Property Pod: How to buy a buy to let property

Our house in the middle of our street. Our house.

That was when we used to sleep.

Our house in the middle of our street. Our house.

Hello and welcome to Property Pod with me, Emily Evans, and me, David Blackmore.

And the thing about this podcast is it's trying to break down the jargon and the confusion around property. The first two pods were all about how to buy a property, very much for those who, like me, not so long ago and didn't have a clue what certain things were. Stamp duty. What's that? We've busted all of those myths and jargons on the first two podcasts and now for the third, we're looking at how to buy a buy to let.

Absolutely.

And as somebody who barely owns a house, this is uncharted territory for me. How, however, you. Emily, you know a fair bit about this.

I have a few, yes. And I know because I've been through the process many times and, you know, you only really learn from doing it yourself. You know, there are estate agents out there that will give advice on buy to let properties, but until you've done at least two or three yourself, that's when you really start to learn about the process and how to do it correctly.

Does it get easier the more you do it?

Oh, yes. Yeah, absolutely. Okay, absolutely.

So after you've nailed your first, then you know, second.

Yeah, it's nailing that first and it's the risk. It's. I remember when I first did my first one and I was like, oh, my God, you know, I'm spending all this money and do I do it and, you know, if it's in a good area and you, you've got a plan in place and you know you can get a tenant for it, you know, you've just got to take that leap and buy it.

Yeah. So how do you know that you're ready to buy a buy to let your bank balance? Yeah, I mean, like, you know, I often find that people who I know that have done it always say, well, I just did it, because if you spend too long thinking about it, it's never going to happen.

Well, I always say to sort yourself out first, so make sure you own. Well, live in your own property first. So buy a property for yourself first.

Sort yourself out first.

Sort yourself out first. Unless there is a one exception to the rule. Unless you live in London. If you're a young person that lives in London that can't afford to buy a property for themselves to live in, then buy a buy to let property out of London. So the Capital growth of that property is growing. So eventually you will be able to afford in London, buy a property for yourself first and then you can either release equity from your property or save more money up on the side to buy, buy a buy to let.

And then you're at that stage you think you know what I want to start my portfolio. You pick up the phone. Who's the first number you're dialing?

My independent mortgage advisor.

That independent word again? Yeah, your independent mortgage advisor and that initial conversation because it's someone who's, you know, presumably they, if they're a friend, they know a bit about you anyway. If they were the ones that were involved in your mortgage to buy your house, they will know a bit about you already.

Do you know what? My mortgage advisor has become my friend. So he wasn't a friend in the beginning, but we've done quite a few transactions now that, the fact that he now knows me and he's great and I completely trust him and to have that relationship with your mortgage advisor is amazing. You know, to start off, basically to start off the process you need at least 20% deposit, which is 80% LTV. What does LTV mean?

Loan to value.

Absolutely. So there are better deals at 25%. But again your mortgage advisor will be able to advise you on the mortgage buy to let side of things.

And is their first question how have you got the money? Like how, like where are you getting this money from?

Okay, yeah, so that is a question. So if you, so this is a slight gray area and a bit of a problem. If you are looking to release equity from your current home, you are only really allowed to release equity to develop that property. So. So you know, we do all have to lie a little bit. We have to lie that our property does need a new bathroom and a new kitchen and that's where the money's going to go towards when actually that the money's not going to go towards a new kitchen and bathroom, it's actually going to go towards a property or.

You could have money left over from the project. You could have got an outrageous quote from one builder that was, that was. He just happened to be 20% of what you need for a buy to lake.

It could happen whatever way it works for you, make it work. But yeah, so that's the, yeah.

And the thing when you're, when you're making that, that plunge into the buy to let it's. It's long term thinking, isn't it?

It's not short termism 100% especially now we've got new regulations and new tax implications that are coming out to landlords which we'll discuss. Always look at a buy to let property as long term. Never look at it as a couple, a two year plan. Properties have a property cycle and you know, prices are always going up and down. You know, if you're looking long term, it's always going to be worth more than what you paid for it initially. All my properties I bought in the knowledge of they were going to be my pension. So yeah, so as much as you can make money off a property on a monthly basis and you can earn an income that way, my thinking of when I first started was it was more to do with capital growth as opposed to my monthly rental income.

