Buy-to-let guide

BUY-TO-LET GUIDE 2015: A guide to UK buy-to-let property investment

Buy-to-Let Guide 2015

FOREWORD

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he buy-to-let market in the UK is truly thriving. In the age of unsustainable house price growth and stricter lending criteria, in particular for first-time mortgages, the UK’s ‘unaffordability crisis’ for homeownership has led to an influx into the rental market. Those who would have once been poised to purchase a home now oftentimes find themselves priced out of the market, so it is no surprise that one in five homes in Britain are now in the private rented sector (PRS).

Whilst this is bad news for potential homeowners, private

landlords in the buy-to-let sector are enjoying a buoyant market, fuelled by high tenant demand and both growing rents and growing house prices. Therefore, it has been estimated that two million private landlords now own and rent out five million properties in the UK, at an average of 2.5 properties apiece.

It is in this landscape that buy-to-let investments in the UK have truly skyrocketed, offering a level of security, stability and financial returns that other investment classes simply can’t

Glossary

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Overview

Why buy-to-let?

Those who have faith in bricks and mortar, rather than stocks and shares, have good reason to believe in property as a viable investment option.

People are increasingly turning to tenancy agreements as opposed to mortgage arrangements because of the rising costs associated with homeownership.

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Hotspots

Property choices

Regional cities are now far outpacing the capital, with Manchester recently gaining the coveted status as the UK’s number one buy-to-let hotspot for 2015.

The type of buy-to-let property you choose to invest in is not too dissimilar to how you take your tea - it’s all down to personal taste and preference.

This report has been created by Knight Knox using information that is correct at the time of print (July 2015). The report should be used as a guideline only, and should not be used in lieu of financial advice from an IFA or similar qualified financial professional. Knight Knox will not be liable for any financial loss, cost or expense incurred or arising by reason of any person using or relying on information in this publication.

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provide. Therefore, it is unsurprising that The Telegraph in 2014 found that property has outperformed all other mainstream assets for the past 18 years, namely because of rising house prices, increasing rents and a distinct lack of available stock on the market.

It has been said that the supply-demand imbalance in the UK housing market is so profound that the country needs at least 240,000 new homes annually, but only a meagre 141,000 (58%)

were built last year. So therefore the landscape is set—a lack of available housing has led to an increase in house prices, which has priced potential homeowners out of the market. This in turn has led to a rise in demand for rental accommodation, meaning that investors with property in the UK’s private rented sector can enjoy both higher rents and low void periods. For any savvy investor, it seems like there truly has never been a better time to consider buy-to-let investment.

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Things to think about...

Case study

Having a clear and carefully thought-out strategy is essential in order to achieve the desired yields and capital gains.

Jane has decided that she will use her £150,000 cash savings to invest in a buyto-let property - how does that work?

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Do’s & don’ts of property investment

Taking the next step on the property ladder

Before you take the step into the buy-to-let investment world, make sure you compile a checklist of vital things to consider.

Rising property prices and rents continue to make buy-to-let attractive to consumers, while lenders have been fighting to offer the best deals.

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Buy-to-Let Guide 2015

BUY-TO-LET IS BACK EN VOGUE IT’S OFFICIAL.

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s an income generator, property investment is a highly attractive option, particularly when compared to low savings rates and stock market volatility. If you add into the mix a buoyant property market - made more prosperous by a General Election result that has banished Labour-led plans that threatened to dent the residential market - not to mention record low interest rates, more tenants in the market, as well as rising rents, it is unsurprising that investors are waving the flag for buy-to-let.

Those who have faith in bricks and mortar, rather than stocks and shares, have good reason to believe in it as an investment option.

Buy-to-let property purchases have been around for many years, but the introduction of assured shorthold tenancies under the Housing Act 1988 opened the market up to investors even further. With a stable income from rental receipts as well as an accumulation of wealth if house prices go up over time, the market has been growing rapidly in recent years. This is particularly the case in the regions, where there has been a notable shift from the unsustainable and unaffordable prices in London, with investors and tenants

£1.07 trillion

alike drawn to burgeoning, inexpensive regional cities like Liverpool and Manchester.

The success of buying a property with the sole intention of renting it out to generate income, or by watching the capital value increase, translates into an engaged market - one that acts as a perfect advertisement for would-be investors. According to a recent survey from The Association of Residential Lettings Agents (ARLA), 66.7 per cent of residential landlords said that they did not intend to sell any of their properties in the coming 12 months, and 24.9 per cent said that they intend to acquire further properties during the same period. The average estimated life expectancy of a property investment among respondents was 20.3 years, which means that more and more landlords are seeing a sizable return on investment in the long-term as well as the short.

According to industry research, the value of buy-to-let property across the UK is expected to reach £1.07 trillion

by March 2016, having increased 11 per cent in the year to March 2015 to £990.7 billion. In addition, the number of private rented sector (PRS) households will reach just under five million (nearly one in five households) by March 2016.

