"Speak to a broker that understands buy-to-let mortgages. Don’t assume your current broker does. Even better, use a broker that has their own portfolio, as they will have a deeper understanding of what will work for you."
- Matt Cottle - MVC
While blowing the froth off an ice-cold pint of Madri in our local pub the other day, I got into a conversation with one of the regulars, a decorator, telling me about a house he was currently refurbishing. He told me a horror story about a first-time landlord who had spent a fortune buying and renovating the place to a particularly high standard.
Knowing the property under discussion, I listened intently. Once refurbishment was completed, the poor first-timer made the fatal mistake of accepting a mate-of-a-mate tenant who proceeded to screw him for the rent after a few months in situ. After a lot of ill-fated negotiating, it had taken him another 6 months to get the scumbag out as well as a couple of grand in court, solicitor and bailiff fees.
To add insult to injury, the tenant had allowed dogs to urinate and defecate at will, even up the walls somehow. Several doors had been punched through (heeere’s Jonny!) and the bathtub had a large crack through the middle of it. The dogs, presumably, had been locked in the kitchen all day and had chewed off the corners of the cabinets and scratched through the kitchen door. Delightful.
I sipped at my pint while he regaled the finer details of this poor chap’s tenant-from-hell story. Then, knowing I’m a landlord myself, shook his head and told me how mad I must be to be in this business. I sympathised and offered my condolences to his client.
Unknown to him, this wasn’t my first rodeo. I’ve heard this story a hundred times in various guises, all with the same connotations:
· New investor falls in love with a house, enters a bidding war at the top of the market and ‘wins’ (loses).
· Rips out a perfectly good property and replaces it with expensive fixtures and fittings suitable for their own standard of living.
· Rents out the property undervalued to a friend or family member, who decides that paying rent is overrated.
· Tenant goes on to have drunken quarrels with exes or new boyfriends/girlfriends, annoying the crap out of the neighbours and resulting in damage to the property.
· Shortly after, the whole project goes south.
It is a tale as old as time itself.
After all the hard work and investment, the landlord has been screwed over. Then there’s blood, sweat and tears of removing them. But finally, the circus has finally left town. And the only loser is the landlord themselves. What a mess.
The damaged house is hastily put back together and then sold on quickly - usually for less than they bought it. The nightmare is over. The sleepless nights can be scratched out. The retirement plan is on hold. They tell their story to all and sundry with a tear in their eye.
Out come the tiny violins and the story is repeated a hundred-fold. Everyone around them holds their hands to their cheeks, mouths agape, learning the horrors of being a landlord.
Yes, they’ve just learned that landlording is a business. And like any other business, if you don’t know what you are doing, prepare for an unequivocal dry-humping.
You may have heard of the saying: “A little knowledge is a dangerous thing”.
This is never truer than in the game of property rental. Like a Catherine wheel with a dodgy fixing, things can go off-piste and cause chaos very quickly in the wrong hands.
Enter the speculator:
He has heard so many times about the advantages of property investment: you can buy a house fairly cheaply, spend some money making it pretty, make a profit from the net rent and generate capital growth just by owning the property itself. What could possibly be so hard about it?
He cannot procrastinate any longer and has seen a property in which he has developed a whimsical attraction. It has darling rosebushes growing around the front door and his wife has already fallen in love with a picture of it (neither of them has seen the rotten roofboards and damp patches).
Not wanting to disappoint, he goes to see it and makes an offer which is then turned down. He is in a bidding war with two other parties and is determined to win. He increases his bid and… bingo. It will be their first rental property of many. He contacts a mortgage broker and buys the property in his personal name, not understanding the tax implications of doing so.
A version of the above story then unfolds. It’s often a disaster from start to finish and it all could have been avoided if the right advice had been sought in the first place. It’s no surprise that almost half of Britain’s landlords own just one investment property. Perhaps they were so damaged by the experience, they didn’t or weren’t able to do it again?
Let’s reverse the exercise back to the beginning and look at it like a professional investor would:
1. Buying
This is not your home, and you will probably never live in it, so you do not need to feel it in the same way. Tenants want clean, warm, efficient properties close to bus stops and major roads and public services like doctors, dentists, takeaways, schools, pubs and supermarkets.
