Buying a Property – Part 2 - The Real Value of a Building Survey

Never be tempted to cut corners when considering the purchase of a property because even if you think a building survey is expensive …… it often proves to be much more expensive not to have one

Source: Daily Mirror

In my last article I discussed the limitations of a survey that would be instructed by a mortgage lender (a mortgage valuation survey) and how a purchaser should not rely on this as means of assessing the condition of a building. This is because the primary purpose of this type of survey is to establish the value of a property and to be confident that in the event of any default on behalf of the borrower, that the lender can re-coup what they are owed. The objectives of a purchaser however are very different in that they want to be satisfied that the building they plan to buy, and often live in, is not concealing anything that they are not aware of. I say ‘not aware of’ as it is perfectly feasible and acceptable to proceed with the purchase of a building as long as you are fully aware of any potential issues/problems. Let’s face it, buildings, particularly older buildings are highly unlikely to be free from defects and in fact many of us will accept buildings with issues/problems at a lower price, as a way of trying to get a bargain, this is particularly true of property developers.

Not all of us are property developers and the vast amount of residential property transactions that take place each year are by members of the public who in many cases have little to no knowledge of buildings and therefore rely on professional guidance. It would therefore seem sensible, particularly due to the large investment involved that prospective purchasers commission a survey so that they can establish if there are any issues/problems with the building they are considering buying. However, you may be surprised to learn that the vast majority of purchasers choose to ignore this very important part of the purchase process. 

Source: RMA Surveyors

The Royal Institution of Chartered Surveyors (RICS) recently reported: ‘Results from an RICS’ survey of home buying consumers, released today, show that many homeowners who did not take out a home survey are left with a property they regret buying and an average of £5,750 in repair bills. The survey of 1,017 buyers across the UK found that consumers are clearly aware of the need for independent advice, with 94% of respondents agreeing it is important to commission a survey. However, nearly a third failed to do so. This means buyers are left ignorant of issues with the property, such as structural defects, dry and wet rot, subsidence and many other faults, only for these to become serious matters at a later date. The new homeowner may then be unable to afford, or may lose the desire, to fix the faults and may be left with a property they may no longer want to live in but are unable to sell to recoup their losses'. (Source: http://www.rics.org/)

Over a third of those surveyed failed to have an independent survey commissioned. We could speculate on why, however as 94% of respondents agreed that it was important to commission a survey, I think it is reasonable to discount ignorance as the primary reason for this. I suspect that cost may be a significant contributing factor, where many prospective purchasers see this as a cost they can do without and hope that they ‘get lucky’ and purchase a property with no issues/defects, that they were not aware of.  However, trying to save money at this point is a false economy. True, a comprehensive residential building survey may cost on average between £700 and £1000 (costs will vary depending upon the size and complexity of a dwelling and the survey selected), however, this is always money well spent. In fact, purchasers should be asking themselves if they can afford not to have a building survey undertaken rather than thinking about how much they will save by not having one done.

A level 3 Building Survey (see below), will provide a prospective purchaser with a comprehensive assessment of a dwelling and highlight not just significant issues, but anything that the Surveyor thinks is relevant. Armed with this information, the prospective purchaser may decide you try to negotiate the sale price with the seller (to reflect the findings of the survey) or maybe even decide to discontinue their interest and look for alternative properties. Either way, the information provides the purchaser with choices, where decisions can be made before contracts are signed rather than having to deal with the consequences when the property comes into their legal ownership. I am sure that in hindsight many of those who took part in the RICS research above would have regretted not spending £700 to £1000 on a Building Survey, as they ended up with an average repair bill of nearly £6000. Never be tempted to cut corners when considering the purchase of a property because even if you think a building survey is expensive you can see from above that it often proves to be much more expensive not to have one. On the flip side, the Building Survey may not identify any significant issues. Even in this scenario this represents good value for money as you now have piece of mind that the property you are considering is in reasonable condition and you are likely to avoid any nasty surprises. The lesson here is very simple: Always commission a Building Survey before exchanging contracts!

The information provided by RICS below summaries three different levels of survey that you may consider when purchasing a dwelling: RICS surveys are available to suit the particular circumstances of the client and the property:

Level 1 - Condition Report

Provides an objective overview of the condition of the property, highlighting areas of major concern without extensive detail. This option is ideal for buyers purchasing a modern house in good condition and for sellers and owners.

