Monthly Archives: April 2012

//April

Five key considerations before investing in property to let

The UK are big fans of property ownership, approximately seventy percent of property is owned with thirty percent rented, a ratio well above the average in Europe.  Although the bulk of the drive for ownership about owning your own home, there’s also a growing popularity in buying property to rent out as an investment.  Buy-to-let is a well marketed industry and is presented as an easy access opportunity to the general public.  Letting out property as an investment can be lucrative in the right circumstances, however it is still a form of “business”, which has specific rules and requirements to be successful.  Many people step into property investment without a full understanding of the many aspects that need appraising.  Below are five key considerations, however please note the list is not exhaustive and all investors should do their own research before making their commitment.

Mortgages

For the investor usually there are two main methods to raise finance:

Buy-to-let mortgages

Equity release from your own property.

Buy-to-let mortgages are specifically marketed by the financial sector for this type of business. The rates of interest are usually higher than a mortgage taken against your own home. This is because there is a higher perceived risk to the lender in that the loan is usually covered by the rental income from a 3rd party who in this case is not the named borrower.  This risk usually also translates into the need for a larger deposit to be put down against the purchase price, for example a 20-25% deposit requirement is typical.  In calculating that risk affordability is given extra scrutiny so any applicant may need to evidence a higher degree of affordability at the underwriting process then with a residential mortgage.  The buy-to-let mortgage is specific in that it treats your investment as a business case in its own right. 

Equity release mortgages allow the investor to borrow against the equity in their own home and then use that cash to purchase the investment property.  In this situation the interest rate is more favorable, the lender considers the risk lower as the affordability and means to pay the loan is directly attributable to the borrower directly.  The level of borrowing in this situation is determined primarily by two aspects.  Firstly the level of loan-to-value, LTV requested, i.e. what percentage of the equity in your home’s value you wish to borrow against and secondly affordability criteria to service that loan.  In terms of affordability any potential rental income from this equity release is not considered, so unlike the buy-to-let mortgage you are assessed for affordability based on your current situation only.

Buy-to-let – Pros – Takes into account potential rental income in affordability criteria

Buy-to-let – Cons – Typically higher interest rate & setup cost, higher deposit required than most residential mortgages

Equity release – Pros – Lower interest rate, typically lower setup costs

Equity release  – Cons – Affordability criteria usually excludes potential rental income

Other points…

Often people move out of their main residence, with the intention of keeping the property to rent out and mistakenly assume they can continue to run their residential mortgage on the property.  However the risk levels and the terms that the residential mortgage was taken out against have changed, therefore the mortgage lender will require you to change your mortgage to a buy-to-let product or return to residency in the property.

Especially with buy-to-let mortages there may be other criteria on which properties a company will and will not lend on.  For example, some companies will not lend on apartments above the 2nd floor etc.  It’s recommended to check this against the property type being considered.

Overall seek professional advice before making any financial commitment.

Potential Rental Market Returns

It helps to know in advance what your economic conditions are, i.e. potential access to loans, available deposit, budget if no finance needed etc…  This may help to clarify the amount of monthly rental return you are looking for to both meet expectations of the lender (where finance is needed) and yourself in terms of a given return for your invested money.  Surprisingly the reverse often happens, a property is found, committed to and then at that late stage the financials are considered!

Potential rental returns can vary greatly; aspects such as location, property type, property condition, supply and demand are just a few variables so it’s essential to gauge the market correctly.  Using a property letting agent is a smart way to get a feeling for what is obtainable.  A good lettings agency will provide guidance and advice without obligation.

Bear in mind that when a figure is established for rental return some consideration should be given to “voids”, periods of time where the property is not rented.  Voids are obviously undesirable but always possible due to the nature of tenants moving in and out.  On average a figure of fifteen percent is sensible to account for, as the future is unknown.  However, using a good property management agency can help reduce the void percentage through efficient organisation and by leveraging their tenant client base and marketing reach.

