For many years, it didn’t make a huge amount of difference whether people had an investment plan in place before they bought a property. Until 2004 for some and for others up to the credit crunch, average prices had enjoyed a rapid journey upwards, giving virtually everyone who owned property an excellent return. The level of rental income was not overly important because the capital gain was so good.
However, the last decade has been a very different story and the gains seen in the past are not currently being forecast for the future. Although it’s taken most of the last decade for reality to really sink in for many investors, more are realising that property is no longer the easy money-maker it used to be.
As a result, if you already own or are considering buying investment property, you have to understand a lot more about the market, have clear financial plans and be able to track how well your property is performing so you don’t get any unpleasant surprises. It’s still possible to generate good returns but it’s no longer possible to buy any property just because you can afford it and assume that everything will work out if you hold on to it for long enough, especially with tough new tax regimes.
Making an investment plan
The vast majority of investment property is good at either generating income or growing in value – it’s harder to find one that does both well – so the first thing to decide is what kind of return you want and when you want or need it. That, together with the amount of capital you have available to invest and the length of time you are prepared to tie it up for, is likely to dictate the type of property and let that is most appropriate for you.
A big consideration is also whether to be a hands-on landlord or engage a managing agent. With the amount of legislation that has hit the lettings industry since buy to let mortgages were introduced in 1996, and particularly since the Housing Health and Safety Rating System (HHSRS) came into force in 2006, being a landlord is now something of a legal minefield. Each local authority in England has its own take on many of the rules and you can now be fined up to £30,000 if you are found to be in violation of the law. While in Wales you have to be accredited by certain training organisations before you can manage property. Scotland and N.Ireland have their own rules on landlord registration too.
The easiest way to ensure you don’t fall foul of regulations is to engage a self-regulated letting agent that is ARLA, NALS or RICS registered to handle the lettings and management of your property. Although that is an added expense, if you are not confident that you are able to keep up with the legislation yourself and ensure your property is always compliant with the latest changes, it is probably money well spent and it is of course tax deductible.
Carrying out solid initial research
Once you have decided what returns you need and when, you need to look at your local market and understand what kind of property is going to deliver the returns you need. Speak to local estate and letting agents and carry out your own online research to build up a picture of house price and rental trends. You need to be sure that the capital you’re going to have to invest will be money well spent, particularly if refurbishment is required. Do you buy something for less that needs a bit of work or do you buy something that’s ready to rent? Should you invest in buy to let for the longer term or are there opportunities to improve and sell on?
Your exit plan
Whatever your reason for investing in property, at some point you will probably need to sell or retain as much rental income as possible to meet your financial goals, which should be prepared well in advance.
The thing that is likely to have a significant bearing on how much money you realise from selling is the amount of tax you pay. Even if you are intending to simply pass the property on to family, there will be tax implications, so it’s important to consult a property tax expert and/or wealth manager as early as possible – ideally before you buy. They will be able to look at property alongside your other income and financial investments and advise how to structure your purchase and ownership, and the best way for you to realise the return on your invested capital so that your tax liability is minimised.
It is also advisable to have a contingency, in case the property market or economic climate is not ideal at the time you want to sell. That might be refinancing to release equity if you need a lump sum, or continuing to let and postponing your original plans for a while, if possible. Bear in mind that your own circumstances are likely to change over the lifetime of your property investment and you might need to make adjustments to how you let and what you do with your profit.
Importantly, you need to have a system for tracking your investment and reviewing your financial plans on an annual basis. Whether you do it yourself or use your financial advisor – or even a helpful local lettings specialist – you need to keep an eye on how well your property is performing against both similar properties locally and other types of financial investment. That way, you can make informed decisions about what changes you might need to make to ensure you continue to get the best possible returns.
Please feel free to take a look at our buy-to-let calculators and don’t hesitate to get in touch if you’d like to have a chat with one of our specialist mortgage advisers.