Rob is a 30-year-old graphic designer and is looking to make additional retirement provision by investing in his first buy-to-let property in the Leicester area. Leicester's student population means that there is strong rental demand. To buy a suitable property, Rob thinks he needs a deposit of about £20,000. He can comfortably afford his residential mortgage payments and over the last few years has saved £5,000 in a deposit account.
Mike Fitzgerald, sales director at Brentchase Financial Services, says that Rob is right to consider buying a property in a university town, where demand always exceeds supply The buy-to-let market is still alive and kicking, and the past year or so has seen clients buying investment properties as part of their pension planning.
Rob is obviously aware of the potential problems and is right to buy a property in an area where there is much demand. Locations close to universities have always provided an excellent source of rental income, but there are various factors to be taken into account when one is renting to students. One of these is that the property must be convenient to the college and have good transport links. Rob should also ensure the property is sound and we would always recommend a full structural survey.
Properties close to De Montfort University in Leicester are rising in value as long-term investors pour into the residential letting market. Rob could buy a decent house in the area for £130,000 with a rental income of £11,500 per annum.
With a deposit of £20,000, Rob would need a mortgage of £110,000 which is just under 85% LTV. There are many suitable schemes for him to choose from and we would determine from our fact-finding if Rob wanted a long-term fixed rate for security or a tracker scheme at a decent rate.
The Genesis Lakes and Rivers range has a three-year tracker rate at 0.85% giving a current pay rate of 4.35%. There are no overhanging redemption penalties. There is a minimum applicant age of 25 years for this product. The product also has a minimum salary requirement of £15,000, which should not be a problem for Rob. There is also a good selection of fixed rates to choose from if Rob felt that he needed the security of stable rates.
The anticipated rent of £11,500 would cover the mortgage payments, which on the above scheme are £602 per month for a 25-year term. We would recommend that Rob banks the surplus in a separate account so this money could form a fund for repairs and improvements to the property.
Rental voids in a good university town are usually not a problem and, as can be seen from the above figures, the property will look after itself financially. Rob should talk to an accountant to fully maximise his investment potential.
Roger Hillier, product development manager at Mortgage Express, says provided he does his homework, Rob's buy-to-let venture should be profitable Rob is in the fortunate position of having an affordable residential mortgage and also has surplus disposable income. As there has been a lot of coverage on how well buy-to-let investors have done, it's not surprising that he is thinking about investing in property. But has he left it too late – is this the right time to buy property? Buying to let should be seen as a long-term investment, so a short-term blip in prices should not deter him.
But before making the decision on whether or not to invest, Rob should make a full review of his financial circumstances and future plans as this will help him consider all options for retirement provision. The review may show that a buy-to-let property is not his best option.
However, if it is a serious consideration for his long-term future, Rob needs to consider where to buy. Should it be in Leicester? He lives there so he can get in touch with letting agents and read the local paper to get an idea of the best areas, property types and rent levels.
On the face of it, Leicester is a good bet – the city has two universities and a nursing fraternity, which means there will be a constant and renewing demand for rented property. If he wants to take advantage of student demand, for example, he'll maximise his income by ensuring that his property is ready for the start of the new intake at the universities.
He must then decide how much equity deposit is required and how he is going to fund it. The cheapest properties typically are terraced houses. In June this year, the Land Registry put the average price of a terraced property at £88,500. Most buy-to-let lenders will lend to 85% LTV. This means Rob needs a 15% deposit of about £13,000, plus extra cash for furnishing, redecorating and advertising for a tenant. Rob has savings of £5,000, which could contribute towards his costs.
But he has a shortfall, so how will he raise the difference? He could look at his other investments and expenditure to see if there is scope to increase his contribution. Or he could join up with a partner to invest jointly, which will reduce his equity commitment, but would also reduce any reward.
He could take a further advance as his residential mortgage is affordable, but this could turn out to be a risky option and Rob should consider the increase in LTV and the extra monthly cost. He should also consider what would happen if interest rates were to rise. This option may be acceptable if Rob could afford to reduce or repay the further loan over a short term by making overpayments on his residential mortgage.
If Rob cannot raise the extra funds for a buy-to-let in Leicester, he could consider buying in another area of the country where property is cheaper. Provided he does his homework and takes a long-term view, Rob's venture into property investment should be a profitable one.