October 31, 2016
Buy to let graph

Many people still consider buy-to-let as a viable alternative to pensions and saving investments, and with good reason. The effect of low-interest rates and a historically rising property market make buy-to-let one of the most attractive long-term investments accessible to the public. Obviously there are risks associated with such an investment, though the same could be said of all potential high return investments.

During 2016, the banks have been busy writing to us, first to tell that us even less of our money will now protected under the FSCS (Financial Services Compensation Scheme), and more recently in relation to their “new” (lower) savings rates. From November, Santander will be cutting the top rate for their 123 current account in half with perhaps other banks set to take a similar stance. It’s getting harder to benefit from having your saving in the bank.

Due to recent changes, the odds of a Premium Bonds win have worsened – in fact, according to money-saving expert, the odds of winning one of the two £1million top prizes are 1 in 30,777,005,514 whereas the odds of winning nothing are 61,551,860,613 (that said, I recently won £500 and £25, both from the same monthly draw so I can’t complain with that). More and more savers are feeling the effects of lower interest rates, which combined with a longer life expectancy, is resulting in people reconsidering their options for a retirement fund – with buy-to-let being one of them.

The principle of buy-to-let is this: The compounding aspect of the value of the property coupled with increasing rental returns, outstrip any inflation in running costs in the medium to long-term. Your annually rising rental income should more than cover your mortgage payments in the long-term, because repayments do not compound in the same way, although fluctuations in the rate of interest over the term should be expected.

In principle your surplus rental income should eventually pay off your mortgage, providing you with a regular “retirement” income whilst keeping your equity intact, and hopefully rising. When reaching the point of surplus, some people purchase another property and build a viable property portfolio.

Jonathan Stephens, Managing Director of property consultancy Surrenden Invest, believes the move towards alternative investment opportunities has already begun. He explains: 

“With interest rates at their lowest since the Bank of England was founded in 1964, investors are abandoning institutional investment products for others that offer more favourable returns on capital. Just last week I received a letter from my bank informing me that my personal current account would no longer attract interest, the letter then when on to say that my savings accounts would also be subject to review next month. So the big question savers face is where to invest their hard earned cash?”

However, for many this change will mean venturing into unknown territory which can be unnerving for those wanting to make the best decision for their future finances. With the property market not faltering as predicted post Brexit, investors are looking to the buy-to-let landscape for a chance to make to most of their money.

Jonathan continues: 

“We have seen a huge influx of relatively inexperienced investors who in most cases have never considered property for investment before. These clients are what we call ‘one time’ investors who, in contrast to our large portfolio clients, are unlikely to be in a position to invest the same levels of capital again. These investors are looking for a one-time opportunity to get into property to secure their financial future.

My advice is to tread very carefully as there are companies currently exploiting market conditions, promising colossal returns over a relatively short period of time and these are mainly what we refer to as alternative forms of property investment.

In my experience the best property investments are the simplest ones, if it isn’t broken don’t fix it. So why invest in something which is trying to re-invent the wheel? Our advice is to buy in the best areas and don’t compromise on location, especially when buying outside the Capital.”

Jonathan concludes: 

“If an investor called us today we would set their expectation at around 6% net rental income and 3%-5% capital growth, with an annualised yield over 5 years upwards of 10% net. Surrenden Invest aims to under promise and over perform; our projections are effectively a worst-case scenario.

One of the great things about traditional buy-to-lets is their simplicity, therefore it is possible to request all the fixed costs, for example the ground rent, service charge and management fees, and off set those against equivalent apartments currently available to rent on Rightmove or Zoopla. This is a very easy way to find out how realistic the projected returns are.”

Source – Property Reporter 

As with any form of investment, professional advice should be sought with research playing a vital role in the decision making process. Whilst obtaining the capital for your investment is the first step, it doesn’t stop there. In fact this is simply the very beginning of an investment, which requires regular management and monitoring.

As an example, we recently assessed just how many hours our Letting and Property Management departments spend looking into regulation and industry related changes. On average we dedicate 44 hours each month towards regulatory and legislative research, including webinars, training and the sourcing of information.

Some of the changes brought in are absolutely understandable, such as The Smoke and Carbon Monoxide Alarm (England) Regulations 2015; however, EPC’s, the How to Rent Guide and Right to Rent checks (to ensure those looking to rent have a legal right to be in the UK) seem nothing but a burden, at least from a landlords perspective, with the latter surely being a job for those protecting our borders?

Despite the continual wave of regulation there is still a healthy appetite in the buy to let market, and each month we spend many more hours valuing property and offering advice to both new, and more seasoned landlord investors.

If you have questions about an existing, or a future buy to let investment, please feel free to get in touch.