The value of UK buy-to-let property

5m

The estimated number of households in the UK’s private rental sector by 2016

24.9%

Buy to let is booming, with growing numbers of professional and amateur investors seeking to pour yet more cash into a market worth £1 trillion.

The Telegraph, 2015

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The percentage of landlords intending to acquire more properties in the next 12 months

Assessing the landscape

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o if you are considering dipping your toe into the buy-to-let market, how does the landscape currently lie? As of 2015, the buy-to-let market has been truly thriving, with growing numbers of investors seeking to pour yet more cash into a market already worth nearly ÂŁ1 trillion. Even in the era of tougher stipulations on lending, buyto-let mortgages are on the up, with recent figures from the Council of Mortgage Lending indicating that the total value of buy-to-let loans increased by a huge 35 per cent from March 2015 to ÂŁ2.7 billion.

One thing that has been distinctly positive for the buy-to-let sector is that the barriers to entry for property investment are relatively low. The market is extremely diverse, with varying investment options available for would-be buyers - both in terms of property type, size, price band and location. If you have access to available funds, becoming a landlord can be just a signature away. However, what is important to consider if you are a first-time investor is ensuring you seek comprehensive advice from a reputable property investment company. The housing market is constantly changing and can differ depending on which area of the country you are in, or looking to buy in. Experts have their finger on the pulse and can ensure that you generate the best return on your available capital to keep up with market trends.

Cumulative rise in UK housing stock since 2000 by tenure 3,000,000

Cumulative change in housing stock

2,500,000

2,000,000

1,500,000

1,000,000

5000,000

0

-5000,000

Source: Department for Communities and Local Government (DCLG)

Owner occupied

Private rented

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-1,000,000

Public and housing association

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Buy-to-Let Guide 2015

WHY BUY-TO-LET?

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he numbers across the property spectrum translate well for investor confidence and make for healthy reading. The population of the United Kingdom is estimated to be over 63 million (as of July 2014) and is set to continue to rise to more than 65 million by 2020, a rise of 3.3 per cent. According to figures, 80 per cent of the population live in an urban conurbation (50.8 million people as of 2014) , so demand for city living is rising in direct correlation to the UK’s growing populace. However, despite this muchneeded demand for housing in popular cities, it has been welldocumented in recent years that house-building is not currently fulfilling demand, putting further pressure on construction output and the increasingly overheated property market.

The lack of available housing in the UK has been widely publicised in recent years. According to a report by Kent Reliance, just 141,000 homes were completed in 2014 - 35.7 per cent fewer than the amount built the year before the credit

UK annual population growth and completed housing new builds 1,000,000

900,000

800,000

700,000

Annual population change

UK house building

600,000

500,000 400,000

300,000

200,000

100,000

0

Source: Office of National Statistics (ONS), ŠMarket Oracle 2013

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2010

2005

2000

1995

1990

1985

1980

1975

1970

-100,000

crunch, and well shy of the 243,000 per year required. This significant drop in house-building has created a chronic supply shortage, together with the increasing issue of ‘unaffordability’ - waves of would-be buyers simply find the cost of home ownership too prohibitive. This has resulted in a spike in the PRS as people turn to tenancy agreements as opposed to mortgage arrangements, because of the rising costs associated with buying a home. Naturally, this has created a vicious cycle in the market - a shortage of properties has pumped up prices of existing stock, making the ‘unaffordability crisis’ for homeowners even worse. While the prospect of renting in many other countries is not an alien concept, in the UK we have grown up in a culture where we aspire to become homeowners. However, in the wake of increasing house prices and the difficulties for first-time buyers in particular to secure affordable mortgages, the PRS has become the only viable option. The rise of the ‘rentysomethings’ - an age-group characterised as ‘Generation Rent’ because they are unlikely to ever be able to afford their own home - has spurred on the buy-to-let market, making it the attractive investment option it has become today. The figures back up this theory: private rented households in the UK account for a staggering 77.4 per cent of the new households created in 2014 alone across all tenures, more than four times the current proportion of stock that is privately rented.

The scene is perfectly set and the evidence keeps on pointing towards buy-to-let. Economists at the Wriglesworth Consultancy for lender Landbay recently conducted in-depth analysis of the market and found that returns on buy-to-let property have outstripped shares, bonds and cash since the market took off in 1996, earning returns of almost 1,400 per cent. Not simply because of the impeccable landscape for rental properties in the UK, buy-to-let is becoming increasingly popular as an asset class in its own right. Unlike many forms of investment, property is something that you can feel and touch - a tangible asset (made of bricks and mortar) that many people regard as a much safer option when it comes to investment. While the property market can fluctuate like any other, it does not carry the same volatility as stocks and shares, which require specialist knowledge as well as an appetite for risk. Property’s stability, combined with low barriers to entry and highly reliable performance and returns, has resulted in it outperforming other asset classes for a considerable time.