Okay, so you're saying about the 20% deposit and is that kind of you thinking I have this much money tucked aside, that is going to be the 20%. So then you can work out what the property you can get mortgage wise?

Yeah. So 20% deposit and then also a lot of landlords as well will buy a property to do up and then rent out because you're earning, you're making money that way. You always want a bit more than 20% because then you want to make changes to the property. And I always say to any landlord looking to buy a property, don't buy a property unless you live in it yourself. I would never. The amount of properties that I've seen landlords buy that I'm like, this is terrible. You know, you need to do a lot of work to this. And they're like, no, we'll just let it out like this. All my properties, I've done up to a high standard. They've all had brand new boilers, all the electrics are up to date. You know, buy a property and never expect a tenant to live in a property that you wouldn't live in.

Yes, you need a little bit of wiggle room.

Absolutely.

Okay, so just explain this to me. So how are they actually working out the mortgage? Is it based on your income or is it based on how much you're going to be bringing in from the property over a year or another time period?

So a lender will lend you amount of money depending on the annual rent. So a great calculation that's been fantastic for me when working out whether to buy a property or not is you take the annual rent, you divide that by 125%, you then divide that by 5% and that gives you the amount of money that that lender will lend you on that Property.

Okay.

That's for a limited company. If you're buying the property in your own name, once again, take that annual rent, divide it by 140% and then divide that by 5%. So there. That's a really handy calculation to kind of preempt. And again, your mortgage adviser will be able to help you with all of this. But I love this calculation because it. If I'm looking at loads of different properties, instead of bottom bothering my mortgage advisor, I can basically work it out on the rental income that's coming in.

Okay. Okay. I think.

Does that make sense?

Yeah.

Let's say, for example, one of my properties. So rental is 695 per calendar month. Okay. We're going to times that by 12 because that's the annual rent 12 months in the year.

That makes sense. And we.

Absolutely. With me.

Yes.

I've still got you. So. So that is £8,340. Okay. So if I'm buying it in my own name, I divide that by 140% and then I divide it by 5%. So on that property, a lender will lend me 119,142 pounds.

Okay. Yes.

Okay, that makes sense.

Yeah.

So then let's say, for example, that Property is worth £170,000. I would need the difference between 119 and 170.

Yep, I'm there. I'm there. But for a limited company, it's less.

It is. It's 125%.

Okay.

But really write that calculation down. Use it. It's fantastic. Another calculation that I'll quickly go through as well is calculating your yield. So the yield on a property is the percentage that it brings in. So if we go, for example, if we go to a bank or building society and we're going to open a savings account and we'll earn like. Well, what we get at the moment, like 1.52%. Something terrible like that. This is a really good calculation to work out the yield on a property. You take the annual rental income. So that's the 695 again.

Yeah.

Over 12 months. How many months in the year.

Yep.

So we have the. Yeah. So this is the yield. So the annual rental income tax divided by the purchase price times by 100. So that's the annual rental income divided by the purchase price times by 100. That will give you your yield.

And that is. I'm still getting my head around yield. And that's. So you're saying about the savings account. So if your savings account is Going to give you interest of 2%.

Yeah. Your yield is your return on that property.

And what is a good yield? What's the one you see? And you go, okay, well that's, that's another box.

Tick, sit. Well, yes, all of my properties are between 6 to 8% yield. And again, it depends on area, depends on purchase price, depends on if you're doing work to the property. There's all these things that take to take into consideration. If I was looking to buy a property, 6% plus.

Okay.

Which is pretty. A lot better than putting it in the bank.

Yeah, yeah. So, okay, I'm with you. Of those two. I'm with you. I'm there. It's almost like a box ticking exercise in terms of making sure presumably that the property you're going to buy is going to be the one that's going to be best for you.

Absolutely, absolutely. But then, as I said before, don't buy a property unless you're looking long term because as much as a yield is obviously great, but it's all about capital growth. So capital growth is basically, let's say, for example, you buy the property for 100,000, in two years, it's worth 125,000. Your capital growth is 25,000. So that is. That for me is the most important thing within my properties because what that allows me to do is, well, I'm making money and every couple of years I can remortgage those properties to release equity to buy more. So the. Yeah, for me it's more about capital growth than the yield and the monthly income that I'm bringing in, because the monthly income side of things is changing over the next few years due to the new tax implications that are coming in for buy to let landlords.

