Building a Buy-to-Let Portfolio in Northampton
How to source, finance, buy and manage
Northamptonshire is a prime location for Buy-to-Let, even though London offers excellent returns, the higher property values need to be taken in to consideration, this often results in a yield that is higher in Northampton. Whilst we are on the subject of yields, there is more than one way to view rental yields, the standard method being to take the annual rental income, as a percentage of the market value of the property. This would be calculated as follows:
- Purchase price: £500,000
- Annual rent: £25,000
Using this method, a property with a market value of £500,000 that achieves an annual rent of £25,000 is a yield of 5%.
Although this is the standard method to calculate rental yield, in practice, this should only really apply if the house is paid for in cash, as the entire sum has been tied up in the property. However, if the property is bought with a mortgage, it can be calculated differently, which I term as a ‘real term yield’
Using the same example, if the property were bought on a 75% LTV mortgage, the yield would be calculated as follows:
- Property purchase price: £500,000
- Deposit: £125,000
- Mortgage balance: £375,000
- Estimated annul interest payment at 2.5% (for example) £9,375
- Annual rent: £25,000
- Less interest payments: (£25,000 – £9,375) = 15,625
- On an investment of £125,000, an annual return of £15,625 is a yield of 12.5%
In real terms, the most important calculation of the yield is in relation to the sum invested. Therefore, by using the alternative method, investors can get a real life snapshot of their actual return.
Do your homework!
Before you do anything, you need to research every aspect of Buy-to-Let, to ensure that you get everything right. I will cover the basics in this post, then I will go in to detail on each part in subsequent posts, as there is a lot to take in.
What sector are you looking to invest in? Are you looking at single units, are you looking at converting a single property in to separate self-contained units? Are you considering HMO? Speak to people in the industry, get first-hand information about supply and demand, any changes that may affect supply and demand (such as a university expanding, or new developments that may flood the supply chain) so that you can establish which area to focus on.
How do you intend to do this? More than likely, you will be purchasing a property that is in need of renovation, to maximise your capital growth and build up equity as quickly as possible, but this is not always easy.
- Who will do the work?
- Are they reliable?
- Raw materials have been rising significantly recently, how will you prepare for this?
- Who will rent and manage the properties?
- Have you familiarised yourself with the law, including any planned changes (such as the minimum EPC rating)
Calculate your finances carefully!
There are many ways to finance a Buy-to-Let
Unless you have access to unlimited funds, you need to have a meticulous financing strategy in place. Anyone can hand over a deposit, pay the fees/expenses then hand over the property to an agent, but even if you do have the deposit available for one, two or three properties, what then?
This is why I will cover all areas of financing and re-financing, so that you can use your growing equity to acquire more and more properties, with your equity constantly increasing, your ability to purchase more properties will snowball.
Speak to a broker
The right mortgage broker can make or break you!
Many brokers are only interested in a single point service. This being that they would like you to apply for a mortgage, or development finance, pay them a fee, then come back to repeat at a later date. An outstanding broker will establish what you have available, what you need and how to raise it in the simplest and most effective way, without hindering you from moving forward at the pace that you need to, in order to build a portfolio.
There are many financial advisers out there, but only a select few will give you the time and creative input that you will need to make this happen.
Form an SPV (Special Purpose Vehicle)
Changes to tax laws have made owning Buy-to-Let property in your own name uneconomical. The changes, known as Section 24, have seriously impaired the tax benefits to private owners, not to mention all of the benefits of buying under an SPV.
Once you have bought a buy-to-Let under an SPV, it is ‘ringfenced’ which means that it is an entity in its own right, that is not at risk from any other entity, neither can it be affected or cause any effect that may jeopardise any other entity.
When a property is owned by an SPV, it is quicker, easier and cheaper to dispose of, as you would not be selling a property, you would be selling a privately held company, which is more attractibe to potential investors.
The yield from one property, will never have an adverse effect upon another, therefore should one property fall below the ‘stress test’ it will not hinder your ability to continue buying. I will explain stress tests in later posts.
Raise the deposit
There are several ways to raise the required deposit, which is normally 25% of the purchase price. It’s fine if you have the deposit sitting around in the bank, but not many people do and even if you do have it, once you have bought a property, you will need another deposit (plus costs) to buy the next one. You will obviously need to have the access to a deposit, even if it is equity in another property, or from an investor who may wish to partner in a JVC (joint venture company) with you, so the key here is to use what you have to your advantage.
If you were to simply re-mortgage your existing property, you could incur unnecessary costs, break an existing fixed deal or even increase the mortgage on a property long term, when you need not. Another option would be to raise the deposit and expenses against your existing property, with development finance, which would be a second charge, that will not impact upon your existing mortgage ( provided that it is not approaching the end of a fixed deal, in which case you need to re-fix first) this could be used as a deposit against your purchase, with the remainder being raised with development finance which is secured against your purchase.