Current and prospective landlords alike have recognised the benefits of buy-to-let property, so much so that properties owned by landlords now account for 4.75 million households in the UK, earning £77.7 billion a year: £42.3 billion in rent and £35.4 billion in rising house prices. Therefore, it is little wonder that nearly a quarter (24 per cent) of landlords want to purchase additional rental properties this year, with three in five landlords (60 per cent) thinking it is a good time to invest in buy-to-let, up from 54 per cent six months ago.

Based on the overwhelming increase in the rental market over the past five years, it is no surprise that statistics from LSL show 45 per cent of landlords have witnessed an increase in tenant demand over the last six months to April 2015, up 3 per cent since September 2014 . This is combined with a boost in recent lettings activity, with new tenancies agreed across England and Wales climbing 6.9 per cent in the month to March 2015. As a result, investor trust in the market is strong, with the proportion of landlords who expect tenant demand to grow further now standing at 63 per cent.

WHY IS BUYTO-LET THE PREFERRED INVESTMENT ASSET? Better returns than stocks and shares over the past 18 years. The Telegraph, 2014.

Opportune market conditions, thanks to ever-growing house prices.

Excellent rental market, due to the increased ‘unaffordability’ of UK homeownership.

Capacity for both immediate rental income and capital appreciation in the future.

High tenant demand means both low void periods and higher investor returns.

Proven excellent returns year-on-year.

No specialist knowledge required.

Relative stability and security of investing in bricks and mortar.

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Buy-to-Let Guide 2015

HOTSPOTS

lowest yield of 5.5 per cent. The highest yielding regions include the North West, with cities such as Manchester and Liverpool yielding on average 6.4 per cent.

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decade ago, it was an almost uncontested fact that the UK’s capital city of London was the most profitable and desirable location for would-be investors. Its rich culture, brimming population, diverse property portfolio and rising rental prices have ensured it has kept its grip on the top ranking. However, fast-forward to 2015 and the buy-to-let landscape couldn’t be more different.

According to Nationwide’s House Price Index, annual house price growth in 2014/15 slowed in all regions except the North of England, with London’s annual price growth softening from 17.8 per cent to 12.7 per cent in the same period. Regional cities are now far outpacing the capital, with the northern city of Manchester recently gaining the coveted status as the UK’s number one buy-to-let hotspot for 2015.

In recent times, price rises in and around the capital have outstripped increases in rent, which has thus led to reduced returns. These calculations are based on rent received against property value and clearly show that inner London has the

However, it is not just investor yields that have increased the gap between the North and the South in the buy-to-let market.

The difference in house price growth between the country’s largest cities is also now at its smallest in nearly 20 years, as confidence in the economy spreads to the regions. The latest report from Hometrack, which analyses prices in the UK’s 20 largest cities, showed that the average cost of buying a home in regional areas has risen by 9 per cent in the last two decades. The research has cemented the now commonly-held view that the property market in the North has really taken off, as London and the South East cool down. Four urban areas demonstrating the greatest potential, according to Hometrack, were Glasgow, Manchester, Sheffield and Liverpool, which have all recorded a significant pick-up in house price growth.

Despite the rise in values, regional cities are still far cheaper than in and around London, meaning that buy-to-let investors can make their capital go much further. According to ONS statistics, the average house price in the North West, for example, is £113,861 compared to £458,283 in London.

Top 10 UK buy-to-let hotspots 2015:

Location

% of housing stock privately rented

Average house price

Average annual rent

Rental yield

Manchester

26.85%

£108,870

£8,628

7.98%

Kingston upon Hull

19.02%

£69,135

£5,400

7.81%

Blackpool

24.16%

£79,654

£5,856

7.35%

Forest Heath

21.80%

£171,322

£12,432

7.26%

Coventry

19.02%

£116,946

£8,424

7.20%

Southampton

23.42%

£151,415

£10,800

7.13%

Nottingham

21.64%

£89,312

£6,288

7.04%

Liverpool

21.75%

£90,426

£5,928

6.56%

Cardiff

20.32%

£150,892

£9,624

6.38%

Portsmouth

22.28%

£155,696

£9,900

6.36%

The Telegraph, 2015

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Further industry research points firmly towards the regions when it comes to attractive and viable buy-to-let options.

Data from property peer-to-peer lending platform LendInvest shows the highest rental yield postcodes from the first quarter of 2015 can now be found in Birmingham, Ipswich, Liverpool and Glasgow. This can be attributed to relatively low house prices, coupled with strong demand for rental property from large student and young professional populations.

Securing high rental yields will not only help to cover any outgoings you may have, but will enable landlords to make a healthy profit from the income return.

Ultimately, buy-to-let landlords should aim to make gains from both the rent and house price growth, particularly if the property goes back on the market.

Buy-to-let is considered somewhat of a two-fold investment strategy: as well as gaining significant rental income throughout the lifecycle of the property, investors can also enjoy capital gains when the time comes to sell, thanks to appreciation in price over a long-term basis.