So when did the new tax implications come in?

They come in in 2020, but they've been being phased in for the last couple of last year. Yeah, for the last year or so up until 2020, it's being phased in.

So is that by. By region or by portfolio?

No, just for landlords.

Oh, right. Basically, it's kind of already out, a soft launch.

So basically it makes me angry with the way the government can change things. But I feel that I've been very entrepreneurial and I've bought, you know, six properties and I've done well, don't get me wrong, I'm not, you know, rolling in it, I'm do it getting by. And the government have just basically taken the rug out from underneath me because basically they're now saying Unless your properties are in a limited company, we are no longer allowed as landlords to claim back the interest, offset the interest on our mortgage. So generally when you get a buy to let property, you'll have an interest only mortgage on that property. No longer are we allowed to offset that mortgage interest against tax. So for example, the property rental amount is £600 per calendar month. Your mortgage is £400 per calendar month. So you have a profit there of 200 pounds. Okay, so no longer. So now as a landlord we are being taxed on turnover rather than profit. Yeah, so before I was taxed on £200, so I paid depending on your, your tax thresholds and whether you're 20% taxpayer, 40%, whatever your taxed, you were taxed on that when now taxed on the full amount. So if I'm a 20% taxpayer, that £200 is now tax, it's no longer profit, it's now tax. And we have now seen within the last few months rents rising. That's because less landlords are buying property because it's now less lucrative. So we've now got a problem where demand is outweighing supply because landlords just aren't buying because this is such a, it is really bad for the buy to let market.

Yeah, no, it is. And I think the big thing with this now from what you're saying and you read that there are still ways to do it, but you just have to do it differently.

The problem is for current portfolio landlords like myself, I've had to decide whether I keep them in my own name and I get taxed an awful lot of money or whether I transfer them into a limited company. Now I've decided to keep them in my own name because the minute I transfer them into a limited company, I am selling. The government see that as a transaction. I'm selling those properties to my company, which means my company has to buy those properties from me, which means new mortgages. So I've got brand new mortgages on all of them, which is very costly. Solicitors, conveyancing fees which is going to be very costly. And, and then because I'm personally selling them, I have to pay capital gains tax on each of those properties, which is 28%. So any profits that I've made and because I've renovated all of those properties, I've built properties, I've converted a barn, there's quite a bit of profit within those properties. Suddenly my tax bill that's going to come through is going to be astronomical. And I was never Planning on paying that tax until I retire and hopefully I'll be wealthier then. So to me, I've decided not to transfer those properties that I currently have into a limited company. But moving forward, I will be buying property within a limited company because the legislation, the new tax implications that have come in, it's not being put into force with a limited company. So you can buy. You've. Obviously we've still got the stamp duty land tax charges that we have to pay if we own more than one property, which is 3% on top of current stamp duty land tax thresholds. But then we putting them in a company name, we pay corporation tax at 20% but then we can still offset the mortgage interest.

And then. So two things you said, you mentioned renovation. Now, is that something that a new buy to let person needs to look for in terms of they've seen the property, how can I renovate this to make this. To get kind of more money at the property and also for existing buy to let portfolio holders as well?

Absolutely. So all of my properties are, have been. I've bought them, I've done them up and not only am I making money off of them through rental income, but I've made money because they've increased in value. That's how I've managed to get the properties up, you know, that I've got through buying a property to do it up. I started my portfolio by doing them up myself. So I'm quite handy. I'm not scared of a, an electric screwdriver and a drill. So they all needed new kitchens and things. So I had a very, I had a great carpenter as well and builder. That's, that's, that's been really good for that. So one thing I would say is, you know, get yourself a decent builder and handymen, electric, electricians, plumbers, that can really help you out with your portfolio because by having that team around you, it just helps so much. And when, you know, when you've got tradesmen that you can trust that they're charging you the right amount of money as well, it's just, you know, it's just fantastic.

So is that renovation yourself or. And that combination of yourself and someone, you know, someone. Should you trust a trades person?

