Buy to Let and the Credit Crunch: Market, Mortgages,Tips

For Buy to Let market, the last few months have been difficult for the landlords with the credit crunch came increase on arrears, lack of buy to let mortgages and tougher lender’s criteria. But it is not all bad news, the houses are cheaper to buy, the rents still increasing and rental demand at all time high.

Credit Crunch

Last year, we started to see the effects of too much borrowing and declining in house prices in USA. One year later, economies throughout the world started to collapse, financial institutions going into administration, Governments in the verge of bankruptcy, mortgage lending at very low levels, UK house prices coming down and a global recession.

It’s all bad news, no! The buy to let market is stronger than ever with the demand for rental properties being higher than ever, due to first time buyers not moving into the ladder and immigration from east European countries.

 Within a dreadful situation, we can always find good opportunities.

2009 New Year, New Hopes!

 It will be into 2009 that we shall see some improvement on the lending, specially buy to let mortgages.

It’s been predicted the houses prices will still coming down but at much lower pace and probably in 2010 they may start coming up.

For the landlords it’s a time to consolidate and review their portfolio with great opportunities to invest if you are in strong position.

Buy to let Market  

Between 2004 and 2006 the buy to let boomed, due to easily accessible buy to let mortgages and property prices growth. Now the buy to let mortgage diminish, tougher lenders’ criteria, specially rental cover, and house prices are coming down. 

Buy-to-let is no longer sizzling and many investors that started being a landlord in recent years are struggling as mortgage rates rise. Many could not change mortgages due to low or negative equity, so when the initial rate deal came to an end and they started to pay the Standard Variable rate of the Lender,  the rent was not enough to cover the mortgage payments.

Within the most affected are those investors who bought properties at a suppose discount to sale straight away, looking for short term investment but when properties prices started to come down and the houses taking longer to sale, they run to serious problems.

The golden rule of buy to let investment is to look as a long-term investment, taking seriously. If the landlords invest wisely, look at long term, do the homework and stick to the tried and tested method of investing for rental returns rather than capital growth, they will be successful. Otherwise, the investor will probably run into serious problems.

Buy to let investment does not guaranteed success as any other investment but doing it well and it can be an excellent piggy bank for retirement.

I am leaving now some tips for all professional or first time landlords:

Do your homework
If you are a first time landlord look at pitfalls before you look at the benefits, buy to let investments are time consuming, therefore think if it is the right time to invest in buy to let or leave the money on a good savings account.

If you are already a seasoned landlord, do not stretch yourself, look first to consolidate and add strength to your portfolio, as if you are in stronger position your next investment  will run smoothly.

Location, Location, Location
It pays to choose carefully where your next buy to let property will be. This does not mean to buy on a cheaper or expensive location but rather the rental demand in the area. Look for clues like if is near a University or Hospital, very trendy area for professionals, excellent amenities and links, etc.  Avoid all cost areas with oversupply of properties to let, look at properties and letting agents’ websites and if a certain area has numerous properties to let, think if you want that kind of competition as you may have to negotiate the rent down to let the property.

Look at the figures

Before you buy, take a look at several properties, writing down the ones are of your interest. Look at the rental yields on them, see if the rental income covers at least 125% of the mortgage payments and if worth to spend around 25% on a deposit, this will help you to secure finance and a good rental yield.  Many lenders restricted the Loan to values to 75% or less and rental cover to 120%-125%, you can still arrange products with less rental cover but think if you want to restrict your rental yield.

Your target tenant

Think who will be your tenant and imagine in his shoes? If you are student you like a place to be comfortable and clean, links to university, nothing luxurious. If you are a professional you will be looking at a modern and stylish interior but nothing too pretentious, and excellent links. If it is for a family rental, do not put any furniture in, leave as a blank canvas, normally over the years the family has a few belongings they want to take to the next property.

Look into your portfolio

Review your portfolio, see if the initial rate deals in any of the mortgaged properties ended and compare the rate you are or will be paying with the rates currently in the market. If you are better off with the lender’s Standard Variable rate, does not mean you stop looking for a better deal. Try to look once a month for new rates or ask to your adviser to keep an eye on the products.

See if there is any opportunity within your portfolio to get a higher rental income. Why not transform a house with 3 bedrooms, 1 dining and 1 living room into a 4 bedroom house with living/dining room; make a loft conversion/extension to get 1 or 2 more bedrooms; renting by the room, as by the room the rental income is normally higher (but must be on right area). The possibilities are immense to add value to your portfolio and increase your rental income without spending as much money as buying another property. 

Look at other areas
Most Landlords invest where they live but most of the good opportunities are normally in other areas.  Do not be afraid, as if you follow the golden rule, can be very time consuming investing areas away but can be worthwhile.

Ask for a discount

When you buy an investment property, you must not forget you enjoy the same benefits of a First time buyer - No chains, so you can move quickly.  If you do not ask for a discount you will not have it.

Avoid Tenancy pitfalls

Put aside at least 2 months of rent, in case when your tenant move out or when you just bought a property  will help towards the mortgage payments until you find a tenant.
Worth paying for a complete tenant check report, where the provider will get you a credit file of the prospective tenants, check their ID, get the references and they are not expensive.  It is not guaranteed you will be good tenants but helps a lot.  Also, you should consider a rent guaranteed insurance, where can cover for rent arrears, pay towards the legal costs to evict the tenants and damage made on the property. With this type of insurance you may request a lower deposit from the tenants to match the excess of the insurance, that may help to secure a tenancy quicker.  

Shop around

Shop around for letting agents, ask a discount to traders: plumbers, furniture. The more you save the higher will be the return from the investment.

Gi M