Buy-to-Let Guide 2016-2017 by Knight Knox

BUY-TO-LET GUIDE 2016/2017 A guide to UK buy-to-let property investment

Buy-to-Let Guide 2016/17

FOREWORD

he buy-to-let market in the UK is truly thriving. In the age of unsustainable house price growth and stricter lending criteria in particular for first-time buyers, the UK’s ‘unaffordability crisis’ has led to an influx of would-be homeowners seeking alternative housing in the rental market. Those who would have once been poised to purchase a home now find themselves priced out of the market, so it is no surprise that one in five homes in Britain are now in the Private Rented Sector (PRS). Whilst this is bad news for potential

homeowners, private landlords are enjoying a buoyant buyto-let market, fuelled by high tenant demand, growing rents and rising house prices. As a result, it has been estimated that two million private landlords now own and rent out five million properties in the UK, at an average of 2.5 properties apiece. It is in this landscape that buy-to-let investments in the UK have truly skyrocketed, offering a level of security, stability and financial returns that other investment classes simply can’t

Contents

P04

P07

The Rise of the PRS

Assessing the Buy-to-Let Landscape

2016 saw the number of rented households in the UK top 5.7 million, a figure expected to increase 26.3 per cent to 7.2 million by 2025.

Landlords have recognised the benefits of buy-to-let property, so much so that the UK now boasts 1.75 million landlords earning over £14.2 billion per year.

P12

P13

The Do’s & Dont’s of Property Investment

Frequently Asked Questions

Before stepping into the lucrative world of buy-to-let investments, make sure you compile a checklist of vital things you need to consider.

You have to be 100% sure before making the commitment to buy an investment property, so Knight Knox has compiled the top five FAQs about UK buy-to-let.

This report has been created by Knight Knox using information that is correct at the time of print (October 2016). The report should be used as a guideline only, and should not be used in lieu of financial advice from an IFA or similar qualified financial professional. Knight Knox will not be liable for any financial loss, cost or expense incurred or arising by reason of any person using or relying on information in this publication.

provide. Therefore, it is unsurprising that The Telegraph in 2014 found that property has outperformed all other mainstream assets for the past 18 years, namely because of rising house prices, increasing rents and a distinct lack of available stock on the market. It has been said that the supply-demand imbalance in the UK housing market is so profound that the country needs at least 240,000 new homes annually, but only 141,000 (58%) were built

in 2015. So therefore the landscape is set - a lack of available housing has led to an increase in house prices, which has priced potential homeowners out of the market. This in turn has led to a rise in demand for rental accommodation, meaning that investors with property in the UK’s private rented sector can enjoy both higher rents and low void periods. For any savvy investor, it seems like there truly has never been a better time to consider buy-to-let investment.

P08

P11

Property Hotspots

Off-Plan Investments

Regional cities are now outpacing London, with the likes of Manchester - the UK’s unofficial ‘second city’ and capital of the Northern Powerhouse - topping the list.

Off-plan developments are often significantly cheaper than their completed counterparts, giving investors a better return on their investment from the get-go.

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P17

Top Landlord Considerations

Case Study - Equity Release

Property investment comes down to two key decisions: the cost involved in the purchase and the role you will play in the property’s maintenance.

See an example of how investors could capitalise on equity release to fund their next buy-to-let opportunity.

Buy-to-Let Guide 2016/17

IT’S OFFICAL BUY-TO-LET IS BACK EN VOGUE

s an income investment, property is highly attractive - particularly when you compare it to low savings rates and stock market volatility. If you add into the mix variables such as Brexit, the UK’s lowest-ever interest rates, an increase in tenant numbers and record-high rents, it’s little wonder that investors are flying the flag for buyto-let. The introduction of Assured Shorthold Tenancies under the Housing Act 1988 has opened the property market up even further to welcome buy-tolet investors. With a stable income from rental receipts, as well as an accumulation of wealth if house prices increase over time, the market has been growing steadily in recent years. This is particularly so in the regions where there has been a notable shift from the

5.7 million

unsustainable and unaffordable prices in London towards burgeoning and less expensive cities in the North of England, such as Liverpool, Leeds, Sheffield and Manchester.

The rise of the PRS

The number of rented households in the UK

£1.29 trillion

ccording to industry research, 2016 saw the number of rented households in the UK top 5.7 million, a figure expected to increase 26.3 per cent to 7.2 million by 2025 - the equivalent of one in four homes in England. During the same year, the Private Rented Sector (PRS) was valued at £1.29 trillion, surpassing the value of mortgaged owner-occupier stock for the first time.

