How To Become a Buy To Let Property Landlord
A Challenging Time For Buy To Let?
The years following the turn of the millennium saw a massive rise in the Buy To Let property market. A potential earlier "credit crunch" had been narrowly avoided by the labour government by its now familiar method of pumping our funds into the economy and setting itself up for the massive downturn that we experienced in 2008 and 2009. One of the results at that time was to facilitate the increase in lending by the financial institutions by a measure of deregulation.
This meant that the banks and other organizations were almost throwing money at would be landlords who wanted to build up a property portfolio. Of course these unfortunate people have mostly lost out as a result of the property price crash that is only beginning to show a glimmer of recovery by 2010.
The events of recent years have turned many away from the property market as a profitable business opportunity. However, now may be a good time for a more measured approach by somebody looking for a long term business and not a quick profit.
A Sure Way To Lose Money?
It is true that many people lost money from their buy to let investments. There is a very good and simple explanation for the reason why most of them did. This is better explained by a case history that typifies the fervour of the halcyon years for becoming a property landlord up to 2007.
John was a kitchen fitter earning around £25,000 every year. He had no savings and at the age of 35 was a little worried about when he was going to start a pension. He noticed a very well presented advertisement in a leading newspaper by an impressive sounding property development company - Smith Properties Ltd - and decided to attend one of their free property seminars held in a neighbouring city.
The seminar was slickly presented, with actual property millionaires telling the audience exactly how they made their money. It was so easy. You simply pay about £2,000 to reserve your property, then short of signing a few documents you would become a property landlord within six weeks! Everything was taken care of - conveyancing, mortgage application and even the management of the letting process to the local students. Your rental income was even guaranteed for a year or two. You need do nothing except wait while your property increased in value as it was "guaranteed" to do.
Oh and yes - if you signed up now you could enjoy a discount on the price of the property that just so happened to be equivalent to the deposit you should be paying the mortgage lender.
John bought two properties straight away, as he was very impressed with the promises. Not only that, but he added to his portfolio over a period of six months until he owned 20 houses in total. Apart from his reservation fees which he borrowed from friends and relations, he put no capital into his portfolio whatsoever. He did not visit his properties before they were bought, many supposedly coming with tenants already installed.
Things started to go wrong. Tennants were hard to find as the market was becoming saturated. On visiting the unseen properties many were found to need upgrading and clearly were not worth as much for the bricks and mortar as he had paid for his "business in a box" from the property company. The downturn came and property prices crashed. John ended up with 20 houses that he had originally bought valued at £4 million, using this amount of money borrowed from the lenders, being worth only £2 million. John petitioned for bankruptcy in 2008.
But the Better Approach is....?
John was typical of many that fell prey to unscrupulous property developers who of course did not want to know him when the market crashed. His name and that of the property company are fictitious of course but there are many real examples of both to be found.
Getting into property means that unless you know a bit about the business and are prepared to manage your business properly you are running the risk of a very quick failure. Letting a company make all the arrangements is not the answer - of course they are going to take the profits and leave you to pick up the pieces.
Investing in property means you must buy at the right price. This needs patience and legwork, seeing as many potential houses as you can, getting a feel for the value in the area you are looking in. Buying in an auction will give you a better margin on price and you are always going to make an offer lower than the market to a private buyer.
You need to spot a property that is selling at below the market price. You will always use your own independent surveyor to inspect and value your potential purchase. The property will probably require cosmetic upgrading to uplift its value fully. You must be prepared to do this yourself - or oversee and manage a contractor to do the work for you - at a tendered and agreed price.
You might use letting agents to manage your tenants, however you will make sure that they are always marketing your property when un-let and collecting rent diligently when occupied. John had no idea if his properties had tenants and found out latterly that some were always empty as they were in such disrepair.
By taking charge of your investment, not leaving others to do the work, it is very possible to build up a property portfolio at any state of the economy. You simply must view it as a long term business and ensure that you have adequate margins in your cash flow to fund a void period of rental and other unforeseen occurrences.
Although many people fear the property market as a result of the crash in prices during the economic downturn - this is probably a very good time to buy. Buying at the bottom of the market means that eventually they will rise. However, even buying at the top of the market will work, you just have to wait longer for your capital to appreciate.
One thing is for sure, whenever you choose to invest in property, do it right. Property development and management is not for beginners or dabblers - you must learn about the market, building regs, construction methods etc and be prepared to work at your business.
The fictitious Smith Property Limited...this was subject of a fraud investigation and ended up with the Serious Fraud Office!