Level 2 - Home-buyer Report

Is most suitable for standard older and modern properties that are in an apparent reasonable condition. It provides a concise report with advice detailing any significant problems that could make a difference to the value of a property.

Level 3 - Building Survey

The ‘flagship’ service providing a detailed report on a property. It is particularly useful for older, larger or non-traditional properties, or one which is dilapidated and has been extensively altered or if the buyer is planning a major conversion or renovation. (Source: http://www.rics.org/)

Author: Gary O’Neill

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Buying a Property – Part 1 – The Limitations of a Mortgage Lender’s 'Survey'

A Mortgage Lender’s 'survey' is for the lender only and should not be relied upon by a purchaser as a means of accurately assessing the condition of a property

Source: The Telegraph

Buying and selling of property can be one of the most daunting experiences of our lives. The complex process of dealing with Solicitors, Surveyors, Estate Agents, Mortgage Providers, Vendors (the person/s selling the property) and the like is something that the vast majority of us do not undertake on a regular basis, and is therefore something that often proves to be very stressful. First time buyers in particular will often feel overwhelmed by the whole process and will rely heavily on their advisors to guide them through the process. Once a decision has been made to purchase a property, buyers will work out their finances and decide how much they can afford to borrow and then try to secure a mortgage or at least a mortgage guarantee before beginning the process of house hunting. 

For most of us purchasing a property will be the largest financial investment we will make in our lives. It is therefore essential that we know exactly what we are buying before we exchange contracts because it is at this point that a property comes into your legal ownership. At exchange of contracts the law assumes that you have made all of your enquiries and that you are fully aware of what you were buying. If subsequently you find problems with the property, then these problems become your responsibility to deal with (unless you feel that you have been advised inappropriately and that you can prove this). It is therefore advisable to be as thorough as you can be to establish the full extent of any issues with a property before you exchange contracts. A range of different surveys can be carried out during the conveyance process for which the inexperienced, particularly first time buyers often do not understand the purpose or scope of the range of different surveys available. For clarity, this article will consider conveyance in respect of a residential dwelling.

Source: Stringinfo

Firstly, if you apply for a mortgage, a survey will be carried out by the lender on the property you are considering purchasing. Do not be misled by this survey. This survey is for the lender and not the purchaser. The purpose of the survey is for the lender to be satisfied that in the event that you default in some way on your repayments then in a ‘worst case scenario’ they will be able to sell the property and re-coup the money they have borrowed to you. This is all about the lender assessing their risk. These types of surveys are not intrusive and in fact they are extremely brief and in most cases are completed in approximately 20 to 30 minutes. The ‘Surveyor’ will make a brief internal inspection looking in the roof space if possible (usually from the top of a ladder). The inspection will also look for visible signs of timber decay or woodworm, and also consider the electrical installation amongst other things. This will be followed by an equally brief external inspection where the roof, chimneys, external walls etc will be inspected. As the Surveyor undertakes the inspection, a two or three page proforma (paper or electronic), mainly consisting of tick boxes will be completed.  The ‘report’ will then be returned to the lender and will indicate whether the property is worth the agreed sale price and also detail any urgent remedial works. It is from this report that the lender will decide whether they will borrow the agreed amount to the buyer or withhold a certain amount for any works the surveyor has identified as affecting the value of the property. I have a personal dislike for these types of surveys because in my opinion ‘surveyors’ are far too cautious in what they report. They often recommend timber and damp surveys and electrical inspections as standard without any real grounds for doing so, and often inaccurately report other issues. This is hardly surprising given the very brief inspection undertaken, however this cautious approach is more likely to be a result of the litigious world we now live in, where ‘surveyors’ provide ‘their own safety net’, and therefore try to reduce the risk of being sued. To a certain extent this is understandable, but this should never be at the expense of accurate reporting.