The value of the UK Private Rented Sector (PRS)

60,000 House prices jumped in August 2016, defying all post-Brexit predictions of a slowing market - asking prices increased in August by 0.6% compared to the previous month, and annual growth increased to 5.6% in August from 5.2% in July. The Telegraph, August 2016

The annual shortfall of new-build properties in the UK

While the value of the UK’s rental stock is rapidly increasing, the number of properties on the market is everdecreasing. The population of the United Kingdom is estimated to rise to more than 69 million by 2024 yet, despite this predicted growth, the supply of housing available on the market consistently fails to meet demand. According to The Institute for Public Policy Research, demand for residential property could top 750,000 by 2025. However, to illustrate the extent of the UK’s supply/demand imbalance, just 141,000 homes were completed in 2014 (35.7 per cent fewer than the amount created in the year before the credit crunch), yet it’s predicted that by the end of the decade, in excess of 200,000 new homes will be required per year. If this continues, this would cause a shortfall of nearly 60,000 much-needed homes each year.

Projections for UK housing tenure, share of households

45 Projections

Mortgaged 40

Proportion of households (%)

30 Owned Outright

Social Rental 20

15 Private Rental 10

Source: PwC analysis, English Housing Survey

Owned outright

Mortgaged

Private rental

2025

2023

2021

2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

Social rental

Buy-to-Let Guide 2016/17

This significant drop in house-building has created a chronic supply shortage which has resulted in a spike in the PRS, as people turn to tenancy agreements as opposed to mortgage arrangements. Furthermore, with average house prices forecasted to reach £271,000 by 2020 rental demand is expected to grow further, and supply continues to dwindle. This issue is even more prominent for Londoners - the average house price in Greater London now stands at £600,076 and, if Cushman & Wakefield’s prediction is correct that house prices in London will grow 22.4 per cent by 2020, prices could reach in excess of £734,000 in that timescale. This goes some way to explaining why PwC has predicted that a massive 60 per cent of Londoners will be renting by the year 2025.

Naturally, this has created a vicious circle in the market - a shortage of properties has pumped up prices of existing stock, making the ‘unaffordability crisis’ for homeowners across the UK even worse. While the prospect of renting in many other countries is considered the norm, in the UK we have grown up in a culture where we aspire to be homeowners, but this is increasingly becoming an impossible dream for most. In the wake of increasing house prices and difficulties for firsttime buyers trying to secure affordable mortgages, the PRS has now become the only viable option for many families and individuals. The rise of the ‘rentysomethings’ - an age-group of young people in their 20s also characterised as ‘Generation Rent’ because they are unlikely to ever be able to afford their own home - has only spurred on the buy-to-let market, making it the attractive investment option it has become today.

Regional nominal house price projections in baseline scenario Region

2014

2015

2016

2020

Wales

£169,000

£173,000

£179,000

£218,000

Scotland

£191,000

£200,000

£209,000

£259,000

Northern Ireland

£138,000

£146,000

£155,000

£198,000

North East

£151,000

£155,000

£161,000

£198,000

North West

£171,000

£177,000

£186,000

£229,000

Yorks & Humber

£174,000

£180,000

£187,000

£230,000

East Midlands

£184,000

£195,000

£205,000

£255,000

West Midlands

£195,000

£202,000

£211,000

£261,000

East

£277,000

£302,000

£320,000

£390,000

London

£490,000

£518,000

£544,000

£670,000

South East

£327,000

£353,000

£375,000

£464,000

South West

£243,000

£257,000

£272,000

£338,000

£265,000

£279,000

£294,000

£363,000

Source: PwC analysis

ASSESSING THE BUY-TO-LET LANDSCAPE

n recent years, the UK buy-to-let market has thrived. The success of buying a property with the sole intention of generating income by renting it out, or by watching the capital value increase (which is particularly likely following the drop in interest rates) translates into an engaged market, acting as the perfect advertisement for would-be investors. Current and prospective landlords alike have recognised the benefits of buy-to-let property, so much so that the UK now boasts 1.75 million landlords, earning over £14.2 billion per year as a result of a winning combination of rising rents and growing house prices. Moreover, according to industry data, the average weekly rent in the UK by 2025 will hit £164, signalling a profitable future for landlords. So if you are considering dipping your toe into the buy-tolet market, how does the land currently lie? According to economists, returns on buy-to-let property have outstripped shares, bonds and cash ever since the market took off in 1996, earning returns of almost 1,400 per cent, making investment property a firm investor favourite. Furthermore, one thing that remains distinctly positive for the buy-to-let sector is that the barriers to entry are relatively low and, with a market as diverse as the current UK property market which has varying investment options in terms of property type, size, price bracket and location, there is something to suit every taste, budget and inclination. If you have access to the necessary funds, becoming a landlord is just a signature away.

The housing market is constantly changing, and important legislations/requirements can change depending on which area of the country you live or are looking to invest in. Experts have their finger on the pulse of the property market, and can help you ensure that you generate the best return on your available capital to keep up with market trends.

