One question is asked more than any other at property investment shows and it’s about exit strategy. Not that investors necessarily know that’s what they are asking.
They enquire if they should buy more properties or sell some. How much tax they will pay if they sell a certain property. Or how many properties they need to buy to live comfortably. Occasionally, someone says they own 30 houses and doesn’t know what to do next.
It all boils down to the same thing; knowing how and when you want your buy-to-let investment to end. Only then will you know where to start.
There are broadly three reasons for investing in a buy-to-let property: for a pension; for financial freedom; and to pass the property on to one’s children.
There are two ways of achieving the first two. “First, by generating income from properties and second, through capital growth which can be re-invested once the properties are sold,” says Kate Faulkner, director of Designs on Property.
Passing property on to children is an inheritance issue that “typically means generating capital growth or a property covering its costs. Then the child moves in and takes over the running costs,” Faulkner adds.
Most people want a combination of capital growth and rental income from a buy-to-let property, but in today’s climate that may not be easy.
“Properties which offer capital growth typically give less than seven per cent income return, so you aren’t likely to generate much income unless you buy the property outright. Properties giving higher income returns usually aren’t in areas where properties are growing in value,” says Faulkner, citing north Nottingham, where some flats are selling for their 2002 prices.
Many landlords forget that they buy property to make money. “They stick with tenants they like rather than take on new ones who will pay a higher rent,” says Robin Campbell, director of sales at investment company Midas Estates.
“An experienced mortgage broker will ensure you are always on the best products to meet your goals.
“Otherwise, you could delay your exit. Also do a six-monthly valuation of your property, along with rent and mortgage reviews, to assess where you stand equity-wise.”
If you don’t set yourself capital growth or income targets, how do you know you have invested your money in the right asset?
“You won’t know whether you should sell up or retire now, or if you should buy more properties or if you should be cashing in,” says Faulkner. “It would be like running a business without a business plan. The bank wouldn’t lend you money without one.”
Landlords should look for a minimum of 125 per cent rental income compared with the monthly mortgage payment as that is what lenders demand. Bear in mind that this income is subject to tax, so you may not want to exceed this figure substantially.
“Landlords with multiple properties will typically borrow as much money against the property as possible while keeping it self-financing,” says Samantha Cooper, MD of the Somerset-based mortgage firm Cooper Associates.
“This type of investor, who isn’t concerned about drawing an income, will keep borrowing money against their investment properties as property prices rise. They will use the capital drawn to redeem their own residential mortgages quickly, and to mitigate income tax on their investment properties.”
According to Rightmove, 30 per cent of BTL investors expect a minimum gross yield of five per cent. An ambitious 11 per cent want at least 10 per cent.
Swansea is one place to look for that, says James Davis from online lettings agency Upad. “House prices haven’t changed in five years, but I’m getting 11 per cent gross yields and rents are rising by 20 per cent a year, due to a growing tenant pool, mainly of priced-out would-be first time buyers,” he says.
Many landlords under-estimate how much they will need to spend on maintenance — about 10 per cent of your rental income, estimates Jonathan Monjack, founder of the Happy Tenant Company, who can reduce those costs for landlords through the power of group buying.
Other landlords fail to maximise their property’s profitability by offering the wrong product for the market. Davis suggests modifying the property to match demand.
“If a new university campus is opening, convert your house into self-contained units for students. If a big employer is arriving locally, convert a house into flats to suit young professionals,” he says.
Don’t forget: your property is a business. And no business thrives from its owner sitting back and letting it run itself.
For information on how to maximise your returns, minimise costs and stay in control, visit Direct Line’s dedicated Landlord Knowledge Centre atdirectlineforbusiness.co.uk/knowledge-centre.
