Good News
Many Buy to Let investors who have traditionally geared their investments heavily, sometimes at the 80% + LTV level, have been left have been out in the cold by lenders until now. Today 10th may 2010 has seen the return to market of Mortgages for Investors in The Buy to Let arena, at the 80% LTV level.
Many Buy to Let Landlords enter the market on fixed deals as this is a way of securing repayments from 2-10 years. After this period investors revert to the Lender’s Standard Variable Rate (SVR). The disadvantage of a SVR is that it need bare no relation to the Bank’s Base Rate (BBR); effectively you are at the mercy of Lender’s internal decision making.
While interest rates are low SVR‘s have remained relatively stable however adhoc interest rate rises are not uncommon. The latest lender to increase its SVR was Marsden Building Society, which increased its SVR by 0.46% to 5.95% on January 1st this year. According to Moneyfacts, 8 Lenders have increased their SVR while the Bank Base Rate remained at 0.5%.
A prudent Investor would try to fix their rates again as it buys security going forward. The downside of re-mortgaging is that it costs a plenty, costs which should happily and logically be viewed as the risk premium for security.
Post election warning bells are sounding, a hung parliament could be the literal hanging of many investors if they don’t build the security factor into their investment model.
For many Buy to Let Investors the 80% LTV level may not go far enough however, it’s arguably the best news some may get this year.
Sadly Value for Money opportunities rarely come in Technicolor; they are far more likely to present in a paler shade of grey.
On so many levels exposure to the risk of poor Investment can bring even the wisest Investor to their knees.
Offices bursting at the seems with financial analysts lay testament to the fact that constant monitoring cushions Corporate Investors from poorly performing investments; even so, they don’t always get it right.
As a non Corporate investor, you don’t necessarily have the same sort of analytical resource,but that shouldn’t mean you don’t analyse the proposition.
So what do you do?
Many claim they have a gut feeling about their deals feeling confident to rely on fag packet calculations to support their decision making. In a rising market this philosophy may have been supportable, despite it being just a tad unscientific. The credit crunch has brought with it fresh challenges and even if you are happy with the fag packet calcs., the financiers won’t be.
Financial modelling employs a variety of scenarios all of which may or may not happen. It’s a common sense approach to developing decision making tools that anyone can use.
1. Start with research; pick your property, shares or uncut diamonds whatever it is that floats your boat. Determine the value at today’s cost.
2. Consider additional costs; refurbishment costs, development costs, acquisition costs and legal costs, everything you can think of that will make your asset rentable, sellable or storable.
3. Consider ongoing costs; insurance, maintenance & overheads.
4. Then look at the income; it may be dividends, rent or interest.
[ Remember for property always factor in void periods, the shorter the lease the longer the void periods are likely to be. For example it might be prudent to only include 40% of city letting income; where accommodation is let daily, unless you have proof that you can do better than this. For a 6 month shorthold tenancy, assume at least one month a year will be void. With commercial property the lease may be longer but don’t assume you will let straight away especially in today’s market. A prudent investor would establish this type of tenancy before buying the investment.]
That’s the straightforward part ‘Income and Expenditure’ cash flow.
If you can imagine these figures in a spreadsheet you could handsomely demonstrate that your proposal stood a chance of making you money or conversely not; at least in this case it gives you the option to walk away before it’s too late.
Now we have to consider different scenarios.
The easiest to envisage at the moment is an increase in interest rate.
It’s reasonable to assume that interest rates will rise in the next 2 years however, it’s anybody’s guess by how much and when.
It could however, firmly put the scuppers on your plans.
A rise in interest will change the ongoing costs of borrowing. Therefore build in a rate rise of varying degrees and see what happens to your cash flow analysis.
What if a commercial tenant were to exercise a break at year 5 in your plan, how long would you be without rent, what if this scenario coincided with your worst expectation of interest rate rise.
What if a major employer in the city suddenly went bust leaving your buy to let investments unoccupied for long periods, a flood, a fire maybe; the list goes on?
Some of the mentioned events are possible, but unlikely. These types of occurrences can usually be insured against and let’s face it, insurance makes sense; you can’t think of everything.
Whether it’s a £50,000 or £50,000,000 investment, financial modelling will help you demonstrate to lenders that you have considered the possibility of change into the model. If your cash flow remains good despite worst case scenario then it’s a goer.
