Buy to Let Returns

August 21st, 2010

Return on Cash & Yields Explained

The majority of property investments entered into are on the aims of securing a good return for your money. Buy what is considered a good return and how does one work the return out?

"Calculating the returns on property can be done in a number of ways..."

Property Returns - A calculating time

With bank returns at an all time low, it is understandable that many are considering alternatives to improve on their cash returns. Whether it be, stocks, managed funds, tracker funds, fine wines, land &  property – the number one aim is to beat inflation – only then will one be protecting their capital from being eroded over the years.

Indeed with typical bank returns of less than 1% an inflation running at 3.1% – most peoples capital is actually being eroded!

So lets take some examples on property investment and see what returns we can muster – and also look at the different types of returns.

YIELD - This is probably the most common calculation used and currently most landlords or new investors would be looking to get 8.5% – this figure will then typically make sure the property will cashflow.

To work out yield the yearly rent is taken and divided by the purchase price of the property or current value -so for example a recent property purchased in Scotland for £55,000 will rent out per month for £460. This will therefore give a yield of 10% – TEN TIMES a typical BANK account !!!  (If the property is financed then to make sure it cashflows a yield of 8.5% is needed.

RETURN OF CAPITAL EMPLOYED – ROCE - Well if the property is “ungeared” that is to say it has been purchased outright – then the ROCE will be the same as the yield above. However, if the property is “geared” and has a typical Buy to Let mortgage on it – then the ASSET was purchased using only 25% on the landlords money. This means that even after mortgage costs the yields will typically be higher. Lets work this though;

Property purchased at £60,000 - cash introduced of 25% (£13,750) and mortgage of £41,250

Total outgoings are £171 pcm – with rents still the same at £460 pcm then the surplus is £288 pcm or £3457. This against the cash used of £13,750 means that the returns on cash employed is 25% – YES 25% !!

So clearly buy investing in a some good stock, taking some gearing then the returns will look to be fantastic.

If you need any help with the above article – or wish to talk about increasing the efficiency of your portfolio – then drop me a line – john@its-property.co.uk or call on 0845 456 6069 – thanks.

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Buy to Let Market starting to thaw..?

August 15th, 2010

"Is the Buy to Let market thawing...."Buy to Let finance flowed freely in the run up to the credit crunch with the many lenders able to use Securitisation to provide funding to existing landlords and new would be landlords. Indeed since those dizzy days it can be said the Buy to Let market for finance has shrunk 93% - with most lenders currently licking their wounds. That said perhaps over the next few months we will see lenders ....why? Let me give you my thoughts ....

With the Buy to Let market ravaged by a shortage of funding from its peak in 2007, then soon the finance streams will surely begin to flow again – here we look at why…?

  • The lenders have not been idle during the last 12 months, indeed one can say they have been busy during the credit crunch – mostly on the other side of the desks – chasing up arrears! Well perhaps this have helped them research the marketplace – so the same mistakes are not made again?
  • Many lenders like others in the property market have founds themselves acting as the accidental landlord – this has given them a valuable insight into all parts of this market – the Good parts and the Bad.
  • In the past many lenders were happy to grow their business and chased the larger “portfolio” landlords – during the credit crunch it can be seen lenders have lost their appetite for these landlords – favoring instead the smaller new landlords who are looking to grow slowly and have separate income in the background.
  • Loan to values due to competition went to levels that even amongst landlords were considered “risky” – this coupled with “notional” discounts from new builds often meant no “hurt money” and a patten of landlords amassing large portfolios without due diligence , rental profiling and little safety nets in the background – currently with average loan-to-values (LTV) at 70%, the market is trading is a relatively safe environment.

So why should lenders change..?

  1. The market is very fruitful with typical arrangement fees at 3 times the levels in the main residence market
  2. Loan-to-values mean that this part of the market still offers them all low risk lending
  3. High margins on lending rates – the typical rates are very high still, whilst these are dropping they still allow the lenders to make profitable returns with little downside
  4. Fewer players – the market is less crowded compared to all others – this means they are all profiteering and picking the low hanging fruit together – this MUST change soon as other parts of the property market stall based on uneasy economic data on jobs
  5. Overseas funding will soon start to mark is return back to our shores, whilst this may appear as a trickle initially – it will allow more lenders to return
  6. Demand – there is still a healthy appetite for funding as more and more look to “property investment” as a way to outperform bank returns and a healthy hedge against inflation.

What the lenders over the next few weeks / months and I am confident that we all will benefit from some lower rates, return of some of the lenders previously froze out and also some of the existing lenders looking to expand their books in this part of the market.

With bank base at 0.5% and most savings accounts paying significantly less than the 3.2% annual inflation levels, then surely and more cash will find itself in the property markets – when even ungeared returns are 11% and when geared offer returns of between 14-20% (www.its-property.co.uk)

Best wishes,

John

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What will interests do? Aug 2010 a hold ?

