In this article we will provide you with an insight into the buy-to-let basics, from our guest writer from Why Property Works, Hazel De Kloe.
I trust you've enjoyed a good start to 2014 and have 'geared up' for the year ahead. In the final part of this mini-series on Buy-to-Let Basics, I am covering the 'Business End' of the process. What do I mean by this? When you have found and bought your buy-to-let property well, you will then be getting ready to put it out to the market. To maximise its potential, you need to ensure that all angles are covered. Ideally, I would imagine that you are looking to place your property at the top of your local market so that you can achieve the best rent as well as attract good tenants. In order to realise this, you must pay attention to certain details.
1. Refurbishment and project management
Depending on the type and age of property you have bought, there may be renovations or repairs which will need your attention. If you have done your maths properly, you will have taken these costs into account before having bought the property. The beauty of the property business is that (as far as I know!) it is the only business in the world in which you can, almost to the penny, accurately predict cash flow before spending anything on the project. Correct due diligence and research combined with working out correct calculations can ensure this (notwithstanding unforeseen costs which may come to light during a refurb). When you have determined what needs doing, you can decide who is going to carry out the works required.
The two main options you have are to carry out the works yourself, thereby saving on labour costs, or to bring in contractors to complete them. Having been down both roads myself in the past and witnessed many people choose this route, I can honestly say, in my opinion, that going along the DIY route is a false economy. Not only does the work generally take longer, it often turns out substandard to a professional and can end up costing you much more in lost rent and additional mortgage payments. It is important, however, to bring in a reputable project manager (or building contractor with project management experience) and trades people and be wary of those who would rip you off. For example, I had six quotes once on a full refurbishment of a 3 bed terrace property which ranged from £16,400 to £29,850! The person who had quoted the least was in fact a solid recommendation and turned out to be a fantastic person to work with. It just goes to show how much a project like this can impact on your offer and eventual purchase price if you don't accurately factor these costs in. Another extremely important point is to do with the Building Regulations. If you are planning to make any structural changes to the property, it is crucial to work with your council's local planning department and building control officer to ensure that you get works signed off during and at the end of the project. If you do not do this, you run the risk of compromising any remortgage or sale of the property when solicitors start asking questions...! It is also just general good practice.
2. Letting and management
The most important part about letting and managing your buy-to-let is...systems. If you don't have a good way of finding a tenant, vetting them, setting up the AST, creating inventories, signing in your tenant and ultimately managing you tenant and any repairs and maintenance on your property, then find someone who does have this set up to do it for you. I have found letting agents to be invaluable in helping me find (on the whole!) decent tenants to live in my properties. We self-manage a number of our properties and others are managed for us, depending on their location. Ultimately, if you are confident that you can run this process yourself and live close enough to you property, then self-management can save you quite a bit of money over the course of the year. If, however, you live too far away or just don't have the time to do the job properly, then having a good letting agent on side can save you a fortune and take away most of the day-to-day operations.
3. Taxes and portfolio management
As important as having a good team to help you with the acquisition, refurbishment, repairs and management of your property, it is also essential to have a good accountant. Knowing how you'll set up your property before you begin is just as crucial as how you'll run it when you have it. Most people who become landlords will own property in their own name. The benefits of doing it this way typically outweigh any advantages you may find in holding property in a Limited Company, for example. It is generally easier to raise a mortgage in your own name than in a company name and you can also take advantage of your Capital Gains Tax Allowance each year (currently standing at £10,900 p.a. per person) if you structure your portfolio correctly. Far be it for me to say what is right for you though, it is always advisable to seek the opinion of a professional accountant or tax adviser on this on how best to structure your portfolio.
4. Refinancing and building your portfolio
If your objective is to build a portfolio of properties, then it will most likely be that you will need to 'recycle' your funds at some point in order to continue to build. Saving for each and every deposit can take an inordinate amount of time and even if you have a relatively decent sum to work with, this can often be swallowed up quite quickly within a few deals. If you have a large capital fund with which to work and are treating your property investments more like a business, the success of that business will only be determined by the rate of return and how well you are maximising your profits. What I call 'The Holy Grail' of property investment is to be able to extract every penny that you have invested yourself back out of the deal after you have refinanced it. To see a worked example of this, feel free to visit http://www.whypropertyworks.co.uk/our-services/maximising-return/
and scroll towards the end of the page to see the numbers. If you are able to get as close to this as possible from each acquisition then you will be able to build your portfolio much quicker and more sustainably than if you just buy a property at or near market value and leave your own funds in.
This concludes the 3 part mini-series on Buy-to-Let Basics. I trust you have enjoyed reading and have picked up a few useful tips and guidance here and there. Watch out for next months' article in which I will go into detail about what makes a sustainable investment.
Until then...happy investing!
Hazel de Kloe – Why Property Works
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