By doing considerable homework on the location and investing in property where there is high rental demand, buy-to-let properties should deliver a healthy monthly return. ‘Generation Rent’, investment in infrastructure, job creation and a positive economic outlook - the key catalysts for increased rental demand - are the reason behind the resurgence of areas like Manchester and Liverpool and provide a readymade market for buy-to-let landlords.

THE UK IN AVERAGES

THE NORTH / SOUTH DIVIDE

MANCHESTER Avg monthly rent Avg asking price Yield

£980 £134,950 8.7%

SOUTH KENSINGTON Avg monthly rent Avg asking price Yield

£2,925 £2,250,000 1.6%

Source: The Telegraph, May 2015

Average UK monthly rent

Average UK property price

Average gross yield

£761

£175,653

4.2%

LSL Property Services, Aug 14

Land Registry, July 14

Home.co.uk, Sept 14

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Buy-to-Let Guide 2015

PROPERTY CHOICES

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nce you have chosen your desired property location, the type of buy-to-let property you choose to invest in is not too dissimilar to how you take your tea - it’s all down to personal taste and preference. Some people like a project of a home that requires significant work even before a tenant has stepped through the door. Others prefer an older property that is ready to accept a tenant straight away, while a vast proportion of investors have their eyes set on a new house or apartment that is modern and up to spec, ready and primed for an eager rental market. Experts believe that the most rentable properties are modern two-bedroom apartments - not only does the new-build variety require little maintenance, they are also regarded as easier to sell when the time comes.

In regards to investment types, the two main opportunities are residential and student properties. Residential developments are considerably more expensive than buying student accommodation, but still remain the most common asset class due to the high rental demand.

However, in terms of the student buyto-let market, the initial capital outlay is considerably lower, even though it can still command high yields, making it an extremely attractive and viable investment option. It goes without saying that it’s important to research and consider locations that have a high student population. Together with the likes of Manchester and Liverpool, Sheffield is an excellent city for student property - its universities are consistently ranked amongst the highest in the country for ‘student experience’ and the number of international students living in the city has increased by 30 per cent over the last five years, making up one fifth of the student body. This has led to the city and its universities investing heavily in their facilities, rendering it an even more popular choice for students and therefore an attractive opportunity for investors.

Student accommodation is no longer about the traditionally old-fashioned halls of residence. Today, students are more commercially-minded than ever before and want more for their money - bills included, free Wi-Fi, onsite gyms and Sky TV, among others.

These demands are all reflected in the

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quality of the developments now on the market for investors. As the needs and demands of modern students change, so too does investor confidence in the student accommodation market. As recently as July 2014, a staggering 84 per cent of landlords surveyed in a joint report by Accommodation for Students and Glide have stated that students make excellent tenants, with a further 69 per cent believing that it is better to let to students than non-students.

However, ultimately the type of investment you choose depends on the sort of tenant you would like to attract.

If families are your key demographic, larger-sized properties with at least two bedrooms is a must, whereas students and young professionals are generally keen to live in a high-end studio or one-bed apartment, so planning for your target tenants before purchase is a vital part of your investment planning.

As well as choosing your preferred type of buy-to-let properties, the options in the market don’t stop there.

Property investors have a range of decisions to make to ensure that they are purchasing the best investment to suit their needs. These include buying off-plan versus existing developments, and even making decisions based on who will conduct the maintenance of the property (hands-on versus fullymanaged investments).

One aforementioned area of the buyto-let market that is gaining particular traction is off-plan investments. Offplan property is the act of purchasing a

TWO KEY OPTIONS IN PROPERTY INVESTMENT RESIDENTIAL

The residential property market is incredibly popular because of the lack of available housing on the UK market, and the current insatiable tenant demand in almost every major UK city.

STUDENT

The student investment market is growing from strength to strength of late because of high student demand and lower initial purchase prices for savvy investors.

property while it is still under construction, or has yet to begin.

What makes this type of investment so appealing to early adopters is the substantial capital gains that are potentially on offer by purchasing property in this way.

Off-plan developments are often significantly cheaper than their completed counterparts, giving investors a much better return on investment when the time comes to accept tenants.

This is because properties can justify higher rents because of their recently-built status. Although investing in off-plan is seen as a more long-term approach that requires locking away capital until the development’s completion, generally the returns are significantly higher - both in terms of rental yields and eventual capital appreciation.

Historically, off-plan property investment has been seen as ‘riskier’ than purchasing a pre-built property, simply because you can’t guarantee its completion. However, investing with an experienced developer with a proven track record will almost completely alleviate this risk, leaving investors with a sound state of mind and above-average rental returns when the time comes for the property to complete.

In the same vein as choosing the right location, the success - and potential returns - of an off-plan investment can often balance on its surroundings and high levels of infrastructure that exists in the area. Planned or existing road networks and economic drivers such as universities and employment hubs, help feed off-plan property developments and make them sustainable and attractive to would-be investors.