I few years ago I bought and sold a property. The surveyor for the lender of the prospective purchaser of my former house reported damp problems and an issue with the chimney. A timber and damp survey was recommended (by the surveyor) with a £1000 retention sum for repairs to the chimney. The prospective purchaser tried to use this to negotiate a reduction of the purchase price, however as a Chartered Building Surveyor I knew that this was completely inaccurate and unnecessary. I tried to challenge this, however as it was not my lender (it was the purchasers of my house), I continually hit a brick wall. My purchaser became unnecessarily nervous about buying a house which they now thought was riddled with damp and with a chimney that was about to collapse! In the end, and to ensure that we did not lose the sale, through gritted teeth, I agreed to a £500 reduction, even though this was completely unnecessary. I am sure that many reading this will have similar experiences, which I am also sure is one of the reasons why some property transactions fall through at the last minute, which is extremely frustrating.

This demonstrates that lenders rely on the advice of ‘surveyors’ who carry out such a brief inspection that it is almost laughable, who then recommend further inspections and remedial works that are often not necessary. Remember, a mortgage lender’s survey is for the lender only and should not be relied upon by a purchaser (mainly for the reasons stated above), as a means of accurately assessing the condition of a property. A much more comprehensive inspection is therefore required and I would recommend that a Building Surveyor is instructed to undertake a full, comprehensive survey of a property prior to contracts being exchanged. Although this will have a cost attached to it, you will often find that a building survey will prove to be extremely cost effective as it will highlight possible defects/issues which can either be used to negotiate the sale price, or possibly allow the buyer the choice of pulling out of the sale, before contracts are exchanged. This is something I will discuss in my next article.

Author: Gary O’Neill 

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Brexit 'deal agreed' - But is it a good deal for the UK?

This is a voyage into the unknown which was always going to be complex and challenging. The terms of the divorce were never going to be amicable as Europe cannot be seen to make it easy for the UK as they will clearly want to discourage other European nations from going down a similar road

Source: European Union Experts

As a member of the British public I am becoming increasingly frustrated by the constant messages coming out of Westminster and Brussels about Brexit. Like most people, I am not party to the Brexit negotiations, so I have to make do with the scraps of information that are constantly thrown at me through the media, which basically tell me nothing.  All we seem to be hearing is that ‘Britain has made concessions on this and concessions on that’. We hear today that the UK and EU have now agreed a deal for stage one of the negotiations, but how do we know if it is a good deal or not? Have the EU made any concessions? When I think of the Brexit negotiations I get the image of a vulnerable British rabbit encircled by 27 European wolves all waiting to pounce on every whimper that the rabbit makes, until it reaches a point where the rabbit is terrified into conceding for fear of being attacked by the wolves. What I want to know is where is the British Lion that will stand its ground, fight its corner and keep the wolves at bay?

At this moment in time, above everything what we need is strong leadership. You may not like Donald Trump or agree with his approach to politics or agree with his policies, however, there is no doubt that he is in charge and that he is not prepared to be messed around. Teresa May continually told us that she wanted to 'strengthen her hand' with Europe and so she called a 'snap' election. This must rate as one of the biggest misjudgements in British political history because, instead of strengthening her hand she ended up cutting one of them off!  With the hand that remained she had to hold out the begging bowl to the Democratic Unionist Party (DUP) in order to secure a very slim overall Parliamentary majority. The European Union must have laughed its socks off in the knowledge that they would now be negotiating with a wounded Prime Minister, with limited power who faced opposition from all corners including her own party. Not exactly the strong leadership that we need, is it?

Source: Sheet Plant Association

Whether people voted remain or leave is now irrelevant, that debate and that ship has now sailed. There is no point in dwelling on this because on Thursday 23rd June 2016 51.9% of the British public decided to leave Europe, and at 11pm on Friday 29th March 2019 the UK will leave Europe. The triggering of Article 50 seemed to take forever as we were told that the UK wanted to be as ‘prepared’ as we could before giving formal notice to Europe that we would be parting ways. It took nearly nine months from the referendum before Article 50 was finally triggered on 29th March 2017, giving us two further years to ‘negotiate’ a divorce. This is a voyage into the unknown which was always going to be complex and challenging. The terms of the divorce were never going to be amicable as Europe cannot be seen to make it easy for the UK as they will clearly want to discourage other European nations from going down a similar road.