Yeah, absolutely. So if you can do, if it's a light renovation, it just needs decorating and bit of painting here and there and maybe the garden needs sorting, then great, do it yourself. But when you, when, you know, I can't fit a kitchen, so that's when you need other professionals to come in but at the end of the day, you know, and some people buy property, do it up and then sell it on. I don't do that, I buy it, do it up and then keep it and let it out. So it all depends what you want want to do really, but that's what I would recommend. I'd recommend long term, find something that needs work doing to it, do it up and then let it out. Because then also when you're letting it out, you know that everything's done and you know that, you know, we all have contingency funds just in case something goes wrong like a boiler breaks down or something like that. But if you've put a brand new boiler in, you know, touch wood, it's going to be good for the next like five to 10 years. So if you've done all that legwork in the beginning, then hopefully it's going to be a stress free tenancy.

Yeah. The one thing bite that kind of always scares me a little bit is choosing the right area that there must be in every town. There must be an area that people rent and a place that people buy and also the type of property to get. Because what kind of tenant do you want as well? Those are two things that I struggle to get my head around really.

So that's the. One of the most important things to identify is what sort of tenant do you want? What kind of tenant are you looking for? Are you looking for first time renters that have just moved out from home with their parents? Well then you're looking at kind of like a two bedroom house or would you rather. And the tenancy is going to be, you know, they might move more regularly every like two years, for example. Are you looking for just an easy stress free tenancy where you've just got a family in there that might stay 10 years, in which case then you buy a four bedroom house. So identifying what kind of tenant you want will then help you identify what kind of property you want and then what area. So let's say for example, if you've got that family that are going to have kids, well, what are the best schools in your town? So it's really identifying what type of tenant you want. Some landlords actually quite like having housing benefit tenants because then they seem to stay put a lot longer. With regards to some councils, they pay the money directly into the landlord's account. However, universal credit's changed things there slightly recently. I personally, and I'm happy to say this, I personally, I go for kind of, yeah, your young people that are looking for their first house and then I also have a house that was mine, I've got a family in. So that's kind of my market. Your two, my two to three bedroom houses are my market.

And if you want to find that research, is it better to email sort of local letting agents or is it better to sort of go in, in person or better to be on the phone? How did they react to those kind of inquiries?

I would recommend going to this word again, independent letting agent. So by that I mean two things. I mean not tied to an estate agency because you'll find sometimes that an estate agent that's linked to a letting agent, they want the letting agent to sell their properties, you know, so they're. The letting agent are going to recommend that you buy the estate agency that's linked to them, their properties. So you might not get the, you know, fully correct information. And also independent, I mean, not a corporate company. You know, the amount of corporate. I've worked for quite a few corporate companies, independent estate agents, letting agents, I just feel they're so much more honest. They've been around in that area a lot longer. Staff are trained much better. I would go into an independent letting agent, speak to the valuer and the manager in the branch and go, look, I'm looking to buy a property. This is my budget. Tell me what areas I'm looking in, what kind of tenant I'm going to be looking at getting. And the end of the day, if you're going to. By going in and seeing them, you're kind of saying, I'm going to come back and use you to rent this property out. They're going to want you to buy a decent property.

Yeah, no, absolutely. And would you do that to two or three or do you just try and pip for one that you.

One or two, I would say because at the end of the day when you're. It's different to like if you're buying, selling a property and you're going to get comparisons between three different agents, this is slightly different because you've got nothing at the moment. They're offering you a service to be able to. Then you then take up their services. So they're needing to impress you with regards to what they find. Does that make sense? Yeah, I would say one or two. Yeah.

So everything's in place. You're looking to get to the, to the latter parts now of making it all complete. And I guess you mentioned when it comes to how to buy, we're speaking about buildings and contents, insurance and Landlords must need insurance as well.

Absolutely. So landlords can you need landlords building insurance? It's landlords building insurance because you aren't you as the owner of the property, you're not living in the property, your tenants are. So it's landlords building insurance you need. There are other insurances you can go for. So you can go for insurances that if the tenant doesn't pay the rent, that they will cover that. I've never gone for anything like that. Because at the end of the day, if you look after your tenant, you manage your tenancy correctly. Touchwood. Hopefully they'll always continue to pay their rent, but that's again, finding the right tenant.