Evaluating Costs

There are several variables in costs and also some common costs to account for and find out ahead: 

Property Type – For example an apartment will typically come with service charges, find out what these are ahead

Furnished or Unfurnished? – If furnishing enhances the rental return or ability to let the property then account for the setup costs of furnishing and also the replacement costs over the years.  Again a local lettings agent could advise on the pros and cons of this choice

Repairs / incidental maintenance – Some upfront accountancy needs to be made for maintenance whether internal or external.  Level of cost should be judged on state/condition of property.

Property Management & Marketing – What are the annual costs, both one-off and ongoing?

Ground rent – Payable annually for all leasehold ownership where applicable

Buildings Insurance – Leaseholds, properties with communal aspects the insurance costs are dictated to you.  Freehold you choose, check market rates

Landlords Liability Insurance – Optional but recommended

Contents Insurance – Optional but recommended

Other Legal Requirements – Several additional costs to account for see next section.

 All in all once a full financial appraisal has been made of both costs and returns it’s probably a good time to start looking for the right property.

Legal Requirements

 The property rental sector is not as heavily regulated as the property sales and estate agency market.  However there are several Acts of Parliament which govern generally and regulate residential property lettings, such as the Housing Act.  These laws are typically broad and all encompassing, certain aspects of them do apply to the property lettings industry whilst many do not. 

It’s also true to say that in recent years the letting industry has become more formalized and there is an increasing quantity of lettings specific legislation being introduced.  This is in many ways a positive thing as helps to bring higher standards and professionalism to the sector; it’s also worth noting that some of the compliancy comes with a financial cost.  For an up to date list of legal and safety regulations that any prospective landlord must be compliant with, consider talking with a letting agent, who will by up to date by default and should provide free no obligation advice.

Managing your Property

There are 3 principle methods landlords usually consider:

 Management via an agency – Tenants are both found and managed as a complete outsourced process.  The cost is usually expressed as a percentage of the monthly rent received.

 Self-Management with Marketing via 3rd party – Landlord chooses to manage the property but uses an agent to find and vet potential tenants; the landlord may also use the agent to be compliant with the legal tenancy contract.  The cost here is usually expressed as an upfront one-off fee.

Complete self-management – Landlord manages the full scope of activity, markets their own property plus finds and manages their own tenant.  The cost here is whatever the independent costs are the landlord incurs themselves.

Pros & Cons

 Agency Management – Pros – Experienced management of all tenant and property related issues, financially simple – all monies managed for you, potential to negotiate best market rental rate, increasingly cost effective for landlords with multiple properties

Agency Management – Cons – Cost is perceived higher than self-managed.  However the long term earnings may be greater as a function of agent experience. 

Self-Managed, with 3rd party marketing – Pros – Lower cost option, allows landlords with enough time and confidence in their own management to save money 

Self-Managed, with 3rd party marketing – Cons – New landlords in particular stand a higher risk of error or mismanagement and usually gaining experience comes with a cost.

Complete self-management – Pros – All costs under control of the landlord and if all the work is done by the landlord probably will provide the highest return on paper.

Complete self-management – Cons – New landlords in particular stand a higher risk of error or mismanagement and usually gaining experience comes with a cost.  They also don’t have access to the marketing tools or are able to leverage the economies of scale that a lettings agency can, which may mean the economics behind this choice need to be carefully weighed.

Overall each scenario should be considered in its own right, the property and person involved, attitudes to risk versus reward and the amount of available spare time are big factors in making the decision.  A local letting agent will be able to advise on their service offerings which should help determine the economics of this choice.  Note that performance and service levels are likely to vary between agents.

In conclusion these are five key aspects to consider before you consider investing in property to let. Each person’s motivations, personal feelings and situation will be different but generically addressing these five considerations will help provide an informed methodology to take the next step forward.

