Landlord investment goals- What can be achieved
Landlord Investment Goals – When deciding to become a landlord and acquire property for buy to let purposes, it’s sensible to have a clear idea of your investment goals. What is it, you exactly want to achieve. With regard to Buy to Let property purchase. This can be from either;
- A capital profit goal ( through rising house prices) or
- An income goal via your monthly payments from a tenant you may find for the property.
- A combination of both the above.
Rental incomes are usually fairly stable and typically are between 0% & 20%. Part of your pre purchase work will be to identify property which will prove easy to rent, finding this type of property will help to ensure that periods of rental voids are an infrequent occurrence. Property prices themselves are more volatile but unless you are looking to make to make quick short term gains, knowing when exactly to buy will not be too much of a problem. The long term trend should be upwards, social & economic changes point to this even if conditions become temporarily depressed.
Investment Mentality – different people have a different attitude to risk and investment, your attitude or mentality to making money from property investment should take in to account fluctuations in both local and national housing markets. Local markets can often behave quite differently from nationally and knowing your local area or making a detailed study of the demands and needs of your chosen area is of paramount importance. Paying attention to local news detailing changes in local needs can also reap dividends. As a Buy to Let investor, you should be aiming to make investments on a medium to long term basis, this should help iron out any short term ( downward) property price fluctuations. Short term property price purchases, tend to be the preserve of speculators and unless you really know what you are doing, you can lose a lot of money. You should try to obtain a combination of rental income and capital appreciation. Always take professional advice before making any purchase and try to look for value in any property that you buy. Local professionals can be a valuable source of free information, they can help alert you to buy to let property deals as well as help you achieve your long term goals. Don’t make the mistake that many people do of feeling that you always know best, be prepared to listen and take advice. Ultimately the critical success factors ( whether income or profit based) will be;
- Minimising periods of rental voids- This is the buy to let landlords worst nightmare, even short periods of having your property unoccupied, can play havoc with your projections.
- Effectively managing your cost structure to maximum long term rental yields, this can be achieved by careful attention to the property you buy and matching it as closely as possibly to local markets needs.
Achievable Investment Goals – to financially quantify and define your goals you will need to carry out a full analysis of your expenses and will have to factor in changes in the financial variables. Be realistic, try to look at things on a worse case scenario basis as well as assuming as most people do, that property prices will go up, mortgage rates will stay the same and you will always be able to source a quality tenant thus avoiding the rental avoids that seem to afflict everyone else. Many people would save themselves several thousands of pounds if they spent a while carrying out these calculations. Buy to Let investment is not for everyone, and in fact the” Buy to Let journey”, should start with these calculations and not with attempting to source a property. Make sure that your goals are achievable and also consider how much time you are going to have to spend on this project. Logistics are important too, A property in Scotland may be difficult to administer if you live in Devon. You may have to employ the services of a local letting agent.
Objective Goal Setting – your primary reason for entering the buy to let market is to make investments that ultimately will improve your financial situation or provide you with long term financial security. Remember this at all times, you must remove emotion from your decisions. Purchasing property is just another form of objective investment but as tenants are involved, there is a human element to the situation. Most people find dealing with the tenant to be the most difficult aspect of property management and sometimes unpalatable decisions have to be made. If you find it difficult in dealing face to face with people, who may, from time to time have financial problems or may wish to discuss a grievance with the rental property, then you may be better served by employing a property professional such as a letting agent to handle these negations on your behalf. Tenants should be treated fairly and equitably but it’s probably best not to adopt an overtly friendly attitude. Be professional in your dealings, that way everyone will know exactly where they stand. Before you start, write down how much money your initial investment will be, then write down how much you would like to make on the sale of the property, factor in all the deductions that will have to be made along the way. By knowing your starting point and finishing point and all points in between, you will make it easier to monitor your progress. Try to remember the acronym S.M.A.R.T. This stands for : Specific, Measurable, Accurate, Realistic, Timely. It is unbelievable the number of people that set sail on an investment idea with out really paying to much attention to what they are doing.
Types of Investment Goal – there are two main types of investment goal, related to buy to let property.
Capital profit– With capital profit, the main goal is to make a profit from the increase in the value of the property. By adopting this stance you must believe that over your designated period of time, the property price will rise. You will usually have to make a deposit to purchase the property, with the balance of the purchase price being funded by a buy to let mortgage. The mortgage payments are met by renting the property to a tenant. This type of investment goal, relies on the principle of gearing. Logically, the more properties you own, the more capital gearing( profit) you have. Of course property prices can go down and interest rates may go up and these are some of the inherent risks with this type of investment. By carefully selecting your property, you can help maximise your profit. Because of inflation, it is generally accepted that over a period of time, house prices will increase in value.
Rental income- the main goal is to achieve a rent that will not only cover the monthly mortgage and all expenditure but will leave you with a residual income as well. When the mortgage has been paid off, you can sell the property and make a profit, or retain the property and live off the income. It’s highly unlikely that one property will be sufficient to live off and you need to think about this at the planning stage. There are two basic options of dealing with the rental income from the property. One approach, is to use the excess money to pay of the mortgage as quickly as possible and your own personal circumstances and prevailing interest rates will help you make the decision. Once you have paid off the mortgage you will own an asset outright and the monthly rental will then form part of your income. You could of course opt just to spend the excess monthly rental payment. If you wish to do this, it is probably better to look for a property with a higher rental yield ( such as student or HMO accommodation. These types of property, do not normally produce such strong capital growth.
Planning Considerations – In finalising your investment goal (s), you must consider the practical considerations before approaching the mortgage lender to request a loan. The following items will require your thought.
- Consider how many properties you intend to buy. If you are going to buy more than one, you will need to make sure that your mortgage lender will place no restrictions on the size of your portfolio or the total value of property being acquired. Lenders are now very cautious because of the state of the market.
- Consider, the type of tenant you wish to attract. Some lenders do not wish to lend on properties that will be let to students or DSS, local authorities or housing associations. The type of tenant, may be taken in to consideration when the lender considers your application.
- Consider the type of property you are going to purchase, whilst most properties will be private dwelling houses, some will be HMOs, ex council property or even flats. These type of risks may have additional regulatory requirements, which may put off many lenders.
- Consider, how much money you can afford to invest. The lender will usually want you to make a deposit and this can now be a sizable proportion of the required loan amount
Assetsure provides UK landlord buy to let insurance for buildings and contents for private landlords, letting agents and property management companies in the United Kingdom.