When first considering investing in property, it’s important to define your goals why are you investing? What do you hope to achieve? Are you planning to retire from a stressful career, creating a sustainable income in retirement, to leaving a legacy for your children.
On this latter point, we’ve noticed an increasing trend whereby the recent pension freedoms have led to people using their pension pots to invest in property to achieve a monthly income for the rest of their lifetimes (in a way, a substitute pension). Many people are choosing to use some of the funds to help children and grandchildren during their own lifetime, rather than leaving money in a Will or Trust, which affects their investment strategy.
Options when investing
There are three main routes in terms of property investment – buy-to-let (BTL), flipping (refurbishing a property and then re-selling it at a higher price), and property development (obtaining planning permission and building one or more properties from scratch). You may also have heard of a few other possibilities, including Rent to Rent and lease options. Serviced accommodation is now increasingly a way to invest in property, especially if you have a property with multiple rooms and do not wish to rent to longer-term tenants.
There are probably some other avenues you haven’t considered; our investors have had a lot of success with commercial to residential conversions in recent years. This seems to be something of an emerging trend, possibly fuelled by High Street trade dropping off, following the 2007-08 financial crisis and alongside the growth of online shopping (eCommerce). We have qualified Planners on our team, so you’ll benefit from our in-house experience in obtaining planning permission and working within the myriad requirements for such conversions (there are a number of restrictions and laws relating to such change of use conversions). We’d be happy to talk to you about what’s possible.
The best option for you will depend on your goals, but also on your skill-set and experience, as well as the time and money you have available to invest. Many investors start out with BTL, and use this as a vehicle to build their capital. As they gain experience, and develop their working relationship with the team here at Shape Property, they branch out into more than one area of property investment.
On the other hand, if you’re a builder by trade, it may make more sense to you to begin with flipping, and look at developing your BTL portfolio later on. When you come and talk to us about your investment goals, we’ll discuss all of these options with you, and advise you on the right pathway for your circumstances.
FINANCING YOUR INVESTMENT
Many people think that a BTL mortgage is the only way to finance their investment, and it is indeed a common method (especially for landlords with only one or two properties), but there are many other potential avenues.
One potential pitfall to the aware of with BTL mortgages is the EU Mortgage Credit Directive, which came into effect in March 2016. Essentially, the Directive says that mortgage applicants can be classified as ‘consumer’ or ‘professional’ landlords. A full discussion of the potential implications of this will be discussed in another blog post. But it would suffice to say that if you have an existing BTL mortgage and now wish to remortgage, the new financial stress tests may prevent you from receiving the best rate (or, in the worst case scenario, from remortgaging at all). With that said, overall, BTL mortgages will remain a popular and effective method of finance.
So, what other methods of finance are available to you?
If you own your own home, you could use capital release to draw down from your existing mortgage, and use this to make your first investment in property. With the pension freedoms brought in last year, an increasing number of people are using smaller pension pots – which are of an insufficient size to provide the hoped-for income – to make investments. Of course, we recommend that you take professional advice from an independent financial adviser when considering making any such decision.
Bridging loans are also a possibility (if you are looking at flipping, for instance), and we have a specialist dedicated adviser who can talk you through the options available.
An important factor in all of this is how to minimise your tax position, and we are able to advise you on this. For example, we might suggest setting up a Special Purpose Vehicle (SPV) – and if that’s the right solution for you, we have the expertise to handle all aspects of setting up and operating an SPV on your behalf.
DO YOUR HOMEWORK
If you intend to purchase a BTL property, the first stage in your research is to define your ideal tenant. For example, do you intend to rent to young professionals, students, or families? Deciding this will inform your decision about what type of property to buy, as well as what location will be most desirable to that type of person. For instance, young professionals may be willing to pay a premium for a home close to the city centre and public transportation, whereas a family may prefer to live in the suburbs with a nice garden and a good school nearby.
You should also research whether there are any planned improvements or building works taking place in the area. For example, if a new train station is being built, this could attract commuters to the area and indicate that rental (and house) prices may rise over the coming years. If you buy in such an area now, you could be getting a good deal, both in terms of cash flow and capital gains.
An RICS Surveyor can do this research for you – a surveyor can offer a full property search and selection service. Even if you have the time to do the research yourself, you could still benefit from our service, as we liaise with our industry contacts to offer you deals as soon as (and sometimes even before) properties come onto the market. Also, we’ll only present deals to you that meet our minimum criteria for what makes a good investment. In general, we’d consider between 10-15% ROI as a good investment, although this will vary depending on the specific type of deal you’re doing. For example, for BTL investments, anything between 6-8% is a decent yield, whereas for Houses in Multiple Occupation (HMOs) we wouldn’t consider anything below 11% to be worthwhile.
Another thing to keep in mind with BTL is that you should be buying for regular monthly cashflow, not for capital gains (not least because predicting price rises has something of the art of crystal ball gazing to it).