August 1st, 2010

Dear Friends,

It would appear more and more likely that whilst inflation is a good deal higher than the Bank of England or Government would like in public …behind the scenes it might not be this black & white!

  • With interest rates low and keep low for some time ~ it would seem the focus will be on driving the economy forward – in my mind a blind eye will be turned to inflation for some time
  • With the considerable amount of borrowing and debt to pay back – having low interest rates and above target inflation can only help the government erode some of the debt in advance, of all other strategies they are implementing
  • Perhaps, and this is the cynic in me, once the economy is in full steam – then perhaps new targets on inflation will be announced – perhaps allowing a target inflation to be 3.5% before letters are written – after all high inflation going forward, can only be good news for the Government

With VAT rising to 20% next year and other measures to boost the Government coffers, Government(s) old and new, having played their parts will be looking for the lead to be taken from the private sector – with some serious help from the banks !! The later element being down only to the banks themselves, which have again and again proved despite who owns them, they really work only to their own agenda.

Personally for interest rates to rise this year, it will have to happen by November, as a December interest rate rise or January one seldom happens due to the mix match of data. Once they do start to rise, the movement will be one of slow measured rises, perhaps no more than 1% per year, 0.25% per quarter – any faster and all the work done could swiftly be undone!

There still remains so many broken parts of the “financial system” that interest rates rising quickly are about a likely as the banks NOT posting large profits over the coming years!

It would appear for certain, over the next 1-3 years, or perhaps longer to outperform inflation – your going having to remove cash from the bank(s) and place it in another asset classes to get higher returns.

Property, even in current times is performing well and over the last 10 years (including the worst recession for over 80 years) is only second to Gold. One can also demonstrate, with small amounts of gearing it should be in most balanced portfolios.

Regards,

John

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6 top tips Buy to Let

July 29th, 2010

Whether you are a experienced landlord or someone  currently looking to make the “leap of faith” into property investment, to improve on your poor returns of typically 0.5% per annum from a bank account – I trust you will find the top 6 tips  of  some value….

  1. Buy the right property – Yes you have read this right and it smacks of common sense – but often by spending a few moments checking out local demand and current housing stock can pay dividends – why buy a 2 bed flat when the market is saturated with them – chat to some letting agents / council housing officers / local Citizen Advice Bureau
  2. Consider transport links – when tenants are looking for places to rent they often consider the access to public transport / rail links and so on – make sure you have also given these areas  some thought
  3. Choose the right mortgage – make sure you have a lender / product tailored to your needs – pay close attention to fees, the rate you revert back to after any incentive or fixed period – and above all any tie-in periods – seek independent mortgage advice from a fee based broker who will typically have access to 45% more products.
  4. Approach it as a business – don’t get personal! The aim of this investment is to make money and not take over your life – Barrett Homes, Wimpey, Redrow and many more have spent millions on design and still offer white ceilings, magnolia walls and neutral colours – you are looking to maximise rents with a wide appeal
  5. Use the correct landlords insurance – it will pay dividends to use an insurance broker who specialise in let property / landlords  insurance  – there is absolutely no point is paying £25 less per year only to find you cannot claim when you need to !
  6. Be aware of your legal obligations – gas certificates , smoke alarms , electrical checks and so on – if in doubt ask your lettings agent or local housing officer at the council.
Making the most from your property investment

Making the most from your property investment

I hope you have found some of these ideas useful ?

Regards,

John

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Landlord’s – 13 Top Tips for LHA Tenants

July 8th, 2010


1)      Make friends with the council by joining their accreditation scheme & go to Landlord Accreditation meetings – they will keep you updated with legal changes –  http://www.anuk.org.uk/

2)      As part of your referencing procedure – always get a letter from the tenant confirming they are receiving LHA – make a copy of this & note the LHA Claim number, this is very important

3)      Check your local LHA rents BEFORE you complete the AST – they vary on the 1st of every month & are published 5 days prior to the end of every month. The rents are based on the property location, not the landlords location. Visit http://bit.ly/lha-rates to find out more & set a reminder in your diary to check it 5 days before the end of every month.

4)      When telephone vetting or referencing a tenant – confirm who is going to be living at the property. More people usually means larger entitlement, which means an opportunity for the landlord to earn more money ! When this have been confirmed, work out how much the potential occupiers / family are entitled to by using the bedroom calculator – visit http://bit.ly/lha-direct-home

5)      Make sure the tenant signs an Information sharing agreement, for letting agent & landlord – landlord needs to speak to the council if the letting  agent messes up. Put this as an additional clause in your AST , just in case your private tenant looses their job & needs to claim LHA – be wary of your letting agent not doing this as part of their procedure, many say they know how to deal with Housing Benefit / LHA tenants when they don’t !!!

6)      Create a letter confirming the landlords contact details & banking details for receipt of money in case the tenant ever becomes 8 weeks in arrears or the tenant is allowed to have their landlord paid direct from day 1 because they are legally classed as vulnerable. Get the tenant to sign this letter.

