First Time Landlords
Helpful advice from Bishop Sullivan – Residential Property Letting Agent and Property Management Agent in Brighton, Hove, Kemptown & surrounding areas.
Rental property management tips and guidelines for first time landlords. What should you know? How to deal with problems.
Research the market
- What do you know about the market? Do you know the risks as well as the benefits?
- Even though rates are low now some savings accounts may offer a better return than some potential investment properties out there.
- An investment in funds, shares or a trust through an ISA is tax free and can usually be sold up fairly quickly however you cannot give a tired and unloved investment fund your time and care to increase its value.
- Capital Gains can work in your favour in strong markets however it can also have a negative effect when markets change.
- Speak to anyone you know who has experience in this industry as ask for their opinions, warts and all.
- Choose an area that looks promising rather than established. In short this means somewhere that people would like to live for a variety of reasons.
- One method is counting skips outside residential property and local supermarkets (Waitrose = too late!)
- My favorite method is Coffee vs Chicken. Posh coffee shops, no fried chicken shops = too late. No coffee shops and too many fried chicken shops = too early. A good selection of (EG) Costa’s and not many chicken shops with low house prices means the porridge is just right.
- Do commuters like it? Are there plenty of schools for families? Do students want to live there?
- It is logical it make an investment close to where you live as you know the area already and it will be easier to keep tabs on the property.
- Don’t forget that it can also be advantageous to have some distance from your Tenants.
Look at the money
- Sit down and write the all of the likely costs involved in buying, the rent achievable and letting costs.
- BTL investors tend to aim for the rent to cover 125% of the mortgage. Mortgage companies are generally requesting a 25% deposit or more at the moment for rates which are much higher than residential deals.
- There are also arrangement fees to consider.
- Don’t forget to include maintenance costs and letting agent administration fees (as well as the commission).
- What will happen if the market changes and you end up with a void period?
- All of these worst case scenarios need to be considered.
Get the best mortgage deal
- It pays to speak to a decent individual broker as they can take you through all of the available deals and also help decide which one is best for you and your needs (EG fixed or tracker).
- Shop around yourself also to ensure you are aware of what sorts of mortgages are on offer.
Who is your target Tenant?
- A common mistake is to picture yourself in the property, instead picture your target Tenant and try to imagine who they are and what they want. For example students would want something that is comfortable and easy to clean, professionals would want modern and stylish and a families a blank canvas as they are likely to have plenty of possessions.
- Allowing Tenants to make the property ‘look like home’ will usually result in longer Tenancies.
Keep your options open
- Where you live is not always the best place to invest in property, so although you may not be able to keep a close eye it is worth looking further afield.
- Look for towns with good commuter links, popular with families or have universities.
- Properties which need renovation are also desirable as you can negotiate harder on the price and, with varying amounts of effort, improve the value. Remember to include refurbishment costs in your plan. A rule of thumb is the final value of the property to be at least the purchase price + cost of work + 20%.
- Your advantage is the same as a first time buyer so do not be afraid to negotiate on the asking price.
- You are not reliant on a selling your property, you have no chain and have a lower risk of a fall through.
- Make sure you know your market also for example in the winter properties tend to take longer to sell so you can use that to your advantage.
- Or a Landlord selling an investment property that has been owned for a long time with a high increase in capital value may be more willing to negotiate than a family where every penny counts for example.
Aim for yield and don’t forget costs
- Experts say to invest for income not short term capital growth. To compare properties use their yield = annual rent received as a % of the purchased price. Feel free to use our Yield Calculator on the right of this page.
- For example a £150,000.00 property with an annual rent of £9600.00 delivers a yield of 6.4%
- How do you work out the return then? Like this:
- A £150,000.00 property with a rent of £800.00 PCM you’d need £25,000.00 deposit and approximately £2500.00 of purchasing costs.
- £125,000.00 mortgage at 5% interest = £6249.96 per annum (£520.83 per month)
- £800.00 PCM = £9600.00 per annum
- The difference = £3350.04
- Deposit + purchasing costs = £27,500.00
- Annual return – £3350.04/£27,500.00 x 100 = 12.18%
- Don’t forget VAT, maintenance and other expenses such as letting agent administration fees that will reduce this figure.
- Most BTL mortgages are interest only so ideally you will want to keep the rent at the market rate and build up funds to either invest in another property or pay off the mortgage on a future date. Not only that you will also benefit from the gain in capital value on the basis it increases over time.
Know the worst case scenarios.
- House values and rent can go down as well as up.
- If either dip can you continue your investment project?
- What if the current low rates on offer increase?
- What if your property was empty for two months? It is advisable to be able to cover this period just in case.
- What if a large maintenance issue occurred such as a new boiler? You’d need enough in the bank to cover this without causing a cash emergency.
Hands on or hands off?
- Once you have secured a property you will need to decide whether you want to go into the unknown and rent it out yourself or use an Agent for varying levels of service.
- If it is the former be prepared to lose evenings and weekends for viewings and maintenance issues!
- If you have a look at the services offered on the main Landlord page you can see what Bishop Sullivan offers and fees charged.
- Finally, you may want to read Letting Tips on the main Landlord page.