The economy and particularly trade are topics that continually arise as British industry tries to work out the impact of what Brexit will actually mean for imports/exports and to them and their business in a wider context. Again, the EU ‘dictated’ that the next stage of discussions (including trade) could not take place until we have dealt with three key issues; the rights of EU nationals living in the UK, the financial terms of the exit package and agreement of how to deal with the border between Northern and the Republic of Ireland. You would think with all of the UK concessions we have been hearing (which we have no real details about) that negotiations would have moved much quicker however, to the contrary, we are seeing headlines such as; ‘We can't go on like this': mood of resignation in EU as Brexit talks stutter’ in the Guardian (December 5th 2017) (Link). Within the article the current confusion and chaos around Brexit is summed up by a Finnish MEP; ‘the government’s weakness was 'a key question' for the EU. 'We are also in a very difficult position because it would not be in our interests to see the whole thing fall apart', 'At the same time … it’s not our duty to help the British government in a negotiation that is between them and us. The bottom line is that the May government is facing an impossible task', adding that promises made to British voters during the referendum campaign and before June’s snap election could not be kept. The government was in 'an ever-worsening, deteriorating cycle'.

It is a fact that there will be quite a number of years of ‘transition’ whether the UK strike a complete Brexit deal with the EU or not. It will take the UK and indeed European countries and their economies time to adjust as we get used to the reality of life without each other. Therefore, if we know and accept that there are some turbulent years ahead then the question arises of whether it is in the best interests of the UK to strike a deal with Europe that involves so many concessions that we are effectively still a European nation but without the ‘official membership’. There is plenty in the media about the implications of a ‘no deal scenario’ and yes, this would have serious implications.  In the Guardian (December 7th 2017) (Link) the House of Lords warn that a ‘no deal’ Brexit would be ‘the worst outcome possible’.  Well, maybe it would but at this point in time nobody really knows. What I would like to see and I’m sure many others would share this view, is a British Government that shows some fight, a British Government that stands up for Britain, a British Government than shows leadership and a British Government that provides confidence to the British people that they have a plan in whichever scenario plays out.  At present, all we see if confusion, discord and poor leadership which has reached a point where we have no idea what is going on. Sadly, this also seems to be the case for those negotiating Brexit on our behalf! What a sad state of affairs.

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Property Investment - 5 Tips to Maximise Your Buy to Let Investment

It is still possible to make a good return on buy to let investment however this is not always as easy as portrayed in the media.  An investor will need to carefully plan their investment, ..... to have any chance of achieving a good return

Source: http://www.dailymail.co.uk/

With property prices starting rise in many parts of the UK and with the Bank of England making noises about when (not if) interest rates will start to rise, anyone with property or considering buying property will be watching closely to see what happens.  The property market in the UK has proved difficult for many over recent years due to the global economic downturn, a consequence of which is property prices consistently falling in the vast majority of areas within the UK. Many have found themselves in negative equity (this is where the value of the property reduces to a point where it is worth less that the amount that is outstanding on a mortgage loan), and are faced with the dilemma of being ‘cocooned’ within the property market and waiting for things to improve or making a financial loss (sometimes significant), in order to be able to move.  In fact BBC News Online recently reported ‘Negative Equity currently afflicts over half a million households in the UK.(Link)

Despite the difficulties discussed above, property in still portrayed as a ‘safe investment’ within a number of popular TV programmes and has no doubt contributed to the rise in private property investors. These programmes have helped to paint a picture that anyone can invest in property and that anyone can maximise an investment and make large sums of money.  Whilst this is partially true, this message is also misleading as to maximise a property investment takes knowledge, skill and money.   Property can be a sound investment, which can provide exceptionally good returns, but only if you know what you are doing!  Like myself I am sure you have read/heard of many examples of those who have listened to this message and decided to ‘dip their toe in the water’, without any real knowledge or experience and have ended up losing large sums of money, which in some cases has sadly led to repossession and even bankruptcy. Below I offer a few tips for consideration for those who are thinking about entering the buy to let market for the first time.  I appreciate that some will consider buying property, refurbishing it and then selling it on (something referred to as ‘flipping’), however for the purposes of this article I want to focus on the buy to let investor.