This would take care of your purchase, but at this point, you have bought a property that is financed entirely with development finance, which is expensive, so time and planning are of essence, or you will get yourself in to trouble!
Factor in all your expenses
On top of the deposit, you need to consider all of the following expenses.
- Broker Fees
- Survey Fees
- Conveyancing costs
- Stamp Duty (including the additional 3% when purchasing a second property or buying under an SPV)
- Council tax, which is payable from completion until the property is rented. (This will be the full rate, without discount)
- Site clearance and securing ( these properties invariably have lots of rubbish, plus the old kitchens, bathrooms, carpets, etc)
If you conducted your renovation costs with due-diligence, you should have a good idea about what to expect, but there are always unforeseen expenses, be it electrical, plumbing, or even something as simple as discovering that the water supply is still via a Lead pipe, which would need to be updated immediately, the water authorities can charge upwards of £1,500 just to connect your new pipe to their feed!
Plan out your project management
It is crucial that you plan out your project management, because time is money. Personally, I try to arrange a significant gap between exchange and completion, because that way, on exchange, I am certain that the sale will proceed, so if I have a few weeks until I complete and I can use this time to order windows, find builders, bathrooms, kitchens etc. In an ideal world (it’s rarely ideal) new windows can be installed almost immediately after completion (assuming they need changing) then all the major work can be completed, including electrical and plumbing first fix. As long as you have not bought a property that requires structural work, ( I would never advise this if you are intending to build a portfolio) you should be able to have the work completed within 12 weeks maximum. This is very important as you cannot proceed to your exit plan, until all the work is completed.
Ensure you meet the terms of your exit plan!
It is very important to bring the property up to top spec as quickly as possible, ensure that you have all your documents in place, including EPC (or a new one which will probably have a higher rating after all the work is completed) Gas safety certificate, Electrical appliance certificate and then you can rent the property, which will then demonstrate an income to the lender, who is only concerned about the financial viability of the property.
BEWARE: Do not rent a property to anyone until all the certificates are in place and all the correct documents are presented to the prospective tenant and signed for. At this stage, it would be wise to use a reputable letting agent, especially if you are new to the industry, as one mistake at this point, could cost you dearly at a later date. Not all letting agents are the same, I have come across agents who do not take the law seriously, they are only concerned about getting their fee, but that could leave you facing serious legal issues at a later date.
Once all this is in place, you should be able to exit to a Buy-to-Let mortgage, which should cover the development finance used to purchase the property, plus the charge on your existing home that you used to raise the deposit, plus a surplus. This will only work if you bought a property in need of renovation at the right price and added value by completing all the work to a high standard, therefore increasing the value of the property. This would require an uplift of around 30% so it is not an easy task, but something that investors up and down the country achieve consistently.
Do not underestimate the importance of compliance when you rent
Tenancy laws have been tightened up severely in recent years, the greatest change being introduced in 2015 (known as the deregulation act)
Sections 33 to 41 of the Deregulation Act 2015 (DA 2015) contain provisions in relation to Section 21 Notices, including:
- Removing the need for a landlord to specify in a Section 21 Notice the last day of a period of the tenancy as the date on which the tenancy comes to an end.
- Limiting a landlord’s ability to serve a Section 21 Notice at the start of an AST, to ensure that tenants are actually given two months’ notice before the tenancy comes to an end.
- Introducing an obligation on landlords to provide information about the respective rights and responsibilities of both the landlord and the tenant under an AST.
If you do not comply to the rules BEFORE renting out your property, you will lose your automatic right to use a Section 21 to gain possession of your property, which can result to astronomical legal costs and many months (if not years) of litigation to recover your property. Do not take this lightly!
Prepare to repeat!
Now that you have financed, purchased, renovated, rented and re-financed your property, you should now have more equity, the figure you already had, plus the added equity that you have created in the property that you have just completed, as well as an additional income from the rent. In theory, you should be able to repeat this process and you may even be able to raise finance on both properties to proceed with two additional purchases, if you have the energy for it, which will be well worth it, as your next step will be to go from one Buy-to-Let, to three and so on. I would say that in practice, it would not be impossible to go from your first project to a portfolio of twelve or more, within five years. Now do the sums, twelve times whatever equity you create, plus twelve times the monthly net profit on the rents, does that sound appealing? All the facilities are there, should you wish to do so.
I will be covering every aspect of building a portfolio in future posts. If you would like any advice with anything to do with building your own property portfolio, or if you have any questions regarding anything to do with property, please feel free to get in touch using the contact form below.