As the UK property market continues to soar to new heights, property investing remains relentlessly popular.
Yet with average house price in the UK increasing by £8,000 in February, representing the biggest month-on-month rise for 20 years, and average house prices standing at the highest they have ever been, it becomes harder and harder for anyone to invest for the first time.
Here are some tips on things to consider and how to persuade a lender to support you in your ambitions if you want to join the property investment movement.
Even cheap property is expensive nowadays and unless you have a very large amount of cash on hand, borrowing money is the only way you are going to be able to start your property business. Debt isn't a bad thing if it can be channelled into an appreciating asset or a source of income that exceeds the cost of servicing the loan, so don't be afraid of it.
Decide from the outset whether your intention is to hold on to the property and rent it out (buy-to-let) or to undertake a quick refurbishment and sell it on (buy-to-sell). The type of loan that you need and the lenders' criteria will be different in each scenario.
Investment properties come in many different forms.
You could buy a dated or neglected property and refurbish it for sale or rent; you could buy a brand new property from a developer, either complete or 'off plan', for rent; you could buy student accommodation, or other property with more than one tenant (known as a house of multiple occupation or HMO); or you could even buy commercial property - a shop, an office or a warehouse, for example.
The type of property that you invest in will have a bearing on your obligations as a landlord, the potential income yield, the type of tenant that you are likely to attract, and how easy it will be to liquidiate your investment if you need to. All of these contribute to the risk of the investment, which will be important to you and will certainly be important to the lender.
Every lender will expect you to make a contribution to the purchase price from your own resources. Amounts vary, but are typically in the range of 25%-50%. You will often see this referred to as the maximum loan to value, or LTV for short. As a first time investor, you may find that you are required to make a larger contribution than an experienced investor with a portfolio of properties.
Taxes and fees can mount up quickly and most lenders will expect you to cover these yourself. In all cases, there will be valuation fees and security fees from the lender, and legal fees to process the sale. Remember too, that stamp duty is higher on an investment property. If you are buying to let, amongst other things, you need to account for letting-agent fees, insurance, and maintenance.
Depending on how you structure the investment, you will have corporation tax to pay if you invest through a limited company, and income tax and capital gains tax to pay if you invest in your own name. Seek advice from an accountant on the right structure for you.
Rental yield is your annual rental income expressed as a percentage of the property value. This is the accepted way of working out your return on investment relative to other opportunities you may have. As a rule of thumb, 5% is generally considered OK, and 8% desireable. The cost of any borrowing will be a deduction from your rental yield, so you need to be sure there is a good enough margin available to make the investment worthwhile. The lender will assess this too.
When calculating rental yield, you should allow for maintenance costs and periods when the property is empty e.g between tenants. These are known as void periods; the longer they are, the greater the drag on your return.
The potential for capital appreciation is probably what attracted you to property in the first place and is something else that you can factor into your return calculations. Remember, though, that you can only realise this gain when you sell. If you are buying to refurbish and sell, your forecast profit before tax and return on investment will be the capital appreciation achievable relative to the total cost of the refurbishment.
Like the properties themselves, lending products come in all shapes and sizes and it is important to match the right product to your needs.
If your strategy is to buy-to-let, then you will need a buy-to-let mortgage. This is a term loan on either a fixed or variable rate, normally for up to 10 years, although up to 25 years is possible. Repayment can be interest only, meaning only interest is covered each month. The capital is repaid at the end of the term through the sale or refinancing of the property. The alternative is capital repayment. Here, monthly payments cover interest and also reduce the capital outstanding, much like a residential mortgage.
A buy-to-sell project is most likely to need a form of bridging loan. This is a short term loan, more often than not interest only, to allow you to buy the property and undertake any improvements before putting it back on the market for sale. These loans are invariably on a fixed monthly rate - 1% per month is not unusual. The risk with a bridging loan is that the project over-runs on time or costs. This can make the borrowing expensive and quickly wipe out any projected profits.
All products have arrangement fees, possibly around 2%, as well as the cost of the interest.
As a first-time property investor, one of your main challenges is going to be finding a lender happy to lend to an investor without experience - it is one of those classic Catch-22 situations. A larger than minimum contribution will help your cause here, as will a well presented business case.
Avoid going from lender to lender and amassing a collection of declines. Not only is this demoralising, it can also make the job of finding a lender who will say "yes" even harder.
Instead, talk to a regulated finance broker. He or she will know which lenders have the best appetitite for first-time investors and the type of property you are wanting to buy. A broker will also help you gather the required information and present your application in the best possible way.
If you would like an introduction to one of our panel of experienced and regulated brokers, please get in touch.
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