RESEARCH TO UNDERTAKE BEFORE INVESTING: Be familiar with property market statistics in the area you are looking to invest in, such as house prices, rental demand, average rents and available rental supply. Know your ideal tenants and what would appeal to them (for example, families may look for good schools nearby while young professionals tend to look for city centre apartments). Determine how you are planning to maintain the property - if you are looking to manage the property yourself, ensure you have a network of trusted tradespeople to conduct due maintenance in the property. Know your finances intimately - plan how you are going to fund your property, and work out how much rent you will need to charge to generate a healthy profit.

Because of the impeccable landscape for rental properties in the UK, buy-to-let is becoming increasingly popular as an asset class in its own right. Unlike many other forms of investment, property is something you can feel and touch, a tangible ‘bricks and mortar’ asset. While the property market can fluctuate like any other, it does not carry the same volatility as stocks and shares which require specialist knowledge as well as an appetite for risk. Its stability, combined with low barriers to entry and highly reliable performance and returns has resulted in the investment property market outperforming other asset classes for a considerable time. However, if you are a first-time investor - or even if you are a seasoned investor looking to diversify your portfolio or invest in a new area, it’s important to ensure that you seek comprehensive advice from property professionals.

Buy-to-Let Guide 2016/17

PROPERTY HOTSPOTS

growth in London has also been slow: according to YourMove’s Buy-to-Let index, yield growth in London slowed to just 3.9 per cent in May 2016, with the North West and Yorkshire both witnessing growth of over six per cent in contrast.

s little as a decade ago, it was almost an uncontested fact that the UK’s capital city of London was the most profitable and desirable location for would-be investors. Its rich culture, vast population, diverse property portfolio and high average rental price (which in 2006 was on average £199.42 per week, 64.6 per cent higher than the national average of £121.10) ensured it kept its grip on the top ranking. However, nowadays the buy-to-let landscape couldn’t be more different. Price rises in and around the UK’s capital city of London has far outstripped increases in rent, leading to significantly reduced investor returns. Yields have been disappointing in London of late, with inner London at the bottom of the pile at 4.4 per cent, while high-yielding cities in the north of England like Manchester and Liverpool have been consistently recording yields of 7.1 per cent apiece. Yield

As a result, regional cities are now far outpacing the capital, with the likes of Manchester - the UK’s unofficial ‘second city’ and the capital of the Northern Powerhouse - topping the list in a recent growth potential index, named by The Global Liveability Survey as the UK’s best city to live in and in the top 50 cities globally. Manchester’s position (a significant 10 places above London in the rankings) was attributed to the city’s transport infrastructure, cultural offering and property boom. This has gone some way to seal London’s fate as a city that is slowly but surely becoming a less desirable place to live, work and invest. However, it’s not just investor yields and sentiment that have increased the gap between the North and South in the buy-tolet market. The difference in house price growth between the country’s largest cities is also now at its smallest in nearly 20 years, as confidence in the economy spreads to the regions. Data from property peer-to-peer lending platform LendInvest

The growing unaffordability of London: House prices in London vs. North West (2015-2020) £700,000

£600,000

£500,000

£400,000

£300,000

£200,000

£100,000

£0 2015

Source: JLL

2016

2017

2018

2019

2020

North West

Greater London

shows the highest rental yield postcodes from the first quarter of 2015 were found in Birmingham, Ipswich, Liverpool and Glasgow, which can be attributed to relatively low house prices and strong rental demand from large student and young professional populations. Furthermore, Hometrack’s June 2016 report (which analyses prices in the UK’s 20 largest cities) showed that Leeds, Manchester, Glasgow and Liverpool are all outperforming London in terms of house price growth and, despite the rise in values, regional cities still offer better value for money than London as they are considerably more affordable. According to Santander research, properties in the North West could reach £200,000 by 2020, yet in London prices could reach 3.5 times that amount by that time, topping the scales at over £700,000. The troubles for disenfranchised Londoners don’t stop there it’s estimated that one in four homes in London will cost more than £1 million by 2030. Ultimately, from an investment standpoint, buy-to-let landlords should be looking for properties that will allow them to make gains from both rental income (yields) and house price growth. By doing considerable homework on the location and investing in an area with high rental demand, investors have the potential to generate a healthy monthly return. Key catalysts for future house price growth include growing tenant demand, investment in infrastructure, job creation in the area and a positive industry outlook despite Brexit uncertainty. This goes to show that, instead of looking locally or in areas that you are familiar with when deciding where to invest, you should instead choose a location like the north of England which can offer you a two-fold investment strategy: a significant rental income during the lifecycle of your property and significant long-term uplift in property prices, offering significant capital appreciation when you come to sell.

