why do you want to invest in property – what do you want the investment to deliver?

For instance, if you want a property you can use now as a short-term holiday let to generate some rental income, then move into yourself when you retire, that’s a very different proposition to investing purely to maximise rental profit or capital gains. Perhaps you want to buy something for your children and their friends to live in while they’re studying, that you can then rent out on the open market once they’ve moved on. 

  1. When and how do you need your investment to deliver? 

Once you’re clear on why you’re investing, think about what kind of financial returns you want or need from your investment and when you want to see those returns.

If your main goal is generating ongoing rental profit to supplement your income, how much do you need each month? On the other hand, if capital growth is your priority, how much lump-sum profit do you want and when? Perhaps you’re investing to boost your pension pot or your children’s inheritance, in which case, what’s the deadline and how much do you want to see the value of your investment grow over time? Or would you like a balance – some monthly profit and reasonable equity growth?

Here’s a rough guide to how different types of properties and lets tend to deliver on rental income and capital growth. While every landlord would ideally like both, that’s rare in today’s market, so it’s important to decide on your priority.

(Of course, there are many more factors to take into account, including: how much you have available to invest; the ongoing maintenance required for each type of property; legal compliance costs associated with each type of let and management demands on your time). 

  1. Your attitude to risk 

Historically, we have seen that property can be less volatile than stock markets and less likely to be subject to sharp rises and falls. It’s also seen as a relatively low-risk investment because:

  1. It’s a tangible asset with an intrinsic value, and 
  2. You can earn rental income while the property is tenanted, which can cover all the costs associated with the property and leave you with profit on top.

However, any financial investment involves risk so, before you invest in buy to let, it’s important to know what the potential risks are and make sure you’re happy with them.

The most obvious risk is that the property goes down in value, but this need only be a real concern if you’re forced to sell in a downturn. The good news is that as a landlord, you’re likely to have at least 25% equity when you buy and, as long as you have a tenant paying their rent each month, you should be able to keep paying any mortgage while the market recovers. However, if you don’t own the property outright, it’s wise to have a reserve capital fund that will allow you to keep paying the mortgage for at least six months, just in case.

Secondly, your costs could increase, as they are currently across the board: mortgage rates, labour, materials and services. So, before you invest, make sure you go through all the costs you’re likely to incur in owning and letting the property and ‘stress-test’ them to check where your break-even point would be – how high would costs have to rise to wipe out your rental profit?

Thirdly, your rental income could fall or stop altogether. In reality, rents are much more stable than property prices, so your main risks are having void periods, where the property stands empty between tenancies, and your tenant defaulting on their rent because they either can’t or won’t pay. Both those risks can be greatly minimised by making sure tenants are properly referenced before they’re accepted, and the let is professionally managed. Read our ultimate guide to tenant referencing for more guidance. 

It’s important to understand that property is generally a medium to long-term investment and it can take time to release equity, either by remortgaging or selling – it’s not as easy to access your cash as it might be with stocks and shares. So it’s advisable not to tie up all your capital reserves in property, just in case of an emergency or unexpected loss of other income.

  1. What type of landlord do you want to be?  

This really comes down to how hands-on you want to be. Do you have the time and inclination to handle everything yourself – including responding to calls from tenants at inconvenient times – or would you rather pay an agent to take care of everything on a fully managed service? 

Remember that the agent’s fees are tax deductible, so are effectively ‘discounted’. 

There is also the option of paying an agent to secure a tenant and then managing the tenancy yourself – so they advertise the property, conduct viewings, handle the referencing and check the tenant in, then you take over.

However, landlords self managing without registration and qualifications is acceptable in England, but the rules in other countries are different, see: Wales, Scotland and N.Ireland. There are then very different rules for letting HMOs

But becoming a hands-on landlord isn’t just about having enough time to do the practical aspects of the job, you’ve also got a huge amount of  legislation to know about and comply with, such as providing gas safety certificates and protecting your tenant’s deposit, as well as making sure you have landlord insurance and declaring income for tax purposes. 

You’ve also got to have a reliable way of staying up to date with the latest changes and be aware that if you fall foul of the law – even unintentionally – there could be huge penalties

All this takes time - investing in property is high maintenance compared to alternative investment options – so really think about how much you want and are able to take on.

The benefit of investing with a mortgage rather than all cash

Most people try to own their home outright as soon as financially possible, so they have peace of mind that it’s all theirs. But when property is a buy to let investment, one key way that landlords tend to measure the success of that investment is by the level of return they get from capital growth. 

If you buy a property – or any other financial asset, such as stocks - with 100% cash, if the market goes up by 10%, that’s a 10% return on your investment (before tax and any fees).