I don’t know about you, but I prefer to be away from the hustle and bustle. That’s the difference between the needs of a homeowner and a tenant.
Look for houses that have been on the market for a long time. They probably have had sales already fall through. The seller will be on the ropes and motivated to make a deal. This is a numbers exercise so do the numbers stack up?
The price you can offer has to consider all the costs first. Work backwards from its value once renovated and the rent it will achieve, taking away all the costs to acquire and refurbish it plus 10% for the unseen. This will leave you with the maximum amount you can offer. Walk away from bidding wars and don’t exceed the max offer.
2. Yield and Return on Investment (ROI)
If you don’t understand either of these before you buy, you will probably end up in hot water. You must learn what they mean and why they are so important.
Yield is the annual rent divided by the purchase price. You should be aiming for around 7% or more.
ROI is the annual net rent divided by the actual amount of cash you have put into the property to buy and renovate it. Look for double digits. The higher the better, but never settle for anything under 10% that’s for sure.
3. Limited Company
If you are procrastinating about the structure in which to buy a rental property, let me help you: do it through a new limited company. Set it up yourself online or ask an accountant to do it for you. Organise a bank account as soon as you have your certificate of incorporation and credit it with the funds to complete your first purchase and renovation.
This will become a director’s loan from you to the company. You can lend the company more money at any time. This will increase the loan balance owed to you. You will be able to draw this money back as and when you wish as cashflow allows.
Until the loan has been fully drawn back by you, there is no need to take any form of other income from the business, as this will trigger a tax or national insurance bill.
4. Mortgage
Speak to a broker that understands buy-to-let mortgages. Don’t assume your current broker does. Even better, use a broker that has their own portfolio, as they will have a deeper understanding of what will work for you. Analyse and understand the costs of a mortgage over, say, a 5-year period Rarely is the lowest monthly payment the cheapest mortgage.
Always put down 25% or more. If you cannot do that you cannot afford it. Look for something in your price range.
5. Refurbishment
Once a property has completed, you want to be in and out in 4 weeks maximum. That property needs to be rented out – it’s costing you money every day there is no tenant paying the bills.
I always look for properties with boilers that are in good working order, because they are expensive to change. I also look for newer properties that do not need rewiring. Most importantly though I’m looking for good or repairable kitchens and bathrooms.
There is no need to rip out perfectly good fixtures. They can be made good again for a fraction of the price. A well-refurbished kitchen can last another 5 or 10 years and save you an awful lot of headaches and cash.
You will be surprised how many properties have zero kerb appeal yet have all their faculties in order once you scrape back the layers and show them some love. I have bought many an ugly duckling over the years and with a wave of my magical experienced wand, they are ready to attend the Royal Ball in no time, astounding all around them with their hidden beauty and bagging the handsome prince to boot.
6. Tenants
Talking about handsome princes, this is what I mean - tenants. After all the effort you have put in thus far, you must ensure the person who is meant to be paying the bill, will do so. A tenant will make or break your investment, especially if it's your only investment property.
Get an agent to do a viewing day with 15-minute slots. You want all the prospective tenants parked outside, eyeing each other up. It creates competition, driving up the desirability and justifying your sky-high rent - good tenants will happily pay for the best properties.
Present the property beautifully with freshly cut lawns, air fresheners, door mats, heating and lights. Insist on shoe covers, put out hand wash and a fresh towel in the bathroom. Clean the toilet and put out a fresh loo roll with a little bow on it. Your prospective tenant will fall in love with it.
Once you have your shortlist, do your homework. Insist on seeing 12 months' bank statements. Check their net pay matches their payslips and they have paid their previous landlord in full and on time.
Overdrafts are not acceptable, neither are betting habits. Check their social media – are they troublesome types that stick themselves to motorways on Saturday afternoons or are they lovey-dovey types who prefer to celebrate weekly family birthdays? Swing past their old property to see if they are a good fit for yours.
A word of warning though: there is no guarantee that any of the above will prevent your investment from going sideways, but by applying the principles that have helped me build a well-performing portfolio, you now have a damn sight better chance of survival. Good luck!