When the housing market is extremely buoyant and on the rise, as it has been in recent years, buying off-plan enables investors to purchase a property at a lower price than if they wait for building work to commence. During that period of construction, the value of the investment can often grow substantially.

the area and competition around the development before investing. A reputable and established investment company can put your mind at rest at every point of the purchase process, with some companies even guaranteeing your deposit back should the property not reach fruition, going above and beyond to reassure investors.

THE BENEFITS OF OFF-PLAN INVESTMENTS Significantly less expensive than new-build developments.

Can stagger the payments.

Most companies offer an assured rental period after completion.

Capacity for excellent capital gains.

However...

Be sure you use a reputable company.

Thoroughly research the development - make sure you are clued up about the timeline of the project so you can plan your finances accordingly.

So, how does off-plan property work? Generally, it requires a deposit to be paid in the first instance (for example, 10 per cent) which secures the purchase of the property and ensures the purchaser owns the contracts to the property. As these gain value closer to the time of completion, healthy profits can often be made on a purchase before the property is finished. As with all other property transactions over a certain value, off-plan investments do not escape stamp duty, but it should be noted that a lot of developers include this within their fees and handle all tax implications that this could impose.

Check the portfolio and track record of your chosen developer in delivering buy-to-let projects, and ensure there is appropriate insurance in place to cover the build’s duration.

If you are attracted by the capital gains that often come with an off-plan investment, then the due diligence that comes attached with any significant property purchase follows a familiar theme. Due diligence is of paramount importance when considering any type of property investment, especially in the off-plan market. Make sure you are fully happy with the company and property you choose before paying a deposit, and ensure you do your homework-fully research the company,

Take into account the valuation of your property if you are going down the mortgage route, many will require this at the start and the end of the project, which may result in the loan amount altering if the property value changes considerably.

Look at other properties the developer has built - this will give you a good level of understanding about what to expect once it completes.

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Buy-to-Let Guide 2015

THINGS TO THINK ABOUT...

Buying a property - whether you are a first-time buyer, a seasoned home mover, an ‘accidental landlord’, or a professional buy-to-let investor - requires careful consideration to ensure you are making the right move at the right time.

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he potential returns in the buyto-let market are evident, but as with any investment - be it stocks and shares, government bonds, or alternative investments having a clear and carefully thought-out strategy is essential in order to achieve the desired yields and capital gains from your assets. Some key considerations before investing in buy-to-let are: Personal motivation - Depending on your age and financial circumstances, your reason for entering the buy-to-let market is purely personal. If you are looking to use the property to fund retirement then it is advisable to focus on yield (rental income as a proportion of price) as opposed to the longer-term strategy of watching your property gain in value. If this is the case then choosing an area that has high rental demand but affordable property will create a low risk yet rewarding investment, but first and foremost you must be certain of exactly what you want your investment to yield. Also, before you make any decisions, be sure you have the available capital at your disposal to purchase your perfect investment.

The market - Research the buyto-let market thoroughly so you are completely up to speed with all the risks as well as the rewards involved. Property investing has paid off handsomely for many people, both in terms of income

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and capital gains, but it is essential that you go into it with your eyes wide open, acknowledging all potential costs and pitfalls (and the best ways to alleviate these should they occur).

Understanding the process Select your investment, but if you’re unsure about where to invest or what asset is the best choice for you, don’t leave it to chance - speak to a reputable property investment company that can offer you the most up-to-date advice, together with helping you create a diversified portfolio which does not rely on just one particular asset class (i.e. residential property). Once that decision is made and proper due diligence has been carried out, ensure that you secure the property with a deposit.

Location - Investing in local markets can often be the easiest option, as the territory is familiar and the property is only a stone’s throw away should you wish to manage it without the help of an agent. However, as figures already show, there are prime locations across the UK that are growing in prominence in the buy-to-let market and are able to generate considerable rental income. In regional cities, the cost of entry into the property market is typically lower, while yields and the potential for medium-term price increases are higher. You need to match the kind of property you can afford

and want to buy with locations that people who would want to live in those homes would choose.

Tenants - Have in the forefront of your mind who your target audience is: find a property that will appeal to that demographic and once you have signed that all-important tenancy agreement, create and maintain a good working relationship with your tenants to ensure longevity and avoid rental voids. Remember that allowing tenants to make their mark on a property (such as decorating, adding pictures, or taking out unwanted furniture to make it feel more like home) means that these tenants will stay for longer, which is great news for a landlord.

Potential void periods - Experts advise allocating one month’s rental income per year to cover any void periods or unexpected expenses. It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from specialist providers, or as part of a wider landlord insurance policy.

Regulations - There are a number of obligations that you have to comply with as a buy-to-let landlord and the regulatory landscape is constantly changing. For example, buy-to-let investors must meet

official ‘deposit protection’ rules, with existing landlords having to comply before the cut-off date on 23 June 2015, after which they risk paying unlimited penalties. Landlords must register with one of the three Government-backed deposit schemes. Fines are unlimited, but will be calculated at three times the initial deposit taken and apply to landlords who fail to put tenants’ deposits into an official scheme before the deadline. The changes apply to all landlords in England and Wales if they have an assured shorthold tenancy agreement in place.