1. Undertake an Investment Appraisal  

Source:  http://encorepropertysolutions.co.uk/

Careful consideration should be given to your objectives with a focus on what you are trying to achieve.  Ultimately, this should be to maximise your return.  New buy to let investors may often not understand the importance of this basic objective and that they are now in the World of business and are therefore trying to make a profit.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return.  Failure to undertake this initial assessment or be tempted to ‘take a chance’ is extremely unwise and can result in significant losses being made.  For more information on investment appraisals see my previous article ‘Property Investment – Why an Investment Appraisal is crucial for Buy to Let Investors’ (Link)

2. Research the Market

It is important to understand the property market in the area that you are planning to invest.  Nowadays there is a vast amount of information at your fingertips, just by undertaking simple internet searches.  Gather information on local property values and rental incomes to give you an idea of the type of investment that you might want to make.  Websites such as Righmove and Zoopla are good initial sources of information for property prices, as well as websites for local Estate Agents and Letting Agents to provide more local information.  The information you find during your research will help you to establish the likely investment value and give you an assessment of the likely rental returns, which you can feed into your investment appraisal. If you decide to buy at auction, this research will be crucial in deciding what your maximum bid limit will be.

3. Condition of the Property

The condition of an investment property can have a significant impact on any likely return and therefore needs to be carefully considered.  There are bargains to be found, however, in general terms you normally get what you pay for.  Always undertake a thorough inspection of a property before committing to purchase to establish its condition, particularly auction properties.  This is because buildings have a habit of concealing a variety of nasty surprises, which you want to find out about before you purchase, not after!  Rectifying problems within a building that you were not aware of and not budgeted for have the ability to completely wipe out any profit and in some case can result in a loss. Surveyors should pick up any significant issues during the conveyance process however this is something to be particularly cautious of when buying at auction, where sufficient inspection may not have been undertaken.

4. Keep Control of Repair/Refurbishment Costs

It is worth continually reminding yourself that you are planning to let the property and therefore you must ensure that you spend money appropriately/efficiently.  The specification for any repair or refurbishment works should reflect the area, type of property and tenants that you likely to attract.  You must expect tenanted properties to accommodate some wear and tear so durability should be considered along with how the building will look. If you are investing in an area where rental incomes may be on the low side, then spending money on expensive fixtures, fittings and finishes will not be cost effective.  On the flip side you may be required to provide a high specification in certain locations to attract high rent paying tenants.  The point here is to know your market based upon doing your research above and control repair and refurbishment costs appropriately in order to try to maximise your return. Do not be tempted to do a high specification finish, to your own tastes, where this is not warranted.  Remember, this is a business and wasting money unnecessarily just eats into your profit.

5. What Permissions/Approvals are required?

Something that is often overlooked by investors is the impact of obtaining various permissions/approvals and how this can increase costs.  In most cases issues arise due to a complete lack of awareness by members of the general public. Awareness of statutory approvals such as Planning Permission and Building Regulations approval seems to be improving, however, other types of approval such as Party Wall approvals are less understood.  The type and extent of works proposed will determine which permissions will apply, which can often run into may thousands of pounds especially when you factor in professional fees. 

With regards to Planning Permission, an investor may consider scaling down a proposed extension to utilise permitted development right.  This will reduce costs and save time by not going through the formal planning process.  It is always worth obtaining professional advice in respect of whether or which permissions/approvals apply.  This may generate a consultancy fee, however, this could save a lot of money further down the line and will therefore be money well spent.

In summary, it is still possible to make a good return on buy to let investment however this is not always as easy as portrayed in the media.  An investor will need to carefully plan their investment, taking into account some of the points discussed above to have any chance of achieving a good return.  Buying property and rushing into the property market on the assumption that you cannot lose is dangerous and completely incorrect.  I am sure that there are many who can bear testament to this fact, who have lost considerably more than money after investing in property. Successfully investing in property takes hard work, knowledge, money and often a good dose of luck! If you are thinking of investing in property in the near future please make sure that you take on board some of the suggestions above before taking the plunge.

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Housing Market - The Harsh Reality of Interest Rate Rises

Although interest rates are unlikely to rise before 2015, those entering the housing market in particular, should be conscious of imminent interest rate increases and ensure that they budget accordingly

Source: http://www.whatmortgage.co.uk

On 13^th October 2013 Bank of England Governor, Mark Carney, indicated that interest rates may rise in 2015, a year earlier than expected due to an improving economy and a significant fall in unemployment.  Although the announcement also indicated that interest rates are likely to remain low for several years, it is likely to have raised alarm bells for those who have variable rate mortgages as well as those who are thinking about moving onto the property ladder for the first time.