 

 

2012-04-25T21:37:01+01:00April 25th, 2012|

Changing Social and Economic Trends in the UK City Centre and It’s Impact on Property Investment

With the social trend moving ever further toward internet and supermarket shopping, the demographic of city centres such as Norwich and many other cities across the country, is changing. Exacerbated by the recent economic downturn, a gradual evolution in the high street has been forced to gather pace. Presently many smaller retailers and even some of the larger chains face bigger challengers due to customers migrating to the web or choosing to shop outside of town at retail complexs or shopping malls. The trend is growing to such extent that major commercial property investors are now eying the “micro centre” out-of-town shopping mall as holding potential for great returns. For example billionaire investor, John Whittaker, has held high level positions in large shopping mall based property companies, caught the headlines recently by committing his own finances to “CsC” – Commercial Shopping Centres, a FTSE 100 company which owns some of Britain’s largest malls. The grounding for investment seems to be coming from evidence of very high occupancy rates and commercial success in existing malls.

For the city centre the occupancy rate is going the other way, this poses several commercial challenges… Can commercial landlords continue to rely on retailers being able to afford their rents, rents which are premium priced based on location? Certainly the trend seems to be that of those shops vacated, not all are re-let and if they are then often not at the same rental value as before. The tangible advantages of moving into shared occupancy within a shopping mall or retail park complex, is that overheads are often much lower and in a climate where internet retail is rapidly increasing and reduction of overhead is becoming a must for survival.

Aside from business and commercial aspects there’s also a social trend developing, the public do still want to be in the city centre and that feeling of being at the centre of a collective hub is all-pervasive and unlikely to ever change. The retail industry is now not one of those drivers, it’s likely that in future you can expect the attractors for the city to be ever more the service and entertainment industry rather than things retail related. For example, the rise of the coffee shop society and an increase in restaurant numbers are two examples we can observe today. To such extent that the high street is now attracting increasing overseas investment in the guise of new food chains and with that generating increasingly fierce competition. We can also expect a growth in more recreational and entertainment based facilities in future. It is this trend of change from retail to social entertainment and a service industry which is most interesting and offers some respite to commercial property owners and also to the Norwich lettings agents who support those owners.

The unknown economic factor is where the income stream will come from to fund this social change. Will the closure of retail and the jobs associated with that be directly be replaced by a growing service economy? Or are we looking at an employment deficit where people must search outside of the city for work so as to be able to afford to live in it? It’s likely that the demographic of the city centre will be impacted by the availability of work, with likelihood of the middle-aged and to some extent middle-income population moving out of the city and travelling in for recreation as and when. This also suggests a trend towards younger people, working temporarily in the service economy or perhaps while studying, and on the other end of the spectrum those on high enough incomes to afford the premiums of central location. This kind of environment also suggests the birth of more small start-up companies often comprising single individuals, all eking out a trade and the means to stay in their desired surroundings. The internet is certainly an agent of change in terms of helping migrate retail (as we know it) further out from our towns and city centres. However it can also be a benefit to supporting the growth of a new breed of more portable web-based businesses which don’t rely on large overheads and physical space. These type of businesses can have a very positive impact in both the residential and commercial property economies. In changing times there is always opportunity and savvy property developers are recognising this, spotting opportunity to either re-invent commercial property or turn it into character residential property for letting. For example empty sole trader shops can make a great residential home or tired retail premises can be converted into multiple offices to launch new entrepreneurial businesses.

In conclusion it’s clear to see that the retail industry has been changing and still is changing for some time. In today’s uncertain economic climate and with the growth of internet retail this process can only evolve quicker. The result is an almost Darwinian mode for the high street, they need to move to lower overheads, shared infrastructures, logistic services and possibly even pooled purchases to compete. It’s not surprising that smart money is investing in the types of commercial property development that will enable this. For the city centre the future is more social, more service orientated and marketed into by this economy. The city centre will remain a desirable place to live with the residential property market seeing no real decline due to migrating retail and from a business perspective, the social connectivity benefits of the city centre help to provide the hotbed for new “infrastructure free” businesses. Watch this space!

Kings & Co Norwich is working hand-in-hand with several property developers in Norfolk to assist with this evolution. Norwich is a fine city and with efficient management of the property that constructs it, we can rejuvenate our environment both materially and socially.

2012-04-25T11:07:33+01:00April 25th, 2012|

Step by Step Guide in Letting your Property

Letting your property can be a daunting experience but knowing the process can help put at ease a lot of those fears.  Kings & Co Lettings can help with every stage of letting your property from valuation, to viewings, comprehensively referencing tenants and providing a Full Property Management service, if desired.

