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FAQ
 If you’re thinking about investing in rental property but still have some questions that need answering then read on for some useful advice on a number of key issues. Simply click on one of the questions below to find out more...
If you have a property investment related question that isn’t listed, please email us and we’ll do our best to help you.
Why Buy To Let?
There are many reasons why people invest in Buy To Let property: some make the move after becoming disillusioned with the returns from their stocks and shares or private pensions; some want to generate funds to enhance their retirement income, or even to use as the main source of income when they retire; and others are attracted by high capital potential as the housing market has been growing slowly since 1996 and has gradually intensified from 1999.
The main attractions of investing in property are:
- It’s a tangible asset that you can see, use, rent out and improve the value of.
- Long-term capital value has risen at an average of 8% each year over the last 100 years
- Property can yield an attractive rental income.
- The whole venture can be managed by letting agents without the need to be close by
- There are significant tax advantages
- Demand currently outweighs supply in the housing market
- Strong employment, high GDP growth and more single households mean good capital gains potential
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What makes a good investment?
The golden rule with Buy To Let is to invest in property with strong rental market appeal and to make sure you don’t pay over the odds. Ask local letting agents to advise what kind of properties are the easiest to let out, but bear in mind that a flat with 2 double bedrooms above a shop but near to a station rents out considerably faster than a similar one in a nice road that is 15 minutes’ walk from the station, and costs considerably less to purchase too. Also, a large 6 bedroom house in fairly good condition with no garden but close to a university could bring a high yield if rented to a group of students, yet a similar house with a large garden in a leafy suburb could be extremely difficult to let as there aren’t many large families, and they also tend to prefer properties in very good condition with new kitchens and bathrooms.
However, good value 1 or 2 double bedroom flats that are close to a city centre with good transport and communications are a great purchase. You shouldn’t really have any problems, but make sure you liaise closely with local letting agents as each city and area has its own micro-market.
If you have a certain area in mind, it’s best thing to draw up a plan of all local organisations, colleges, train stations, major roads, office blocks, parks and amenities. Then look at the cost of flats or houses, look for areas that are up and coming to get the best value for money. If it looks like transport and/or communication links are likely to improve in the future or new job centres are opening, even better.
After you’ve done this, map out a target search area and ask local agents about the rental market. What’s the best type of property to buy for rental purchase and where’s the best place to buy in the area? How long would it take to rent out and what are the void periods? Make notes, refer back to your plan and decide on the type of property and the area where you want to buy. Also, remember that the more properties you see, the more likely it is that you’ll find a bargain so view at least 10 properties before putting in an offer. Most property investors make the majority of their future money when purchasing a property.
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Where should I buy?
Most investors tend to focus on buying a property fairly close to home, making it easier for them to find good deals and manage the property. However, you could also choose to also operate remotely and purchase property much further away; this way letting agents fully manage the property for you.
Most investors look for 2 things, potential for capital value growth and rental yield. If a property ranks highly in both these areas and is also a low risk, it’s the ideal investment. Areas of high yield are where prices are low and rents are high, with good overall letting demand. It’s also worth considering areas with lower yields but particularly high potential for increases in capital value and also in places where positive change is occurring, such as new railways, roads, hospitals, sports centres, jobs, and injections of public and private funding.
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What are the general trends to consider?
The market to target is that of the baby-boomer, this generation is currently between 42 and 58 years old and has just started to retire, or partially retire. They typically find themselves living as couples again after raising a family, so there could be a shift in property trends from large suburban family houses to smaller luxury apartments with 2 double bedrooms, either in city centres or holiday resorts along the coast. Some will prefer picturesque cottages or farms in the country, so these are options to consider too. Not forgetting the young professionals who will want smart, smaller city-centre apartments.
As families are increasingly on the smaller side, the average 4 bedroom detached house in the suburbs is likely to see a fall in popularity. Many people prefer the convenience of city living with its café culture and access to main roads and airports for travel, so bearing all of the above in mind, the best places to consider are those right in the centre of a city, out in the country, in coastal resorts or higher class market towns and close to universities. There are also those who want to retire to warmer climes, so buying a ‘place in the sun’ is also an ideal investment opportunity.
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How much money do I need to invest in property?
This depends on the location and value of the property you want to purchase. Instead of talking amounts let's think in percentages. As an investor you can get a Buy To Let mortgage for up to 85% of the value of the property, this is not based on your personal income, but on the potential rent of the property. As a general rule you need at least 10% of the purchase price as a deposit, however it is possible to buy property without investing any of your own money.
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How can I raise the finance?
Most investors will use a Buy To Let mortgage. Most banks and building societies will lend up to 85% of the purchase price. Lending criteria varies, but banks have a tendency to lend based on a combination of the following:
- Gross rental income – this usually needs to be at least 125% or 130% of the yearly borrowing cost and is based on the standard variable rate buy to let mortgage rate at the time
- Value of property – the banks will value the property independently and lend either 75%, 80% or 85% of the valued price, but this may be lower than the offered sale and/or asking price
In addition, they may look at your earned income or a combination of your earned income and the property’s rental income and if you have a large property portfolio, your overall borrowing level and rental income level will also be checked.
If you have a regular income from a job, this will be preferable to the lender, followed by self-assessment and then someone without a regular earned income. Some banks and building societies will even lend on buy to let properties without regard for your earned income.
Most banks will lend to individuals although commercial lending to individuals or companies and/or groups of individuals is also possible, though it may not be possible to raise more then 60-70% of the price.
Around half of all UK-based banks and building societies now lend to expatriates and if the borrower is likely to return to the UK in the foreseeable future, this could reduce the lending risk for the banks, making it easier to raise finance.