Over recent years mortgage borrowers have been spoilt by a record low base rate of just 0.5%.  Although the property market has suffered with the economy, we have had the opportunity to borrow money very cheaply for many years. Those who have taken this opportunity may have been lulled into a false sense of security, hoping that this will last for the vast duration of their mortgage loan!  In reality however, it is likely that those who have stretched their budgets or maybe those who are new to the property market will find any interest rate increase a major shock to their finances.

Even a small increase in interest rates will pose difficulties for many with variable rate mortgages, particularly those who have borrowed to their absolute maximum.  As an example the table below provides an indication of the financial impact of an interest rate increase on a variable rate 25 year repayment mortgage loan of £150,000, assuming and existing current interest rate of 3%:

Mortgage amount	£150,000	£150,000	£150,000	£150,000
Current Interest Rate	3%	3%	3%	3%
Interest Rate Increase	0.25%	0.5%	0.75%	1.00%
Existing Monthly Payment	£717.85	£717.85	£717.85	£717.85
New Monthly Payment	£737.99	£758.43	£779.15	£800.15
Increase per Month	£20.14	£40.58	£61.30	£82.30
Increase per Year	£241.72	£486.92	£735.57	£987.61

As can be noted above, for every 1% increase in interest rates on a £150,000 repayment mortgage loan there will be a nearly £1000 annual increase in repayments.  Add this to the fact that energy prices are soaring and in-fact have been predicted to rise for the next 17 years (see BBC News article), and in addition ‘the cost of living – based on the consumer prices index – rose by 2.2% but pay packets have risen by just 0.7% on average in the past year’ as reported by The Mirror online on 12^th November 2013, it is clear that many are likely to find themselves in financial difficulty over the coming years. 

The impact of progressive interest rate increases is starkly demonstrated by what happened in the early 1990’s. The extract below is from a recent article from Guardian Money website :

‘A sudden, sharp rise can have a massive impact on household finances, as Maureen Twiddy is all too aware. Maureen, 49, and husband Paul, 56, owned a house in Carlisle in the early 1990s when interest rates shot up to stratospheric levels. Our mortgage leaped from 6.5% to more than 15% in just 18 months. It was a nightmare and a real battle making our repayments every month. We were lucky to pull through, many others saw their properties repossessed'

Source: http://www.walesonline.co.uk

The big difference between the early 1990’s and now is the value of property. The average house price in the early 1990’s was in or around £52,000 whereas at present this stands at just over £167,000 (Nationwide 2013).  Therefore the amount of money that is needed to borrow is substantially higher and so is the risk to both the borrower and the lender.  Obviously an interest rate increase will have a greater impact with the more money that is borrowed and nowadays the average debt is much larger based upon astronomic capital growth since the early 1990’s. 

The Guardian article above goes on to state: ‘Research by property analyst HML suggests that if rates increased from their current 0.5% to 1.75%, around 30,000 people would fall into arrears within a year. So it could well be time to review your finances and make sure you could cope'

Fixed rate mortgages provide a safety net in terms of financial certainty for a limited period of time, however WHEN interest rates start to increase, as a borrower is nearing the end of their fixed term, they are likely to find that new fixed rate term deals will not be as cheap as they once were.  As demand for fixed rate mortgage products starts to increase, lenders are likely to seize on the opportunity to make more money and increase costs for borrowers.

Over recent years the UK Government have been trying to breathe life into the UK Housing market to try to encourage growth and it appears that we are just starting to see signs of life, fuelled partly by the help to buy scheme.  Although interest rates are unlikely to rise before 2015, those entering the housing market in particular, should be conscious of future interest rate increases and ensure that they budget accordingly.  When interest rates start to increase (and this is only a matter of time), it is likely that the financial burden will prove too great for many.  Sadly, I suspect we will see a sharp increase in re-possessions as lenders start to reduce their burden against potential loss.

