Buy to Let
Those three words have entered the English language and have become, for some people, a mantra that gives a license to print money. Yes there is money to be made from buy to let but there is also money to be lost.
We manage many buy to let portfolios for clients and advise new clients entering the field, and through this experience have built up a sound knowledge of what to do and what to avoid. Without doubt a well managed, well thought out BTL portfolio offers the best risk free return on capital at the moment. Interest rates are at an historic low and some economists have calculated the amount of capital sitting in current accounts earning virtually nothing as being in the billions of pounds.
The advantages of BTL are several when viewed from all angles but especially from the point of view of a pension. The management fees which eat into the income do not occur and you own the capital instead of your money being invested in what might be high risk stocks. You can choose to buy more property to expand the portfolio and therefore income, or liquidate the whole thing by selling.
Lets now look at some pros and cons. The most important to consider are interest rates, where they are and what they are likely to do in the near future and what is also likely to happen to house prices. In all of what we are going to discuss remember, you are thinking in the long term, the days of the quick profit are gone.
Much research has been done on rates historically so its worth a look at a century or so! Looking at the history of rates for the best part of a hundred years the Bank of England rate until 1822 was once more or less flat at 5%. After that rates began to fluctuate between a couple of per cent and as much as 10 but averaged 5 for most of the period until the early 1970,s when a long period of volatility set in.
Throughout the period after the Second World War until the early seventies rates were pretty much stable. From 1960 until the start of the oil price crisis of 1973 the rate averaged 5.4%. Then, for a whole series of reasons which concern the economists but not us, we enter long a period of not just instability but over very short periods of time really substantial hikes in the rates.
Throughout the decade rates averaged between lows of over 9% to highs of 14%. The eighties were little different with lows of just over 7% to highs of 14%. The more recent period has seen lower rates and stability starting roughly in the mid nineties and bottoming out in early 2009 at 0.5% where it is today.
What is predicted for the next few years? If we take historical trends into account then we are looking towards a period of low rates. Some economists are predicting further falls to a quarter of a per cent which is good news for BTL investors in particular. But there are other factors that need to be considered. Depending on the amount of money that is put up as a deposit as well as other matters to do with the upkeep of the building and the costs of management will depend the margin of profit.
The most vulnerable investors will be those who have gone in with the minimum deposit and cannot absorb any rises in the interest rates. Couple that with the kind of scenario we described with the agents and tenants from hell and repossession is not far away down the line.
On the finance side of the equation put down the biggest deposit you can afford and lock into a long term fixed mortgage at the best rates you can get. Remember, this is about long term investment not short term speculation. Now let us look at the actual bricks and mortar that you will be investing in.
Nineteen years ago one of the directors of Mourne bought a nineteen seventies built town house. Excluding improvements, which are just that and put value on a property, the total expenditure on repairs has so far amounted to twenty quid to fix a leaking gutter which he did himself!
There is an urban myth that has been doing the rounds for as long as anyone can remember that Victorian houses are better than newer ones. Rubbish, as any builder or architect who has spent years repairing them will tell you.
There are many portfolios that have been unprofitable for years because of the amount of money that it has been necessary to spend to bring them up to a letting standard. Couple that with a host of new government regulations that seem to be appearing with monotonous regularity and instead of your property becoming a cash cow it ends up as a bottomless pit that absorbs all of the profits and more.
Look at buying a new build with insurance backed guarantees. It will meet all of the current and future regulations in terms of insulation and carbon footprints and can be let immediately. Alternatively consider buying in blocks of flats built in the last thirty years. We have all seen them of various sizes with for sale boards forever outside and over a period of a few years all of the leases could be obtained with the right to purchase the freehold.
Current trends are that the rental market will continue to expand as the owner occupier first time buyer is forced out of the market with lenders requiring bigger and bigger deposits. Put down the biggest deposit possible to give that edge and get the best fixed term mortgage you can find, this will give you leeway for rate rises and those unforeseen events when there may not be a tenant.
Mourne can source one or more properties, arrange financing and legals all as part of a management package which can be as short or as long as you wish. Let us put a proposal together for you.