Do you know that hits on the property portals more than double between Christmas and New Year? As the new year approaches, we hope to see a property market reinvigorated by the General Election results and the prospect of an end to uncertainty – this certainly seems to be the view on most of the online 2020 forecasts. This change combined with a need for many to find a good alternative to a pension will mean many people are currently considering whether they should invest in a buy to let property.
There are many excellent buy to let mortgage deals around and Letting Agent Today reported in December that mortgage costs for buy to let properties had dropped over the last 3 months; the cost of a 60 per cent loan to value (LTV) two year fixed buy to let mortgage, for example, is now 1.7 per cent lower than it was 12 months ago.
Buying a property to let is a very different process to buying a home for you to live in and it’s definitely a time to ensure your heart is NOT ruled by your head. As a landlord, you are running a business, so your priority should be to thoroughly research the property’s earning potential and what it would cost to put on the rental market.
We are all well aware that there is more to a property than its purchase price. Another factor to take into account, for instance, is how much will it cost to transform the property into one that is ready to rent? This has the potential to run into tens of thousands of pounds, so analysing each property carefully to assess what additional investment it will need is critical. Plans must include a contingency fund for those unanticipated repairs that might be required.
Even if the property appears to require no renovation, it will need electrical and gas safety checks, which may lead to additional work being necessary, such as an energy-efficient boiler to help the property earn an EPC rating of E – now required before a tenancy can be commenced or renewed. Higher EPC ratings of C are on the cards for the future, so this is definitely something worth considering if you want to avoid further expense down the line.
As well as the costs of any work needed to make the property ‘rent ready’, you need to consider the costs of the void period while the property is being prepared to rent, including utility bills, mortgage payments and council tax. Tunbridge Wells Borough Council no longer provide any form of council tax discount for empty properties whether undergoing minor repairs or major structural works to make a property habitable.
These are some of the costs you could incur before you get your first tenant in. It can be helpful to calculate these when comparing properties.
- Purchase costs these include the deposit, legal fees, stamp duty, mortgage costs and survey fees;
- Preparing the property for rent including gas and electrical safety certificates, plus any repairs or renovation;
- Costs until you rent the property, including mortgage payments, council tax, utility bills and, if leasehold, any service and ground rent charges.
You will need to weigh these up against the capital growth you could achieve if you sell the property in five, 10 or 20 years, as well the purchase price of the property and its rental income.
There are several ways of calculating yields, so it’s important to use the same formula each time in order to make a fair comparison.
A simple way is to divide the annual rental income by the purchase price.
For example:
£7,200 annual rental income divided by £150,000 purchase price equals 0.048, a yield of 4.8%.
If you would like any help in comparing different properties and deciding where to invest, I am always happy to advise, so please do get in touch by email to Natalie.boardman@belvoir.co.uk or call me direct on 01892 615406. Alternatively, pop in to the office at 15 Vale Road, conveniently located opposite the Tunbridge Wells train station during opening hours to speak face to face.