Are there any other bits as well? Because I know when I had the renovation work done in, in my place, we suddenly needed smoke alarms put into every single room.

Absolutely. So as a landlord, there are a few things you legally have to do to be able to let your property out. So if you have gas in your property, you have to have an annual landlord's gas safety certificate. So this is completed by a gas safe engineer. You might have been used to the term corgi engineers. They're no longer, it's now gas safe engineers. So gas safe certificate number one, an energy performance certificate is also something you have to have. If you've just bought the property, it will already have an EPC because it had to have one to go on the market for it to be sold. If not, get yourself an epc, a gas safety certificate. You're looking probably about, depending on area, 50 to 60 pound plus fat EPC. You're looking around, I would say 80 to 90 pounds plus VAT. You also then need smoke and carbon monoxide alarms. So you need a smoke alarm fitted on every floor of the property. So if it's just a flat on one floor, then it's just the one floor. But if you've got a house on two or three floors, well, if it's on two floors, you need two smoke alarms. If it's on three floors, you need three smoke alarms. So each floor of the property you need a smoke alarm and then you need carbon monoxide alarms in any room where there's a solid fuel appliance, so as in wood, coal or biomass. So this is the new legislation that came in a few years ago. You also have to do right to rent checks. So under the Immigration act, you are required to ensure that your tenant has the right to rent in the uk. And to establish this, you need to see a copy of their Original id, so passport, visa, and you need to make sure you're doing those ongoing checks. So if their visa was to expire, you need to make sure that they've renewed it, etc.

And that's for you to look to check. It's not for the. It's not. I thought, like, oh, I just thought it would be. It would be someone else's responsibility.

No. So if you're looking to rent out, if you're. This is when you're. You found the property, so. And found the tenant. So when they were about to move the tenant in, you need to have a landlord, gas safety certificate, energy performance certificate. You need the smoke and carbon monoxide alarms and right to rent checks that this is your responsibility to do that or the letting agent that is sorting it out for you.

Okay. Okay.

And then you also need to give them a how to rent booklet. I have electrical certificates on all of my properties just because I feel like I'm a responsible landlord and I think electrical safety is very important. But you don't actually. It's amazing that you need an EPC to show how energy performance your home is, but you don't need anything electrical. It is your responsibility to make sure all the electrical items are safe. But you don't have to have electrical safety certificate, which does amaze me to this day.

Now, you will be surprised to hear that it's coming up almost to the end of this particular podcast and I know that we're going to be doing others that are focusing on buy to let as well, because it's huge. And this was very much a summary, wasn't it? An overview of it. And we've chucked in a lot of different things there, which we can dissect later. But what would you say your top tips for people looking out to buy to let?

Top tips are those calculations. Those calculations that we spoke about in the beginning have been fantastic for me. So finding out on each property the rental amount and how much I can borrow against that property, finding out my yields. And top tip would really be buy a property that needs work doing to it, because you're making instant money that way. And don't put all your money into one property. Really spread your money around. Someone came to me recently and said, oh, I've got some. I've got £200,000, I've inherited. I'm just gonna buy this property for £200,000. I was like, don't do that again. It's all personal. And it depends how much risk you, you know, how much of a risk taker you are in life. But I would spread that money around and buy three or four properties.

I was gonna say, would you buy 10, 100,000 properties with your 20% each?

I probably wouldn't do that many. You wouldn't be able to do that many.

Could you imagine that would be a start of your portfolio. So we will be coming back to doing more about the buy to let because it's such a huge bit and for a lot of people it is confusing, it is hard to get your head around. It is kind of the next level in terms of property buying. So, yeah, we will definitely be coming back to that.

And we'll also bring an independent financial advisor in and an accountant in as well to talk about the tax legislation that we've slightly covered and mortgages as well.

Yeah, because there's. Having an overview is great and yeah. And I've learned a lot and people listening will have learned a lot, but sometimes you do need to get down to it a bit more in detail, don't you?

Absolutely. And I feel that especially in the buy to let market these days, this is what's working for me. I've decided to keep my portfolio in my name and then buy now in a limited company. But it might work differently for you. And in that case, I think that's great that an accountant's going to come in and see us and a mortgage advisor will come in and see us as well.

Thank you very much. Emily, you're listening to the property pod.