7)      Take a scanned copy of all paperwork before it is handed into the benefits office – scanned images of AST, Housing benefit form, change of address form, information sharing agreement, a letter confirming the tenants previous address / their new address & the date they moved in. Also hand in the letter confirming the landlords contact / payment receipt details – this will save you having to post it in when there is a problem & wait a minimum of 5 working days for the council to scan it on their system.

8)      Do not reply on the tenant to hand in the paperwork to the benefits office – landlord does it. Get an itemised receipt listing every piece of documentation handed in. Do not accept a general receipt which does not list all items of documentation – paperwork often goes missing in the housing benefit office, & usually at the convenient time when your dealing with a problem !

9)      Correspond with the LHA department via. Email where possible – saves on postage, attached scanned images of documents, correspondence is saved in your email inbox, saves you being on hold for 17 minutes & then arguing with a benefit advisor. Minimize verbal correspondence with the LHA department. Saves on time, stress & creates a written record. Bear in mind Email is a legally valid form of service. Find out if there is a dedicated email address for Landlord Enquiries.

10)   If you need to phone the LHA department, between 8am & 9am is fastest (when everyone is going to work or is on the school run) – Monday morning 8am is best time of the week. Find out if there is a dedicated telephone number for Landlord Enquires.

11)   If you have a problem tenant – Note that Tuesday before the payment is due is last opportunity to cancel / amend the payment.

12)   To get paid directly – consider taking on ‘vulnerable’ tenants. These are people who the council deem to be at risk – there is a legislative protocol for the council follow that allows them to class a tenant as vulnerable.

13)   Consider setting up a Credit Union account for tenants where the landlord is not paid direct

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UK property up by 0.1% in June – Nationwide

July 4th, 2010

Nationwide issues latest House Price Index

30 June 2010
housing_6

* The price of a typical UK property inched up by 0.1% in June
* Annual rate of house price inflation drops from 9.8% to 8.7%
* Budget has mixed implications for the housing market

Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said: “The month of June presented a picture of broad stability for the housing market. The price of a typical UK property rose by a seasonally adjusted 0.1% month-on-month (m/m), following a 0.5% increase in May. The smoother 3 month on 3 month rate of change rose marginally from 1.7% to 1.8%.

“By contrast, the annual rate of house price inflation dropped for the second consecutive month from 9.8% to 8.7%, reflective of the fact that house prices were increasing at a faster pace this time last year. Barring a significant pick-up in house prices over the next few months, the annual rate of inflation should continue to drift lower, in light of the very strong price increases recorded during the summer of 2009. Over the first half of 2010, UK house prices have risen by a cumulative 3.0%.

“Recent indicators point to an increase in the supply of property coming to the market for sale, perhaps in response to the abolition of HIPs in the opening days of the new coalition government. With the level of demand remaining broadly stable, this would in part help to explain the recent slowdown observed in the rate of house price inflation.

“The emergency Budget announced on 22 June marked the beginning of a period of fiscal austerity. The most directly relevant policy change for the housing market was the decision to raise the capital gains tax (CGT) rate for higher earners from 18% to 28%. An increase in CGT for second home owners had already been flagged well in advance of the Budget.

“However, there were fears that the rate could be brought into line with higher rates of income tax, which could have seen it rise to 40% or even 50%. The actual increase has therefore turned out to be relatively modest.

“More important in terms of the short-term impact on the housing market was the decision to implement the change with immediate effect. Had there been a delay in implementation, it is quite likely that many second home owners would have chosen to sell early in advance of the tax increase. This could have shifted the supply-demand balance quite markedly in favour of buyers and put downward pressure on house prices. As a result of the immediate implementation, however, there are unlikely to be any significant supply distortions in the near term resulting from the tax change.

“Looking beyond the short-term, the spending cuts and tax increases in the Budget will clearly put a squeeze on household disposable incomes, which are undoubtedly an important driver of house prices. Given the already elevated level of the house price to earnings ratio, this limits the scope for property values to maintain the very strong upward momentum that we have seen over the last year. However, the acceleration of the fiscal consolidation means that interest rates are likely to be lower than they otherwise would have been, which should provide some offsetting support to households and mortgage affordability. To the extent that an improvement in the public finances raises confidence in interest rate stability, it could even attract more buyers into the housing market over time.

“Provided the economy does not suffer a relapse into recession, the net impact of the Budget on the housing market and house prices should be relatively neutral. This is consistent with the relative stability seen in the housing market during the last major fiscal consolidation in the mid-1990s.”

Nationwide also releases its quarterly regional house price index, which shows the South West has had the strongest regional growth over the quarter.

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Landlords Insurance

June 5th, 2010

Did you know lots of landlords fail to take contents cover and suddenly find themselves exposed on claims for floods / burst pipes with Buildings Only. Call your broker to check your cover or visit www.insurance-desk.com

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