Tax reporting - The Government has also taken steps to reduce perceived tax evasion amongst buy-tolet landlords over recent years. Measures include: compulsory third party deposit protection schemes which report to HMRC; mandatory reporting of landlord details by estate agents to HMRC; compulsory licensing of homes in multiple occupation (HMO), and dedicated HMRC tax taskforces deployed to hunt down tax evading landlords. What is extremely important to note is that as a buy-to-let landlord, HM Revenue and Customs requires you to keep a record of income and expenses for at least six years.

Despite the costs and responsibilities that naturally come with being a landlord, the margins that can be made from owning a buy-to-let property means that this investment can be extremely lucrative. For this reason, the sector continues to attract investors in their droves, as they look to take advantage of a prospering market. Investors are particularly enamoured with the rental returns they are set to receive from their buy-to-let investments, with Kent Reliance reporting that in the first quarter of 2015 alone, the average landlord made a total annual return of 12.5 per cent per property. The report also highlighted that total rent collected by landlords across Great Britain has risen to £4 billion per month, up 7.2 per cent in the year, with annual rents rising on average 3.9 per cent.

market at large, with experts predicting a rise in rents to offset landlords’ costs. Despite this unexpected announcement, the buy-to-let market has still continued to thrive, with estate agents Savills commenting that buy-to-let property now accounts for around 1 in 12 UK property transactions.

TOP 5 QUESTIONS TO ASK BEFORE INVESTING: 1 Do I have the available income?

2 Do I know where and what kind of property I

want to invest in?

3 Have I fully researched the investment

company I have chosen?

4 Do I know how I will manage the property?

5 Am I fully happy with every stage of the

purchase process, and completely confident with the property I have selected?

In addition to the returns investors can expect from rental income, there are also tax advantages available to UK buy-tolet investors. However, it must be noted that the landscape for landlords’ tax relief has changed as of 2015, with some new policies coming into effect that changes the circumstances of some landlords.

One such change is that, from 2017, mortgage interest relief on rental properties will be reduced to the basic rate of income tax only (20%). This is expected to have the most impact on wealthier landlords in a higher tax bracket, but nonetheless this change will be eventually phased in over four years in order to limit the repercussions this may have for higherearning landlords.

However, current and potential future landlords have no need to panic: minor reductions in tax breaks for landlords are not expected to have huge repercussions on the buy-to-let

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Buy-to-Let Guide 2015

TOP LANDLORD CONSIDERATIONS

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hen all is said and done, property investment eventually comes down to two key decisions the costs involved in both the initial purchase and eventual upkeep of the property, and the role you would like to play in the maintenance of your property.

Costs - In your financial planning, you may or may not need to factor in mortgage payments and interest rates, but that aside, there are additional ancillary costs that you should be aware of before taking the next step up the buy-to-let property ladder. Before you think about looking at properties, sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get, whilst at the same time accounting for all possible expenditures you may incur. Costs to consider vary from stamp duty to income tax.

In addition, you’ll need to consider eventual inheritance tax (charged at 40 per cent if your estate exceeds £325,000) if you plan to leave your property to beneficiaries upon your death, or capital gains tax if you choose to sell - which you are liable to pay if you sell the property for more than you purchased it for.

However, like income tax, there are a number of deductibles for the overall capital gains, including: a loss made on the sale of a buy-to-let property; solicitor’s fees; estate agent fees; the cost of advertising the property for sale; and stamp duty.

However, before you begin your financial planning, check with an IFA or HMRC to get a full up-to-date list of all landlords’ tax deductible costs.

Being a hands-on landlord is incredibly time-consuming, with a recent study revealing that a huge 66 per cent of landlords find managing their properties themselves more stressful than their jobs.

Therefore, it is unsurprising that most prefer to use a professional lettings and management company to take on these responsibilities on their behalf. Lettings agents take away a huge proportion of worry for landlords, dealing with the day-to-day management of the property, including: finding and fully referencing tenants, collecting rent, as well as liaising with tenants on behalf of the landlord and organising any due maintenance and repairs on the property. The fee for a lettings agent is on average between 10-15 per cent of the property’s monthly rental value, which many landlords think is a small price to pay for peace of mind and less hands-on work.

However, if you are considering going it alone, be sure you are familiar with of the procedures, regulations, and maintenance required to be a hands-on landlord.

BENEFITS OF USING A LETTINGS AGENT Managing a property yourself can be timeconsuming and can often be a headache. But using a professional lettings agent takes away this responsibility, as they are responsible for:

If you’re looking for a lettings agent to manage the property for you, then you’ll have to factor in their fees, together with maintenance and repair costs, ground rent and initial solicitor’s fees. Other expenses that may need to be taken into account include: legal expenses; a larger deposit on a buy-to-let mortgage (typically 25 per cent); arrangement fees, which can be as much as £2,000; as well as landlord and rent guarantee insurance, but a lot of these expenses are tax deductible.