Most banks evaluate a purchase on a case by case basis; if you’re buying a property at a low price and with high rental yield, have a steady income and need to borrow around 80%, most banks should lend on the property. You’ll have to provide evidence from an independent letting agent that the estimated rent for the property covers 125% or 130% of the mortgage payments (if the property is not currently let out). If this isn’t the case, they would usually still lend to you, but it would be a lesser amount rather than 80%.
This means that you can build up a property portfolio where you only put in around 20% of the funding and borrow the remaining 80%, this is known as leverage. If prices go up by 20%, your equity is doubled, however if prices fall by 20%, you will have lost all your equity.
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What kind of tax will I have to pay?
There are four main taxes involved: stamp duty, income tax, capital gains tax and inheritance tax. It’s best to talk these through with your accountant or tax advisor but here’s a short summary…
Stamp duty is payable when you purchase a property worth over £120,000; the amount you pay depends on the value of the property. Stamp duty for property between £120,000 and £250,000 is 1%, from £250,000 to £500,000 is 3% and for properties over £500,000 it rises to 4%.
You pay income tax on earnings and this includes profit from renting out a property. The profit is calculated from the remaining rent money, once all allowable expenses have been deducted. (these include: interest on your mortgage, insurance, service charges, management fees and maintenance costs).
Capital Gains Tax (CGT) is payable on the net profit of a property once it’s been sold (this doesn’t include your main residence). To calculate the net profit, deduct the purchase price of a property and any capital costs from the selling price. There are also various allowances and with careful planning it’s possible to lessen the CGT on many of your investment properties.
Inheritance tax is charged after your death and is based on the net value of your estate (less your personal allowance). The net value of your estate is calculated by taking the value of all your assets less any debts you may have. As you can imagine property investors can have very large estates so it’s vital that you make provisions to lessen your exposure to inheritance tax.
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Is there going to be a fall in house prices?
People have been talking about an impending UK house price crash for the past 5 years. Each year, prices have slowed then sped up again which could be a sign of an overall market price correction, to spark lower interest rates. Most forecasts do not expect interest rates to rise again above 5.5%, which is three times lower than the 15% peak of 1990. Also, inflation is not expected to rise above 2.5% which is mainly due to efficiency in the global economy, technological advances and improved worker productivity. Consequently, mortgage payments are still pretty affordable for the average person.
One comparison we can draw is how growth in UK property prices relates to that in Europe. Ireland, for example, has experienced a four-fold price increase over past 10 years and their interest rates are around 3.2% as they are in the Euro, which is far lower than in the UK. So if the UK starts to converge with the Euro, interest rates will have to drop and this will prolong the market correction. As long as prices rise at a steady 20% per year, earnings at about 3-4%, unemployment remains good, inflation is under control and interest rates are roughly 5%, there shouldn’t be a reason to panic about a crash. In a healthy and relatively well managed economy such as the UK, there shouldn’t be a problem unless prices rise above 25% throughout the country and interest rates rise significantly.
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Is it too late for me to get into property?
Be careful. Your first property is the most important one to get right, but unfortunately because of the learning curve it's also the most difficult to get right. The trick is to ask lots of people lots of questions and then decide where you think the best place would be to increase your capital in the short to medium term. A good rule of thumb is to scan 100 properties, look properly at 30, get serious about 10, offer under the asking price on five and hope that one accepts. Your chances of having a low offer accepted are reasonable if you’re not in a chain. Any evidence you can provide to the estate agent and vendor to prove that you have the money and are trustworthy will help your case.
Follow the numbers, not your emotions and make sure the finances are attractive. If you can buy at roughly 10% below true market value then this should provide you with enough of a safety margin in case prices drop. This margin will be further improved if you are in a position to quickly do up a property and increase its value. Always be prepared to walk away from a deal; paying over the odds is commonly referred to as the ‘winner's curse’.
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What is a Below Market Value deal?
A Below Market Value (BMV) deal usually happens when a vendor is highly motivated to sell their property quickly. This could be for all sorts of reasons, especially in the current Buyers' Market. The most common reasons for needing a quick sale are: broken chains, preventing repossession, debt, divorce and probate.
Now is the perfect time to pick up serious BMV bargains as the yields will stack up that much better at the moment. Any fears of price corrections or even a crash will be absorbed easily by your genuine discounted purchase price.
If you can purchase a property 15% below its market value you’ll have what’s called an LMD (low money down) deal that covers the deposit but not your fees, to achieve an NMD (no money down) deal, where your deposit and fees are covered, you’ll need to purchase at 18% below valuation. Any deals you make above 18% BMV will result in cash-back that you can spend on refurbishing the property, or anything else you like…
This kind of deal is effectively tax free although it may qualify for CGT (Capital Gains Tax) when you eventually come to sell, as you are actually drawing on the instant equity growth of an investment property.
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How does Closed Bridging Finance work?
Our Closed Bridging Service provides 100% finance to legally pay for property when the purchase price is Below Market Value. The property is bought outright using bridging funds and is then re-mortgaged on the same day, with an 85% or 90% LTV (loan to value) mortgage.
We use specialist lenders who allow you to re-mortgage a property immediately after purchase in full knowledge that you made the application prior to ownership. This means you’ll know how much the re-mortgage funds are going to be before you buy the property, which greatly reduces your risk.
By using Closed Bridging you will only need to mortgage once and so there will only be one set of costs. The traditional method requires two charges, an initial mortgage and a re-mortgage, with time between the two needed for valuations and credit checks, plus a deposit which is tied up until the re-mortgage completes.
Read our FREE Below Market Value Profits report to read about our Closed Bridging Finance service in more detail…
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