Want to know how to invest in property? We’re going to cover the nine of the things you need to consider before you invest in property.
When investing in property, your strategy is above all the most important consideration. When considering your strategy, it will include all of the other considerations we detail below. Think of your strategy as a compass, it shows you where you’re going and it shows you where you need to be and will raise alarm bells, if reviewed regularly, when you’re straying off track. As such, it’s important to write your investment strategy down.
Things to consider, when considering your strategy include;
- Your budget.
- Your goals; are you going to buy a property, renovate and resell (often known as flipping property; we’ll be releasing an article called “How to flip property” soon)? Are you going to let the property out? Your goals are the most important thing to consider. If you don’t have anywhere to aim for, you’re going to miss your target; it’s that simple.
- The type of property you’re going to buy.
- Who are you going to let the property to?
- What area will the property be in?
- What are the average prices of properties in the area you’re looking to buy?
- Are there any below market value (BMV) properties in the area? Why are they BMV?
- How are you going to buy? Through an auction or estate agent, by knocking on doors and asking if they’d like to sell or are considering selling or direct from a developer?
- Are you going to engage in Lease Option or Rent to Rent?
By using the above points to formulate a strategy, along with the following considerations, you’ll be on the right track towards your investment goals.
Tax / Stamp Duty
Stamp Duty Land Tax, also known as Stamp Duty or SDLT, is an important consideration to bear in mind. If you’re a first-time buyer, you can buy a property for up to £300’000 with no SDLT (since Stamp Duty for First Time Buyers was abolished in the Autumn 2017 budget) and rent out the rooms to pay the mortgage, according to Mark Homer of Progressive Property (as reported in The Metro, an interview by Sarah Ewing, published 14th February 2018), however, we’d advise against this as it will breach your mortgage terms if you’ve bought a property to live in on a mortgage. The SDLT abolition only applies to first-time buyers who intend to live in the property and does not apply to Buy to Let mortgages, according to Virgin Money. However, you will be able to take on one single lodger in your property (not a tenant) and charge them rent – this may differ depending on your lender, different lenders have different rules.
On the other hand of SDLT, the tax you may find yourself paying is an important consideration. If you’re an individual landlord operating as a sole trader (which most of you will be if you’re a landlord but don’t own properties via a limited company), you’ll be expected to pay income tax (either at the 20% or 40% tax rate dependant on total earnings, including your salary, pension payments or other investment income) if rent is paid directly to you and corporation tax (at a rate of 20%) if you purchase the properties in a limited company, you’ll be expected to pay income tax on any dividends you pay yourself. Furthermore, you will not be able to deduct mortgage payments on your BTL mortgage if you’re an individual operating as a sole trader landlord (due to new tax rules currently being phased in). For more information regarding Stamp Duty, we’ve published an article on Harry Albert Lettings & Estates which you can access by clicking here or copying and pasting the link below into your browser. It’s everything you need to know about Stamp Duty.
After SDLT (which you pay when you purchase the property) and income and corporation (where applicable) tax (which you pay on the income earned from the property), you need to think about capital gains tax. Capital Gains Tax (also known as CG or CGT) is the tax you pay on the profit you make (if any) when you sell the property. CGT is worked out based on your personal income band (if you’re an individual), it’s set at 18% if you’re a basic level taxpayer and 28% if you’re a higher rate taxpayer. For companies, there is no capital gains tax for limited companies; they pay a tax of 20% on the profits earned from selling assets (the 20% tax is the corporation tax mentioned above). For more information on Corporation Tax, click here or follow the link below:
Another important consideration here is, if you intend to buy and sell a property immediately (often referred to as flipping a property), HMRC will consider it to be income and tax you up to 40% if the property was sold for less than £150’000 and up to 45% if the property was sold for more than this sum. Whereas, if you rent the property before selling it, it’ll be considered a capital gain. We aren’t tax advisors and as such, it is important to seek qualified tax advice from a dedicated advisor before acting on this information.
You can consider altering the property, either adding an extension or even building a new internal wall to create a second bedroom can massively increase the value of the property and the rental yield earned from the property. In Leicester, each bedroom can increase the rental value of a property by approximately £100 per bedroom. If you’re mortgage payments are £400 on a property that earns you £600 rental income per month, an extra bedroom could easily knock the price of rent up to £700 per month, an extra £1200 profit per year, with an extra room comes an extra person (typically) and as such, you need to be aware of the increase in wear and tear. You may also be bound by your mortgage agreement to inform the lender of any alterations or seek their permission to make any alterations.
When purchasing a property, it’s important to consider whether it’s leasehold or freehold. Leasehold properties can be quite difficult for the novice investor to turn profitable due to the service fees and ground rents, as such, it’s advisable to stick to freehold properties. Where you do find yourself buying a leasehold, some of these fees can be passed on to tenants, however, rent can only be increased in line with inflation and your tenants are permitted to dispute the rent increase at tribunal, as such, if your ground rent doubles every ten years, you can’t just double the amount the tenant pays when this increase affects you as the landlord, instead you should increase the rent incrementally in line with inflation in the hopes it meets the increased level of ground rent in future.