Fully referencing and conducting viewings for all potential tenants.

Your role - Buying a property is only the first step on the buyto-let ladder. You need to ask yourself what will happen when you purchase your property - will you rent it out on your own, or get an agent to do it on your behalf? Many people like to be hands-on landlords, but equally feel more comfortable in hiring a management company to oversee the property. Naturally you can make more money by renting the property out yourself, but it is important to be aware that you may be required to give up weekends and evenings on viewings, finding and fully referencing tenants, as well as advertising the property and organising and conducting maintenance and repairs.

Collecting rent from the tenant and carrying out regular rent reviews.

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Drawing up comprehensive tenancy agreements.

Putting the tenant’s deposit in a secure protection scheme.

Conducting all necessary checks on the property and making sure it complies with all relevant regulations.

Sourcing qualified professionals to conduct any necessary maintenance issues within the property.

HOW TO INVEST

Available cash savings:

£150,000 Property purchase price:

£144,950 for an off-plan two-bed two-bath apartment in a highly sought-after area (approximately 25% below current market value)

Average costs:

CASE STUDY:

£2,700 per year This includes management, maintence and ground rent.

Jane is a 52-year-old senior manager at a multinational company, and is looking at property investment as a means of funding her retirement. She is looking at the rental returns from buy-to-let property to subsidise her pension when she is ready to retire, as well as future capital appreciation in the long-term when she is ready to sell as a future inheritance for her three children.

After looking at all available options on the market, Jane has decided that she will use her £150,000 cash savings to invest in a buy-to-let property.

NET rental returns:

£672.78 per month £8,073.32 per year (5.57% NET) Capital appreciation:

Circa 6% per year (30% over 5 years)

Summary After subtracting all possible costs, Jane would expect to receive over £8,000 per year from the rental returns on her property. Furthermore, based on the current property market, Jane should expect her property to rise in value by approximately £8,697 per year (following the average annual capital appreciation of 6% in the area), so she can predict that after a five-year period of 6% annual growth, her property in five years’ time would be worth £188,435, a huge growth of nearly £44,000.

The information depicted in this case study is intended as a guideline and for illustrative purposes only. Whilst the financial information submitted in this case study is correct at the time of printing (July 2015), Knight Knox cannot be liable for any fiscal loss or expense occurred by relying on the information supplied. Any information in this report should not be used in lieu of financial advice from an IFA or similar qualified financial professional.

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Buy-to-Let Guide 2015

DO’S AND DON’TS OF PROPERTY INVESTMENT

B

efore analysing the do’s and don’ts of the property investment market, be sure to know the answer to all the major considerations surrounding your future investment. Firstly, you will have to decide what you want your investment to yield - is your priority generating instant rental returns, or using your property investment as a vehicle for wealth accumulation in the long-term? There are many different reasons for investing in property, so before you invest be sure you know your individual investment strategy.

Next, financial planning is pivotal when investing in any kind of asset, particularly in property where you have to consider oneoff or ancillary costs on top of the initial purchase price, as well as factoring in contingency income in the event of unexpected void periods when your property is empty. However, as well as the financial ramifications involved in property investment, if you are serious about investing in property, you should also be familiar with the financial positives that your property could yield. Landlords in the UK can gain substantial tax relief through offsetting the costs of maintaining their investment property, like necessary maintenance costs and utility bills, contents insurance, interest payments on a buy-to-let mortgage, and letting agents’ fees, which all come under the umbrella of landlords’ allowable expenses and allowances.

There is a whole list of tax deductions that are extended to landlords, so it is financially viable to make sure you are well aware of all available tax advantages before you invest, and make sure you calculate these in your financial planning.

When all the necessary planning and due diligence into the market has been undertaken, the next step is planning your investment on a personal level - before you begin your search to find your perfect investment property, it is advisable to know exactly what you want. First is the type of tenant you would like to attract, and from there you can begin scouting out suitable locations. Your ideal tenant will ultimately dictate where your property is situated, because if you would like to aim for the student market, a city with two or more popular universities like Liverpool, Manchester or Leeds would be a good place to start.

Effective planning is often what makes buy-to-let investment so lucrative, so be sure to plan your investment carefully.

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DO’S AND DON’TS Before you take the step into the buy-to-let investment world, make sure you compile a checklist of vital things to consider. These include: A basic understanding of the buy-to-let and rental market in the UK. An idea of what kind of tenant you want to attract - students, young professionals, or families.

Knowing the basic responsibilities of being a UK landlord, and what this entails.

A rough calculation of how much it will cost to buy and manage a buy-to-let property, while considering financial risks from potential void periods.

Finding a property in a suitable location with high rental demand.

SO WHAT SHOULD YOU DO AND NOT DO AS A BUY-TOLET LANDLORD?

DO: Think of buy-to-let as a medium to long-term investment.

Seek advice from a reputable property investment company on local market demands.

