First published: 2016
Author: Rob Dix
An incredibly comprehensive guide on everything you need to know to buy a house in the UK for property investment.
- Invest enough to buy one high-yielding property every 18 months, then increase the pace as rental income compounds.
- Find properties that need refurbishing, do the work that will increase their value, and refinance so you need less of your own cash to put into the next purchase
- Buy properties with an eye on capital growth, then sit back and wait
- Buy a small number of properties that generate a lot of cash immediately
- Buy, fix up, and sell on for a profit
- When taking out a mortgage on a buy-to-let property, you’ll be able to choose between repaying a small amount of the loan each month until you owe nothing at the end of the mortgage term (a “capital repayment” loan), or just paying off the interest each month so that at the end of the term you still owe exactly as much as you borrowed in the first place (an “interest-only” loan).
- If you’re repaying a chunk of the capital each month, it means your monthly payments will be higher and your cashflow will therefore be lower.
- Paying off just the interest gives you more income each month.
- Benefit from the extra monthly cashflow with an interest-only deal, let the cash build up in the bank, then you can decide to use those savings to pay off capital or not – depending on what seems like the best idea at the time. All you’re doing is giving yourself more flexibility, because you’re not locked into a set repayment schedule.
What to look for in a mortgage product
- Interest rate
- As a general rule, interest rates will be higher for 75% loans than 60% because the risk is higher.
- The interest rate offered may be fixed or variable.
- Fixed rates range from two years up to as many as ten; their obvious advantage is that your monthly payment will remain the same for the entire time, so you can have certainty about what your biggest cost will be.
- Variable rates could just be the lender’s “standard variable rate”, which they can change whenever they fancy (although usually prompted by changes to the Bank of England base rate), or they could be a “tracker” rate, which moves precisely in line with either the Bank of England rate or the LIBOR rate.
- Arrangement fees
- Either be a set amount (like £995) or a percentage of the total amount you want to borrow (often from 0.5% to 2%).
- There are also various valuation fees, account set-up fees and “because we feel like it” fees.
Finding a great broker
- They have access to the whole of the market.
- They do the majority of their business in buy-to-let rather than residential.
- They aren’t just a “processor”.
- They have strong relationships.
- They invest in property personally.
- Rob’s preference: those who charge him a fee
- Because it means they have less of an incentive to place him with the lender who pays them the biggest commission, rather than the one that’s best for his needs. It’s also the case, logically, that if they’re getting paid more per transaction, they’ll need to do fewer transactions to pay their bills and therefore will give him more time.
Deciding where to buy
- Are you going to restrict your search to the area around where you live, or are you prepared to go wherever in the UK you perceive the best opportunity to be?
- A logical next step from staying local is picking somewhere that’s easily accessible by train – because it makes your fact-finding trips easier, and good train links are a tick in the “fundamentals” box too.
- The best investment areas are underpinned by solid fundamentals: jobs, schools, shops, leisure facilities and transport links.
- The ideal scenario is to become bezzie mates with an estate agent so they’ll give you the nod on red-hot opportunities before they hit the open market – because for all their faults, they’ll know what’s coming up for sale way before anyone else.
- Follow up
- By “follow up”, I don’t mean “send an email at some unspecified future point”: I mean “call the agent every week until they tell you that it’s exchanged and the deal is going ahead”.
- Be nice
- One easy thing you can do to make an agent’s life easier is give clear and helpful feedback on what you think about properties you’ve viewed. Agents can feel resentful that they’ve taken the time to drive to a property, wait for you and walk you all around it… only for you to vanish and fail to return their calls asking for feedback. They need to be able to tell the vendor about the reactions they’re getting, so help them out a bit: proactively tell them why you’re not interested, without being unnecessarily scathing.
- Do what you say you’ll do at all costs
Assessing a deal
- Any given property has two prices: its objective market value, and the price that it makes sense for you to pay in order to meet your objectives.
- The thing to remember is that nobody sells a property at a bargain price because they’re feeling generous: there will always be a reason, and it’s your job to find out what that reason is.
- So when you’re assessing a deal, it makes sense for you to calculate market value in exactly the same way: using similar properties, that are very nearby, and have sold recently.
- The investors who secure the best deals view a lot of properties: it wouldn’t be uncommon for someone to view 50, make serious offers on five and end up buying just one.
- Viewings aren’t just about the property itself – they’re about building relationships and gathering information. The more time you spend with an estate agent or auctioneer, the more likely they are (if they like you) to give you advance notice of something that’s about to come onto the market.
Offering and negotiating
- You don’t start by making your maximum offer: instead you want to make an offer that gets rejected.