Licensing and Types of Tenant
If you’re renting your property to tenants, you have to consider what type of tenants you want to occupy the property. Is it an HMO or student let? These often demand more time to manage than, say, a three-bed property let to a family. Another consideration for HMOs is licensing, licensing of HMOs is to ensure those living in shared housing are provided with an adequate quality of housing. A house in multiple occupancy is defined as a property rented out by at least 3 people who are not from 1 ‘household’ (eg; a family) but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’, according to Gov.uk. Leicester City Council says “A property is classed as a house in multiple occupation (HMO) if at least three tenants live there, forming more than one household, and they share toilet, bathroom or kitchen facilities,” and, “HMOs must be licensed with Leicester City Council if all of the following apply:
- It’s at least three storeys high, and;
- At least five tenants live there, forming more than one household.
Civil penalties for unlicensed HMOs can be a fine of up to £20’000 and for unlicensed properties, it is not uncommon for local authorities to reclaim rent paid to landlords as proceeds of crime, Redbridge Council (London) clawed back £97,445 paid to a landlord in rent after being awarded a Confiscation Order under the Proceeds of Crime Act against a criminal landlord last week (February 2018), you can read about it by clicking here or following the link below. Even big agents like Spicerhaart have been fined and convicted for managing unlicensed HMOs and Foxtons were recently fined over £30’000 for failing to prove their properties met the minimum safety requirements. Instead of converting a house into an HMO, it may be worth considering converting a house into self-contained flats to avoid the HMO licensing conditions however, this may require planning permission.
Another consideration is Selective Landlord Licensing, whilst it doesn’t yet apply to Leicester, it is making headway across the nation, with Wales and Scotland having already implemented selective licensing schemes for landlords, with cities as close as Nottingham also following suit, now all landlords in Nottingham will have to apply for a licence (with a price tag of £655, or £400 if you take an accredited landlord course from one of Nottingham City Councils’ chosen providers – whether NCC are receiving any financial incentive from these providers is unclear).
Short-Lets Before Sale?
If you’re only interested in flipping a property, short-lets may be the way forward to generate a revenue during the point the property is ready to sell and the point in which contracts are exchanged. Using platforms like AirBnB, you’ll be able to market the property to those looking for a city break or working professionals who have a business meeting and don’t want to pay for costly hotels. The benefit of this is that, should the sale fall through for whatever reason, you’ve at least earned some revenue.
Consider Commercial Property
Whilst so far we’ve only looked at residential properties, commercial properties can be far more lucrative. Commercial properties come with tax benefits, these tax benefits are tied to interest and operational fees (such as letting agency or property management fees) as well depreciation. The returns on commercial property have historically been very strong, according to The House Crowd, the returns on commercial property have been 9.5% per year over the last 20 years.
Finding Below Market Value Properties
Guide Price: £120’000 Kal Sangra, Leicester
When you’re looking to purchase a property, it’s worth looking for Below Market Value (BMV) properties. Finding BMV properties can be difficult, especially with hundreds of less-than-honest companies sourcing “deals” for clients. One such BMV deal that came across my desk was a property for auction by Kal Sangra in Leicester, off Anstey Lane with a guide price of £120’000, the property was previously auctioned with a guide price of £140’000 but didn’t sell. Similar properties in the area sell at a market value of £165’000 approximately which, when we consider the amount you may spend on renovating the property and bringing it up to a modern standard, it is hardly a worthwhile gamble. You can employ a person or organisation to find property deals that are suitable to your needs, however, you’ll be expected to pay a finders fee on each of these deals.
BMV deals most often come from sellers who need to sell quickly and in areas that will benefit from future regeneration (places like County Durham and other towns and cities in the North and North East England, for example, are experiencing rapidly growing house prices right now).
I think the best BMV deal we’ve seen was a freehold site owned by Leicester City Council, the site is worth in excess of £3’000’000 (£3million) and Leicester City Council chose to sell the site for a measly £24’000 (£24 thousand) to Sowden, the developers responsible for carrying out works on the site and Mattioli Woods, wealth managers who will occupy many of the new offices built on the old Leicester Council owned site, unfortunately, this was a private sale between Leicester City Council and Sowden at the cost of the local taxpayer.
The final and arguably more important consideration than the first is your exit strategy. How will you get out of the game? How long will you be invested for? How do you plan to sell? Quick sell through auction or via an estate agent on the open market? To another property investor, maybe you’ve had a card through your door saying “We buy any house”? Maybe there is no exit, perhaps the intention is to let out the property for the time being until you’re ready to move into it yourself? This is especially popular with expats who have intentions of returning to the UK. Don’t worry if you’re a tenant reading this, you’ll be made aware of this intention when you sign the tenancy agreement. If you’re not made aware of this, the landlord will have a more difficult time evicting you, as such, we recommend our landlords are open with their tenants about their future intentions with their properties, whether you intend to sell it in the future or what – of course, you don’t have a crystal ball so you can only inform your tenants to the best of your ability.
By following the above nine tips and taking them into consideration, you’ll be on the right track to not only making the leap into property investment but also to reach your investment goals. For more information on Buy To Let in Leicester, click here or for more property investment tips, click here.