Get your sums right, and also seek the advice of an accountant or verified Independent Financial Advisor (IFA) before making any major monetary decisions.

Decorate, fit out and furnish your property to the highest standards, in order to attract the best tenants and ensure that your property is let quickly every time.

If you are using a letting agent to fully let and manage your property, be sure that they are ARLA-regulated. This means that they have Client Money Protection, hold Professional Indemnity Insurance to required standards, have staff trained to ARLA’s competency standards, and are kept up-to-date with the latest legal and regulatory requirements.

DON’T: Let personal taste cloud your judgement be sure that the property you choose meets market requirements, not your own.

Purchase anything with potential maintenance problems, as it will add nothing to the rental value, and will cost a lot to maintain.

Think that the running of an investment property to let can be left to friends or relatives in your absence - tenants require a full management service, and this is often a full-time responsibility.

Use off-the-shelf tenancy agreements from HMSO or law stationers, or forget to issue the right notices, or fail to have a proper inventory and condition report made before a tenant moves in. Be sure to leave all documentation to a professional and experienced agent.

Have a strategy in place for the entire lifecycle of your investment, to ensure that your property is fulfilling your expectations and yielding the results you want.

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Buy-to-Let Guide 2015

WHAT SHOULD I DO NEXT?

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egardless of the market environment, you need to decide if buy-to-let is for you. So ask yourself a series of questions: Do you have sufficient capital at your disposal? Are you happy to tie up this capital for a number of years? Have you the resources to manage the property, either yourself or with the help of an agent? If the answer to any of these is no, then you need to carefully consider whether to get involved.

As with all property rentals, the benefits for a buy-to-let landlord can include a stable income from rental receipts, as well as an accumulation of wealth if house prices go up over time. The burgeoning housing market and healthy house price growth in the UK inevitably makes buy-to-let a popular way to invest.

With interest rates at a record low of 0.5 per cent for more than six years - a trend likely to remain for the foreseeable future following the Queen’s Speech, which set out the Government’s legislative plans for the year ahead - and rents rising, many of those with access to capital will continue to turn towards property investment for an income.

Radical changes that allow people aged 55 and over to access their pension savings as they wish during retirement are also expected to strengthen the market further. Experts predict that the pension regulation changes could see as much as £5 billion injected into the property market by people cashing in their savings. This is echoed by new research that has revealed that 32 per cent of people aged 45 to 64 with a pension would consider using some or all of their pension pot to fund a buyto-let property as an alternative to a more traditional pension fund. The study highlights that there could be a sharp rise in the volume of ‘silver landlords’ entering the market as a result of the changes in pension regulation.

What’s never been in doubt is that buy-to-let has not only provided very strong returns for investors since 1996, but has enabled an influx of savvy investors to enter the market. Low savings rates and rising property prices and rents continue to make buy-to-let attractive to consumers, while lenders have been fighting to offer the best deals. The scene is perfectly set.

For more information on becoming a first-time landlord, call Knight Knox on (0)161 772 1370 or email info@knightknox.com.

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TAKING THE NEXT STEP ON THE PROPERTY LADDER 1 Calculate your available finances, and seek

advice from an accountant or verified IFA before proceeding.

2 Do research on the UK buy-to-let market to

see what type of investment you would like (taking into account your chosen location and preferred tenant type).

3 Speak to a property investment specialist,

who will help you find the perfect property that matches your individual requirements.

4 Be sure to ask your chosen property

consultant any and all questions you may have before investing, to make sure that you are 100% happy with your chosen property.

5 Once you have had all your questions

answered, secure your investment property and wait for your rental returns to flood in!

KNIGHT KNOX

K

night Knox is a leading provider of buy-to-let developments to the private investor market.

Specialists at sourcing investment opportunities in both new-build residences and high-end refurbishment projects, the company boasts an impressive portfolio of both completed and future stock - testament to the quality of the properties it brings to market.

Boasting a track record of over 30 successfully delivered buy-to-let developments, Knight Knox works in partnership with four highly experienced developers. Together with them, Knight Knox has built an impressive portfolio of 54 launched projects worth over ÂŁ446million to date, comprised of a mix of prime new-built residential buy-to-let apartments and high-yielding student accommodation projects in major cities throughout the UK.

Through Knight Knox, I have built an investment portfolio of 25 buy-to-let properties that are all yielding high returns and are all fully managed, meaning I do not have to worry about dealing with the day-to-day issues. I will be looking to build my portfolio further and would recommend Knight Knox to anyone considering buy-to-let investments.

Mr I. Latif, Knight Knox Investor

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Knight Knox Quay West at MediaCityUK Manchester M17 1HH United Kingdom +44 (0)161 772 1370 www.knightknox.com This report has been created by Knight Knox using information that is correct at the time of print (July 2015). The report should be used as a guideline only, and should not be used in lieu of financial advice from an IFA or similar qualified financial professional. Knight Knox will not be liable for any financial loss, cost or expense incurred or arising by reason of any person using or relying on information in this publication.

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