For those with a mortgage, whether repayment or fixed rate it would be wise to consider your options now rather than wait for interest rates to start to rise.  You may find that you already have a good deal, however there is no harm and no cost in looking around to see what is available.  Although there is no certainty in life, we can be fairly certain that interest rates will increase in the near future, which allows us to make provision for this in our finances. 

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Property Investment – Why an Investment Appraisal is so crucial for Buy to Let Investors

The formulae to successful buy to let property investment will depend on a range of different factors, which will vary from investment to investment.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return. 

Source: http://www.bridgingmortgage.co.uk

Even during times of recession when property prices are stagnant or possibly even in decline, wily property investors will find opportunities to make a good return on their initial investment, particularly in the buy to let market.  Generally, there are two primary ways in which investors will make money from property, either through capital growth or through rental income. For the purposes of this article I will focus on the latter, where I suggest a number of ways in which a buy to let investor can help to make, and maximise a return on their investement.

The formulae to successful buy to let property investment will depend on a range of different factors, which will vary from investment to investment.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return.  Failure to undertake this initial assessment or be tempted to ‘take a chance’ is extremely unwise and can result in significant losses being made. 

Once a property has been identified for potential investment an appraisal should be prepared, which will assess the likely costs required, balanced against the likely return.  If, through research, an investor calculates the likely annual rental income, and then divides this into the purchase cost of the property, which will include any costs associated with purchasing together with any repair or renovating cost, and any professional fees, then this will give something referred too as the ‘net rental yield’.  As an example, if the net rental income of a property is estimated at £15,000 per annum and the total investment cost of the property is calculated at £200,000, the net rental yield will be £15,000 divided by £200,000, which equates to 0.075 or 7.5%.  You will often hear investors and those involved with property comparing the net rental yield to the returns on a similar investment if placed in a bank account. Inevitable with low bank interest rates over recent years it is not difficult to understand why investors are choosing to put their money into property rather than letting it sit in a bank account.

Source: http://www.buckinghams-residential.co.uk

In order to do establish the net rental yield an investor will need to understand property prices and rental values in the areas that they plan to invest, to consider the condition of a property and the amount of money that they will NEED to spend (notice the terminology) and establish how they will finance the investment.  All of these factors have different variables based upon location, size and nature of the building and the amount of money that may need to be borrowed.  Every investment will be different and investors will need to be thorough in every appraisal they carry out to help them to maximise their rental yield.

If, following an investment appraisal a property is then purchased, then the investor needs to ensure that they stick too and keep control of costs, based upon their budget, which would have been a key part of their appraisal. From this point onwards any unexpected costs will start to impact on the return and if this is allowed to get out of control the investment starts to become less and less attractive.  In order to minimise this happening the investor should have reviewed and understood the legal pack (auction purchase) and understood any specific legal responsibilities applicable to the property.  Once contracts have been exchanged the investor will not be best pleased if they find out that the building is listed (protected), or there is a right of way running through the middle of the rear garden, or there is a restrictive covenant preventing certain types of development, all because they have not taken the time to read a legal pack or to get appropriate legal advice.  This can prove very costly and has the potential to wipe out any investment return and could actually result in a loss.

Experienced property investors will realise that an investment is business and not personal, and they will therefore keep a tight control of what they are spending.  They realise that costs of any work to a property will depend on the likely rental income and they will not make extravagant alterations and purchases that are not going to add anything to their investment return.  It sometimes takes newer property investors a number of years to grasp this, where they will often ‘personalise’ a property to their tastes, assuming that everyone else likes and appreciates the same as them.  Renting in certain areas will not demand high quality fixtures and fittings, therefore including these because an investor wants the building to ‘look good’ does not make any business sense whatsoever.  

Making a profit from buy to let property investment is often portrayed in the media as something that is reasonably straightforward.  Why this may be true for some, the truth however is that success will very much depend on how the investor assesses each investment to calculate the likely outlay and return and this will depend on how well they research a property before making the decision to purchase and how well they keep control of their budget.  Of course, there is also managing tenants including collecting rents, property maintenance and repairs and complying with statutory requirements to consider once any works have been completed and tenants are in occupation. All in all there is money to be made from buy to let property investment however there is much more to it than people often realise.  If you are considering a buy to let investment for the first time then hopefully you will find the content of this article of use.

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