Once you are happy with a workable budget you can then concentrate on the actual value of your proposition, factoring in growth on the plus side and inflation on the negative you can work this back to a Net Present Value (NPV)
What Does Net Present Value – NPV mean?
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.
NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.
Investopedia goes on to explain that
NPV compares the value of a pound today to the value of that same pound in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
You might not be able to go all the way with this, but at the very least you should attempt the first part, it’s a common sense fairly straightforward way to assess whether your next big deal really represents ‘Value for Money’.
Llobby of Signet Law Library, Royal Mile, Edinburgh
Knowing what the laws says and applying it to your situation, is an essential step if you are to succeed in the Buy to Let arena.
The Scottish Government aims to encourage a thriving private rented sector, which provides good quality and well managed accommodation, and in which both landlords and tenants understand their rights and responsibilities.
The legislation covers most types of private tenancy, such as short assured tenancies, assured tenancies, regulated tenancies and in most cases to tied accommodation (where an employer provides accommodation for their staff). However, in many cases they don’t apply if you have a lodger living with you in your home. They also do not apply if you are letting your property as holiday accommodation.
Initiatives to promote this include:
• Landlord registration: private landlords must register with their local authority to ensure that minimum legal requirements are met.
From April 2006 Landlords have been required to register with their local authority to establish whether they are a ‘fit and proper’ person to become a Landlord; whilst most applications are approved the authorities do consider criminal convictions or persistent tenant complaints held on file. The registration is valid for three years.
• Voluntary landlord accreditation promotes best practice in management standards in the private rented sector. The Minister for Communities and Sport announced in 2007 that the Scottish Government would provide start-up funding for a national voluntary landlord accreditation scheme, Landlord Accreditation Scotland, open to private landlords and letting agents across Scotland.
• Mandatory licensing of Houses in Multiple Occupation (HMO) applies to houses or flats occupied by three or more unrelated people who share bathroom or kitchen facilities.
The local authority will inspect the property to make sure that it is ‘safe and suitable’ for the number of occupants. This may include fire safety, emergency exit and the number of bathrooms. They will also consider the management practices you have in place. Do not assume that you will get HMO consent just because the property is large and is located in a high demand area for example close to a University. The number of HMO properties allowed in specific areas is limited to maintain the balance of property use. Always check before you buy. Once again the licence has to be renewed periodically thus allowing the local authorities to monitor use and enforce compliance to new regulations.
• The Repairing Standard increases legal requirements on repair and maintenance in the private rented sector, which tenants will be able to enforce more easily through the Private Rented Housing Panel.
Since September 2007 a new Repairing Standards came into force under The Housing Scotland Act (2006). It applies to most private rented sector tenancies. Specifically:
1. The property must be wind and water tight and be reasonably fit for human habitation. Under recent legislation properties for let must now have an Energy Performance Certificate (EPC) in place which lasts for 10 years.
2. The structure and exterior of the property are in reasonable repair and proper working order.
3. The installations in the house for the supply of water, gas and electricity and for sanitation, space heating and heating water are in reasonable repair and proper working order; all gas or electrical appliances must be checked and certified (The Gas/Electrical Safety Certificate) annually by a qualified engineer.
4. Any fixtures, fittings and appliances provided under the tenancy are in reasonable repair and proper working order.
5. Any furnishings provided under the tenancy are capable of being used safely for the purpose for which they are designed.
6. There is satisfactory provision for detecting and giving warning of fires.
Landlords have an obligation to inform their tenants about the Repairing Standard and where the tenant reports a problem with the property, the Landlord must make repairs as soon as possible. If the landlord doesn’t act the tenant has a right to obtain a ‘Repairing Standards Enforcement Order’.
• Provisions in the Housing (Scotland) Act 2006 would allow the establishment of schemes for safeguarding tenancy deposits. A landlord must justify any deductions made from a tenant’s deposit for cleaning or damage to inventory; they must show that they have taken account of the age of damaged furnishing for example.
Of Course it goes without saying that all tenants should be given and sign a tenancy agreement, this sets out all the terms of the lease, for example length, price, notice requirements, tenant obligations, landlord obligations etc; this document forms the basis of the tenancy and is the document that will be referred to in case of dispute. Using an ‘off the peg’ version may not be suitable for your property so it’s always better to check with someone who is experienced in the lettings industry be that an agency or solicitor.
Finally a Landlord must make sure they have adequate insurance in place to cover buildings and contents. The risk for insurers is greater when a property is tenanted therefore expect premiums to be higher than straightforward residential cover.