Borrowing via a mortgage allows you to put in a relatively small percentage of the property’s purchase price yourself, with the bank putting in the rest. That enables you to boost your investment returns because when the property increases in value, even though you only own a percentage of it, you get to keep all of the equity growth (minus any tax you need to pay on your profits, of course).

For example:

You’re buying a property for £240,000

All cash purchase:

Your capital input: £240,000

10% growth: £24,000

Return on investment: (£24,000 ÷ £240,000) x 100 = 10%

Buying with a 75% mortgage:

Your capital input: £60,000

10% growth: £24,000

Return on investment: (£24,000 ÷ £60,000) x 100 = 40%

Of course, when you have a mortgage there are fees, mortgage interest and monthly payments that will have an impact, mainly on your rental profits. But provided you’re investing over the long term and capital values continue to rise, you could still see a significantly better return over time if you buy with a mortgage rather than all cash.

However, property investment is certainly not straightforward, and what’s right for one landlord may not be right for another. 

So, before you make any decision about how to finance your buy to let, we’d suggest you discuss your own specific circumstances and investment goals with a financial adviser or wealth manager who can help you work out the best route forward - for you.

Who to secure help from to start investing in property 

Buying a property is a big investment of time and money for a landlord and you’re relying on this investment to deliver a financial return, so there's a lot at stake. You have to select the right buy to let property, finance it correctly and successfully manage and maintain it over many years to make sure it gives you the kind of profit you’re looking for. And to do all that well, you need to take advice from a number of different professional experts. 

Wealth manager or financial adviser

If you already have other investments and income from multiple sources, speak to a wealth manager or financial adviser about your investment objectives and take some advice on how property could best fit within your portfolio. This is an important first step as without doing this you could end up with inheritance issues and paying more tax than necessary. 

Property tax specialist

Although your wealth manager or financial adviser may know something about property tax, it is a very complicated area, so it’s best to take some advice from a specialist before you buy. For example, if you receive Child Benefit, if your rental income takes you over a certain income bracket you may lose the benefit and not gain any net income at all. 

Mortgage broker specialising in buy to let

Once you’ve established that property is the right investment for you and you’ve worked out how much you want to invest, the next step is to speak to a mortgage broker. Around two-thirds of buy to let mortgage products are only available through brokers so, even if you already have a relationship with a lender, it’s advisable to take further specialist advice.

A specialist buy to let mortgage broker can build a bespoke financial solution tailored to your needs. They can advise you what level of rental income you need to support your mortgage application and also help you put together a plan for your rental business. Our detailed guide, How to make the right business plan (and become a better landlord) explores goal setting in more detail and includes a useful downloadable business plan template specifically designed for landlords.

Legal specialist/s 

If your property investment is straightforward, you may only need a conveyancer to handle the legal purchase paperwork. However, if your investment affairs are more complicated, such as buying a property with an existing tenant, or you want to pass the property on after you die, you may need a solicitor who’s experienced in lettings or estate work. And making sure you own and will the property in the right way can be critical to efficient tax planning.

Professional local estate and letting agents   

Probably the most critical element in buy to let is purchasing the right property – one that will let well into the future and deliver on your own investment goals. The best way to do that is to work with local property market experts who understand buy to let and know about supply and demand for all types of property in the area. So take the time to find out which sales and lettings agents have the best reputation and track record, and use them to help you make a solid investment.

Beware the ‘property gurus’!    

Unfortunately, unlike financial advice, property advice, even investment related, is not regulated. This means it attracts many sharks who promise ‘get rich’ property investment strategies which rarely work and end up with them getting rich, not you. 

To help combat this, there has been an effort on behalf of the property investment industry to secure accredited property help from real experts. The Property Investors Bureau was set up to build a sustainable future for property investors whilst raising the standards and encouraging excellence in the property investment industry. Its Advisory Board  reads as a ‘who’s who’ of property experts, and includes our very own Paul Shamplina.

Paul Shamplina, Chief Commercial Officer of the HFIS group and Founder of Landlord Action, sums up,

“Buy to let is still a worthwhile investment and demand for rental properties is stronger than ever. But landlords need to be professional and comply with private rented sector legislation. I would always advise first-time landlords not to try navigating the minefield of rules and regulations alone, but to appoint a reputable agent to reduce the stress and, most importantly, to make sure you’re compliant. With more and more regulations coming down the line, it’s harder now for landlords to manage a property than ever before. My advice to landlords is always to understand that they are running a business and must put a price on their time.”

Alternatively there are plenty of property networking meetings and Paul’s Book: The Landlords Friend, which goes into great detail on investing in property, managing, maintaining and helping when things go wrong – which over the medium and long term, they most certainly will! 

If you’ve decided property is the right investment for you, now read our article, ‘Seven things to know before investing in a rental property’.

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