October 2, 2020
What are the first steps to becoming a buy-to-let investor?
Despite efforts to stall its growth in recent years, the buy-to-let sector is still the most popular way for people to invest in Britain’s private rented sector (PRS).
And it can be very lucrative. Even in spite of new tax rules which aim to make it less profitable. The PRS now accounts for approximately 20% of all households in the UK, the second largest form of tenure, and it is the largest form of tenure in London (with around a quarter of all households renting).
Average monthly rents remain strong in Greater London, despite the issues caused by the pandemic. Although the situation is less rosy for prime London properties, where data from Knight Frank suggests rents are tumbling.
In the capital as a whole, though, recent research from The Deposit Protection Service found that monthly average rents remained at £1,345 for the past three consecutive quarters, while in Greater London average monthly rents reached £1,611 at the end of Q2, a 1.8% rise on £1,583 the previous month.
Similarly, research from PropTech platform Goodlord found that Greater London and the South East recorded a rise in average rents during August, with London remaining the most expensive place to rent a property – with an average monthly cost of £1,713.
Demand is also remaining resilient, with the latest Private Rented Sector (PRS) Report from ARLA Propertymark showing that the number of new prospective tenants continued to increase in August.
The number recorded during that month was the highest since records began in January 2015, with the average letting agent branch registering 101 new tenants. That broke July’s previous record high of 97.
What’s more, tenancy lengths have risen to an all-time high, with tenants staying in the same home for an average of 21 months.
All of which paints a positive picture for stepping into the buy-to-let market. Even with the obvious challenges posed by Covid-19, Brexit, tax changes and a whole host of new regulations you need to abide by.
Here, we outline how you can get started on your buy-to-let journey.
Know what you’re getting yourself into
It’s important that, as a buy-to-let investor, you understand the market you are entering. And the possible challenges and rewards it brings. You need to be aware of the rules around stamp duty – with an extra 3% surcharge in place for buy-to-let homes. And the rules concerning mortgage interest tax relief, which has been phased down to zero from April 2020.
There are also many rules concerning health and safety, energy efficiency and fitness for human habitation. As well as more everyday factors such as tenancy turnovers, tenancy agreements, void periods, tenant disputes, deposits, fees and repairs/maintenance. The rules on repossession are also very different at the moment, due to Covid. So you need to make sure you are up-to-date on Section 21 and your current rights.
Partner with a local letting agent
The importance of an experienced, reliable professional by your side is more vital than ever. Covid-19, increased regulation and other factors make a letting agent’s role as crucial as it’s ever been. To ensure you are fully compliant and managing your tenancies in the correct way.
A good local letting agent will take the hassle and stress away from you. Making your BTL a hands-off kind of investment – albeit one where you still have the final say and plenty of input. A letting agent will know the local market. They will know the tenant hotspots. They will know how to fill homes quickly to swerve void periods.
If you are looking to become a buy-to-let investor, but haven’t yet purchased a property, they could also help to source a suitable home for your needs. And offer advice on matters such as mortgages, stamp duty and tax.
There is little point in investing in an area with very low demand. As, naturally, you will have to work a lot harder to fill the home and generate a decent return. At the same time, already established tenant hotspots might be too competitive and hard to break into.
You want to pick out the up-and-coming locations – which, whether through regeneration, the arrival of new transport links, or a particular attraction to young professionals and the students (the biggest renting demographics), are about to become a renting hub.
In London, the rental market is fast-moving and ever-changing. A place that is hip one week might be too boring and mainstream the next.
Places like Kennington, Myatts Field, Limehouse, Canning Town, Herne Hill, Stepney and Furzedown might fly under the radar next to their more illustrious neighbours. But all have strong transport links, access to nightlife, nearby green space, restaurants, pubs and delis close at hand, and proximity to universities.
The latter is an important point, as the capital has a huge student population. Along with young professionals house sharing, this is likely to be your biggest market in London. So you may wish to consider investing somewhere with easy access to higher education establishments.
Equally, well-established rental hotspots such as Clapham, Brixton, Stockwell, Streatham, Tooting, Vauxhall, Clapton and Hackney have become very trendy and desirable for a reason. If you’re looking for guaranteed rental demand and a steady supply of rent, these places might be for you. Void periods are very unlikely, although initial investment might be slightly higher.
Capital gains, though, are likely to be greater if you ever come to sell in the future, as demand for homes in rental hotspots will be very high.
Consider your strategy
How many homes do you want? Do you just want a small portfolio of one or two properties or do you want something much larger?
Equally, do you want to invest as an individual or as a limited company? In the latter case, there are tax advantages to incorporating, but downsides too. There are pros and cons to investing as an individual, too.
Are you buying with a mortgage? If so, which type of mortgage? And will you self-manage or decide to use a letting agent?
There are a lot of things to get your head around before starting out as a buy-to-let investor, which is once again where the guiding hand of an experienced operator is vitally important.
Here at Atkinson McLeod, we operate in some of London’s biggest rental hotspots – and many of its up-and-coming ones, too. We have expert knowledge on what tenants are looking for, and what they’re not looking for. And we know the locations that are best to focus on.
If you have any questions about selling, buying, letting or renting a home in the London area, we are here to help.
To find out more about our services and current operations, please get in touch with our expert team today. You can find out how much your home could be worth on the current market by requesting a free and instant online valuation here.