What Makes The Better Rental Property? 

 

Rental Yield ~ is expressed as a percentage by dividing annual rent by the purchase price. For example if you are paying £75,000 for a £100,000 property and the rental income is £500pcm, divide the annualized rent (500x12) of £6,000 by £75,000 purchase price to produce an 8% Rental Yield (see www.bmvpropertyinvestmentdeals.co.uk). NOTE: This does not include acquisition *fees.

Running Costs ~ The biggest cost will be servicing the Buy-to-Let (BTL) mortgage. Most investor/landlords favour interest only loans against 'commercial property', which Buy-to-Let is. Current, typical BTL mortgage interest rate for a 75% loan equates to just over 3% of your purchase price so, unless you prioritize capital growth, rental yield needs to cover your borrowing plus fees to the Lettings Management Agent, if you intend to use one, usually 10% of the monthly rent plus some set-aside capital for routine maintenance plus the premium for a comprehensive insurance poilicy to cover damage. In todays' market, prudent investment suggests a yield of at least 6% to cover costs and generate reasonable, pre-tax excess income. NOTE: Mortgage interest is a deductable business expense.

  

True Market Value ~ When buying below market value (BMV) property, typical saving will be 25% of the open market value. You need however, to satisfy yourself that the discount is true by comparing similar property in the same neighbourhood using any of the leading estate agency websites, Right Move for example. Remember too, that BTL lenders, lend against the purchase price or valuation, whichever is the lesser. In commercial arrangements most lenders do not accept open market value so, do your own due diligence before buying to ascertain your real day-1 equity. NOTE: Remortgaging, after 26-weeks, can release your deposit to roll-over into your next BMV Deal.

Professional *Fees ~ Selling Fee includes: Finders Fee, Vendor Legal Fee and, Marketing Fee. Depending on the specific property deal, the better BMV websites may include some/all of these fees within the illustrated listing, so you only pay the advertised Deal Fee. Buying Fee includes: Buyers Solictor Fee, Mortgage Broker Fee (although you could go direct to lender if you are prepared to do the research) and of course, Lender Fee. Solicitors and Broker fees for a property purchase up to £200,000 should be in the order of £1,000. As with all purchases of goods or services, remember to allow for VAT as applicable. If you are saving 25% against a properties true value, total fees of £5,000 should be very acceptable. Most of our current listings have a Deal Fee of £500, only. NOTE: Acquisition fees are a deductable business expense.

Tax ~ Though numerous rumours abound about what the Chancellor may or may not do with Stamp Duty Land Tax (SDLT), the current position demands this capital tax liability on a purchase price exceeding £125,000 (with exceptions). NOTE: If you are buying Below Market Value at 25% discount you could own a property worth more than £166,000 and pay no stamp duty (Google SDLT for current tax bands).

 

Demand ~ A good indicator of healthy rental demand can be assessed by the number of properties currently listed by estate agency websites in the same neighbourhood. Though no listings or few listings may be a sign of neighbourhood stability, to many families vacating the same street in a short space of time may have social implications so speak with several, local lettings management agents to check out the postcode for reliable lettings (Google UpMyStreet for neighbourhood comment too). NOTE: Always check out the Lettings Management Agency background and experience for your type of property.

 

Type ~ Most recent reports suggest the current, favoured type of Buy-to-Let (BTL) property has shifted towards 2/3-bed family homes. Presumably this is because young couples, who once used to be more transient, now consider future familly considerations a higher priority in a property-scarce market-place. Exceptions to high-demand family homes are the so-called Student Pods. These are purpose built, under-graduate, studio apartments, sharing common facilities, located very close to Universities and Colleges. NOTE: Such BTL investments represent a prime example of a growing marketplace for the savvy investor/landlord (see Blog, 31st October 2011, Student Pods As Investment Property).

 

Refurbishments ~ Given the above as a starting point, and if you are prepared to do the work (or pay someone else), refurbishments may increase rental yield and open market value too. Be sure however, estimated costs of repair are genuine and deducted from the Open Market Value before applying the Below Market Value discount to arrive at a sensible purchase price. For example, if you have researched key-ready property in a neighbourhood that tend to be worth £100,000, and the refurb' you are considering buying requires £10,000 of repairs, apply any discount after deducting repair costs, thus producing a true BMV discount from OMV (e.g. 100-10 x 75% divided by 100 = 32.5%BMV). NOTE: Every month it takes to complete refurbishment effectively adds the lost rent to your costs!

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