Step 1.  Accurate Valuation

Having an empty property can cause a great deal of stress and reduce your yields.  Every agent’s focus must be to let your property in the shortest period of time at the highest possible price, without over pricing your property which will also cause void periods.  Therefore getting an accurate and realistic valuation is, therefore, very important. 

It’s always a good idea to :-

  • Do your research
  • Get the agents to justify their valuation
  • Consider how much do you need to cover your mortgage, any ground rent and or service charges, and the agency fees. 

Step 2 Kerb Appeal

As with selling a property the condition and presentation of your property is vitally important, especially if there are similar types of property to rent also available.  Remember that tenants are normally looking for the similar types of things in a rental property as if they were going to buy this will be their home and most are looking for something that is clean, tidy, well decorated and well maintained.  Most prospective tenants decide within the first few minutes of walking into a property if it’s right for them. 

Step 3 Selecting an Agent and Service

Selecting an Agent to let your property can in itself be a minefield with so many agents out there.  The most important thing to remember is to go with an agent you believe you can trust as they will be looking after and caring for your property and also one that you can also get along with and who has time for you to find out your individual needs as a Landlord.

 Deciding on which service to opt for again is something that can be difficult, this will come down to what time and knowledge you have and your location.  Letting property can be very time consuming and with everyone having busy lives, trying to sort out a plumber on a Sunday morning is not everyone’s idea of fun especially if you live 100 miles away, in this case a Full Property Management Service would be the best service with all the hassle taken away and someone else dealing with those problems.  If you are close to your rental property and have the knowledge of the Legal Legislation (and also the time), then maybe a Tenant Find Service is more suitable. 

 At Kings & Co Lettings we can tailor our packages to suit your individual needs.

Step 3 Marketing

 To find the perfect tenant you need to give your property maximum exposure, thus ensuring that your property is advertised on all the major property website portals.  At this stage you will also need to have an Energy Performance Certificate (EPC) in place. Kings & Co Lettings can assist with this.

Step 4 Viewing and Offers

Once your property is marketed hopefully the prospective tenants will come flooding in and viewings will commence which will either be carried out by the Agents or yourself if desired.  When an offer is made to rent your property we will inform you of the rent offered and details of the prospective tenants.  If you are then happy to proceed Full Referencing will then be carried out on the prospective tenants.

Kings & Co Lettings use an external referencing company who fully vet the tenants including a credit check.

Step 5  Preparing the property for move in

When the checks are being carried out now is the time to ensure that the following is ready:-

  • Gas Safety Certificate
  • PAT Test – All electrical appliances have to be tested to be safe
  • Ensure the property is clean
  • Inventory and Condition Report to be compiled – Without this you could be powerless to deduct any monies at the end of the tenancy if there was a dispute
  • Take meter reading, which should be carried out at the same time as the inventory
  • Ensure instructions booklets for appliances are available

Step 6 Move in

Once the tenants check have come back and all required Legal requirements have been met then the tenants can move into the property.  We will draw up an Assured Shorthold Tenancy for either 6/12months, whichever is agreed, and all other necessary documentation.  We will also take one months rent in advance and damage deposit.  The damage deposit will then need to be held within a Government based scheme, of which there are 3 to choose from.  Kings & Co Lettings use the Deposit Protection Service 

Our aim at Kings & Co Lettings is to make life as simple as possible for our Landlords be they Fully Managed or Let Only and to ensure their property is maintained and cared for so call us today on 01603 666689 to see how we can help you.

2012-04-20T12:28:57+01:00April 20th, 2012|

Know the Staff – Manager of Kings & Co

Sally White is director of a Norwich lettings agency in the UK and also a working mum.  Having been in the property management industry for over twelve years , Sally follows closely the trends in the letting market and also the accompanying legislation changes.  Sally’s aim is to raise the profile and service levels of the local Norwich letting market for the benefit of both landlords and tenants alike.  For more details about Sally’s project and homepage see Kings & Co Lettings.

2012-04-05T22:04:50+01:00April 5th, 2012|