Property management companies will guide you through the minefield of legislation however; this comes at a price which should be taken into account when carrying out the initial property purchase/letting analysis.
Next time, ‘What about the money?’ after all that’s why you are doing it. Finance and Tax implications discussed.
Flats in Edinburgh New Town
Reacting to the first advert or repossession auction notice you see, advertising property at knock down prices is not the best approach.
Research is the key to successful Buy to Let investment.
First, examine your personal objectives of becoming a Buy to Let investor.
Ask yourself what is the level of commitment you are prepared to invest; most elements of property management are factors of Time & Money ; so if you don’t have the money to pay for services you will have to invest your time.
If you are time rich, then be prepared to become an expert in Property Repair, Customer Relations, Advertising, Financial Management and not least Juggling.
If you have a surplus budget and prefer to out-source all or some of the above services make sure the books balance, after all this is a money making exercise not a charity.
1. Area: when considering which areas to invest in look at the following:
How dense is the population, is it a university town for example, is it a centre of good employment and are there plenty of schools and shops, lastly are there a reasonable choice of property related services; just in case you need them.
Once you have pinpointed possible areas, consider the distance they are from your base, especially if you are going to manage the business yourself; there is nothing more frustrating than spending a Sunday morning driving long distances only to be greeted by an ungrateful tenant.
2. The Property: is the area of choice active in the rental market, if so take the time to look around a few properties which are to let, consider their condition, facilities, the going rent and, observe how long they take to let out. Determine from this research what factors may have caused a home to let more quickly. Although, you may have to bring the property up to scratch in the first place, you want a property that does not have onerous maintenance issues looming.
3. Property Services: Some letting agents will give advice on how to present a property to market..but beware not all agents are good at their jobs so be open minded and check out at least three or seek recommendations. An area with many letting agents and related services generally indicates that the rental market is active, the converse may also be true.
Remember, you want an investment that will bring in regular rent and that means few void periods. You want good tenants; preferably in employment, honest, clean, quiet and content..
It’s a tall order and you may not have the choice if you don’t do your research properly in the first place.
Next time.. you have decided on the area and the sums look good, how do I comply with legislation?
Edinburgh Old Town
The private rented sector is an important if small section of all housing in Scotland, representing about 8% of all housing in the country.
Private sector renting is most popular with the age group 25-34 who prefer to keep their options open when considering where to live.
Property prices in Scotland although lagging behind the rest of the UK have fallen over the last year or so, you could argue therefore, that there has never been a better time to become a Buy to Let Investor.
In support of this Interest rates have never been lower at 0.5%, sadly though this rate is not reflected in the rates offered to Buy to Let Investors. Currently a typical investor would expect to pay in excess of 5%; depending on the Loan to Value. Lenders are asking for at least a 25% deposit on the current Valuation and an estimated rental return in excess of 120% of the monthly rent received. If you are happy with all this and income rather than short term capital gain is your priority then
read on..
The Scottish Government aims to encourage a thriving private rented sector, which provides good quality and well managed accommodation, and in which both landlords and tenants understand their rights and responsibilities.
They will help or hinder you depending on your perspective in the following ways:
- Landlord registration: private landlords must register with their local authority to ensure that minimum legal requirements are met.
- Voluntary landlord accreditation promotes best practice in management standards in the private rented sector. The Minister for Communities and Sport announced in 2007 that the Scottish Government would provide start-up funding for a national voluntary landlord accreditation scheme, Landlord Accreditation Scotland, open to private landlords and letting agents across Scotland.
- Mandatory licensing of Houses in Multiple Occupation (HMO) applies to houses or flats occupied by three or more unrelated people who share bathroom or kitchen facilities.
- The Repairing Standard increases legal requirements on repair and maintenance in the private rented sector, which tenants will be able to enforce more easily through the Private Rented Housing Panel.
- Provisions in the Housing (Scotland) Act 2006 would allow the establishment of schemes for safeguarding tenancy deposits. The Scottish Government is examining with stakeholders the merits and cost effectiveness of various approaches to safeguarding tenancy deposits before considering how to proceed.
So..It’s beginning to look like a plan. An alternative to ploughing hard earnt cash into poorly performing pension’s maybe or, who knows your next job.
Over the next few weeks I will discuss what you should thinking about before taking the plunge.
Helen Clover- Edinburgh, UK
