Buy to let - Back to basics part 2
May 21, 2021
In this second part of our buy-to-let back-to-basics series we are looking at setting property goals and why it is important to think about that at the beginning.
As a quick recap, Vesta believes the following should be considered by anyone interested to get started with investment property:
- Is being a landlord right for me?
- Setting property goals
- Financing a buy-to-let property
- Costs of acquiring and running a buy-to-let property
We covered the first point in our last blog and today we will take a look at the second point.
Setting property goals
Property investment is very personal to you and you should have clear outcomes you wish to achieve.
Setting clear goals
When you are thinking of starting out in property investment, it is absolutely vital that you have a clear idea of what you are hoping to achieve from it - a goal. If you have no target to aim for, then it is unlikely that you will develop an investment strategy that is suited to you and your circumstances.
Property investment is very personal to you, and you should have clear outcomes you wish to achieve from it to make it a successful enterprise.
Most people invest in property for one of the following reasons:
- Additional monthly income
- To hedge their pension and help fund their retirement
- To leave a legacy for their children
In some cases, people will buy their “retirement” home now, and rent it out until such time as they are ready to go and live in the property themselves. This allows them to buy at today’s market prices, generate an income over the years as well as hopefully achieving some capital growth.
One of the great things about investing in property is that it gives you many options, but that can also be a double-edged sword, as it can sometimes be overwhelming to know what strategy you want to undertake - whether that be a standard buy-to-let, house of multiple occupancy (HMO), refurbishment and development, holiday lettings etc. Having a clear goal will help you understand which strategy is right for you. Start with the end in mind and work backwards from there.
Your financial position
Your financial position will also largely determine what can realistically be achieved. For a buy-to-let mortgage landlords typically need a 25% deposit although this can vary between 20-40%, plus there is the additional 3% stamp duty surcharge to factor into your acquisition costs, along with the usual things like solicitors fees, mortgage fees etc.
If you are a cash buyer, then things tend to be a lot simpler and more flexible as you will not be dealing with lenders and their increasingly onerous underwriting processes.
Three main benefits from investing in property are:
- Monthly net cash flow
- Capital appreciation
- Being able to force the appreciation through refurbishment and/or development
High yields or higher capital growth
Clearly, the Holy Grail would be to have monthly net cash flow and capital appreciation together at the same time, but they rarely co-exist. In areas of high monthly yields, it is likely that capital appreciation will be low. Geographically, higher yields generally occur in the Midlands and further north. Based on past data, capital growth is typically more robust in London and the South East but with correspondingly lower yields than in the North of England. As an investor, you need to work out whether you are going to opt for high yields or higher capital growth or try and find a balance of both.
It’s important to understand that monthly net cash flow is money in your bank account that you can spend, whereas capital growth is far more speculative and can never be guaranteed. If you do not have significant other income, you would be advised to focus on monthly net cash flow and look for lower value properties that typically have higher yields. You should then be able to remain in the game long enough to benefit from any capital growth, which would be a bonus!
Here is a working example
If you bought a property in the North of England for £100K and it went up in value 5% per annum, at the end of year 1 it would be valued at £105K. The following year you would achieve 5% growth on the £105K.
If you purchased a property in the South East for £350K and it went up in value by 5% per annum, at the end of year 1 it would be valued at £367,500. The following year, you would achieve 5% growth on the much larger figure of £367,500.
You can now see why Einstein called compounding “the 8th wonder of the world”!
Always keep your personal goals in mind
Wherever you choose to buy, and for whatever reason, it is sensible to start out in a low-risk manner and get some experience under your belt. Depending on which your finances will stretch to, we recommend buying a terraced house or good quality family home in a good school catchment area with good transport links.
Houses generally have a better cash flow than apartments as you do not have expensive service charges and ground rents, and they also tend to capital appreciate better than flats as there is less supply of new houses being built, particularly in the major cities.
Clearly, a lot can change over the extended time period of owning an investment property but buying sensibly at the beginning of your journey can significantly reduce risk and ensure that you start off on the right foot to achieving your goals.
Whatever strategy, location, or property type you choose, just keep your personal goals at the forefront of your mind and make sure your investment is taking you one step closer to them.