- What you should remember when making your offer is that a negotiation is about more than just the price. The other key factors are certainty and speed – so if you have these in your favour, you should make this clear in your offer.
- In terms of certainty, you need to demonstrate that you’re the kind of person who can be relied on to get the deal done. It’s not just about attitude though: at a minimum, you should also be able to show proof of funds for the deposit and a decision in principle from a lender.
- You’ll naturally benefit from speed by not having another property you need to sell (chain-free is highly attractive to agents and vendors alike), but you’ll climb even further in their estimations if you’re not relying on a mortgage at all.
- You must be aware of the single fact that determines the outcome before you start: the person who needs the deal to happen will end up losing.
Appointing a solicitor
- Once you’ve had an offer accepted, it’s time to appoint a solicitor to act on your behalf. Your solicitor will take care of gathering all the necessary paperwork, making sure everything is in order with the sale contract, and dealing with your mortgage company if necessary.
- In terms of finding a solicitor, referrals are (as usual) the best way – and asking local estate agents for their recommendations might not be a bad idea either. They’ll have worked with every local firm, and will have some insights into who is quick and who really, really isn’t.
- You’ll want to obtain a fixed price quote for the transaction (most firms offer this by default), which will be dependent on the purchase price and involve an extra cost if the property you’re buying is leasehold (because there’s more work involved).
- As soon as you’ve had an offer accepted and instructed a solicitor – you’ll need to decide whether to also carry out a more detailed survey for your peace of mind. Your survey will have no bearing on what the lender will offer you (their own valuation is all that matters), but it will investigate the condition of the property in more detail so you can be more confident that you haven’t missed anything.
- The most comprehensive is Level 3, formerly known as a Full Building Survey. This is only really necessary for old properties, listed buildings or those built using non-standard construction methods.
- Alternatively, rather than undertaking a Full Building Survey, you could instruct an expert (found via Google or the relevant professional body for that type of work) to conduct a specialist investigation into a particular aspect of the property’s condition if you have some reason to be concerned – such as drains or damp.
- More suitable for most properties is Level 2 (costing somewhere in the range of £400 to £1,000, depending on the property and location), which inspects the main aspects of the property and give a “traffic light” rating of their condition.
- Is it ultimately worth it? For flats I’d say “no” unless you want reassurance or there’s particular cause for concern, and “probably yes” for houses if you don’t consider yourself to be experienced in matters relating to a property’s condition.
Tax and accouting
- Once you’ve bought a property in your own name, it’s your responsibility to tell HMRC that they now have another method by which they can gouge money out of you. They’ve got no way of automatically knowing, which is great until they catch up with you a few years later and take action against you for tax evasion.
- If you already fill in a tax return, all you need to do is fill in an extra page for your new property income. But if you’re currently taxed via your employer, you need to notify HMRC of your need to complete a tax return. The easiest way is to call them using the details on their website.
- Alternatively, if you buy a property within a company rather than in your own name, that company will need to file accounts. Then, when you draw profits out of the company, you’ll be in exactly the same position as above: you’ll either declare that income on your tax return if you already complete one, or let HMRC know that you now need to.
- Expenses fall into two different categories: capital expenditure, and revenue expenditure.
- Capital expenditure relates to the costs of acquiring assets (in our case, that means properties), and costs relating to anything you do with that asset to materially increase its value. E.g., actual purchase price of property, legal fees for arranging the purchase, etc.
- Capital expenditure can’t be deducted from your profits in the year in which you incur the expense. Instead, you can only reclaim these costs when you eventually sell the property.
- Everything that doesn’t fall under the category of capital expenditure is automatically revenue expenditure instead. Revenue expenditure is much more like it: you incur a cost today, and can immediately offset it against your income. E.g., any fees you’re charged by a letting agent, any bills you pay as part of the rent, etc.
- In short, I’m saying that by understanding the basics of how property profits are taxed, you can optimise your activities to keep your tax bill down – especially while you’re in the acquisition phase. You can see how, timed correctly, you could avoid making a paper profit for years – perhaps until your income from other sources (such as employment) has dropped off and put you into a lower tax bracket, for example.
- The most successful property traders, meanwhile, are thinking about the sale from the very beginning – while they’re still deciding what to buy – and they see everything else as just steps they have to go through before they can put it on the market.
- When you’re planning your refurbishment, every pound you spend should be targeted at improvements that will induce a potential buyer to pay more at the end. For this reason, I’d recommend getting an estate agent around to see the project and offer advice as early as possible, because they see a lot of houses and hear the comments that hundreds of potential buyers make.
- Whatever your refurb budget, I strongly recommend setting aside some money for professional photos.
- Another highly worthwhile thing to consider (but admittedly more pricey than photos) is staging the property with furniture.