North vs. South: Average rental yields (2010-2016) Average rent per annum

Rental yields

Manchester

£8,320

6.8%

Liverpool

£6,708

5.5%

Leeds

£7,800

5.2%

Sheffield

£6,292

5.2%

South-West London

£19,500

4.8%

Guildford

£13,208

4.8%

Southampton

£10,192

4.7%

Plymouth

£7,488

4.5%

North of England

South of England

Source: Lendinvest

Buy-to-Let Guide 2016/17

PROPERTY CHOICES

nce you have chosen your desired property location, the type of buy-to-let property you choose to invest in is not too dissimilar to how you take your tea - it’s all down to personal tastes and preferences. Some people like a project property that requires work even before the tenant has stepped through the door. Others have their eyes set on a new house or apartment: modern, high-spec and requiring very little maintenance, ready and primed for the rental market. Regarding investment types, the two main opportunities in the UK residential market are residential and student. Residential (supplying properties for the whole of the private rented market) tends to be more expensive than student accommodation, but to this day remains the most common asset class due to the high rental demand in the mainstream rental market. In the student buy-to-let market, the initial outlay is considerably less, but has become popular with investors in recent years because of its ability to command high yields, which has made it an extremely attractive and viable investment option. If you go down the student accommodation route, it goes without saying to research and consider only locations with a high student population, such as Manchester with a student population in excess of 100,000—the largest student community in Europe.

In recent years, the student accommodation market has changed beyond recognition - student housing is no longer focussed on the traditionally old-fashioned halls of residence. Today, Purpose-Built Student Accommodation (PBSA) is the order of the day, with modern students more commerciallyminded than ever before and demanding modern luxury amenities - free Wi-Fi, gymnasiums and Sky TV - for their money. These demands are all reflected in the quality of the developments now on the market for private investors to rent out to keen students.

2.27m

The number of students studying at a UK highereducation institution

3-5.5%

However, the type of property investment you choose comes down the sort of tenant you would like to attract. If families are your target tenant, choose a property in the catchment area of good schools, but if you want to target students then proximity to main universities is key. Once you have chosen your preferred type of property and your preferred type of tenant the options don’t stop there. Property investors have a range of decisions to make to ensure that they are achieving the best investment to suit their individual needs. These include purchasing off-plan versus new-build developments, and even decisions on who will be responsible for commissioning and conducting the maintenance and upkeep on the property once it has been purchased (hands-on versus fully-managed).

The amount by which RICS have forecasted UK rents to rise per year over the next 5 years

£913 pcm

The type of investment you choose depends on the sort of tenant you would like to attract. The average UK rental value in August 2016, according to Hometrack

OFF-PLAN INVESTMENTS

ne area of the buy-to-let market that is gaining particular traction in the current investment landscape is off-plan - that is, the act of purchasing a property that hasn’t yet been built or is still in construction. What makes this type of investment so appealing is the substantial capital gains potentially on offer by purchasing property of this kind. Off-plan developments are often significantly cheaper than their completed counterparts, giving investors a much better return on investment from the get-go. This is because the property can justify higher rents when the time comes to accept tenants because of its new-build status, and the fact that the property will most likely have significantly appreciated in value during the build process. Investing in off-plan is seen as a more long-term approach that requires locking away capital until the development’s completion, but generally the returns are significantly higher (both in terms of rental yields and eventual capital appreciation). Some investors consider buying off-plan as ‘riskier’ than purchasing a pre-built property simply because you can’t guarantee its completion, but investing with an experienced developer with a proven track record will almost completely alleviate this risk. A trusted off-plan property provider should be able to prove their track record of past developments, which should leave investors with a sound state of mind that their property will get built on time and will produce the promised rental returns on completion. In the same vein as choosing the right location, the success (and potential returns) of an off-plan investment can often balance on its surroundings and high levels of infrastructure that exist in the area. Planned or existing road networks and economic drivers like universities and employment hubs help encourage future house price growth and make an area sustainable and attractive to prospective investors. Off-plan investment requires a deposit to be paid in order to secure the property - this figure can vary from company to company, with some favouring a lump sum which is then taken from the cost of the property and others preferring a fixed percentage of the property’s value. Then the remainder of the purchase cost is normally done in instalments, with some preferring a payment model which requires a small deposit, a percentage of the value payable on exchange of contracts, a percentage due at a predefined time in the construction period (e.g. six months into construction), and the remainder due on completion - but again this differs depending on the company and the value of the property purchase.

ENSURE THAT YOU: Thoroughly research the development and the developer - Be sure to properly examine the property you are looking to buy and the past portfolio and track record of the development to ensure you feel confident that the property will get built on time;

Make a plan - Because you cannot get a mortgage on the vast majority of off-plan properties, ensure you have a financial plan in place so that you know exactly how much is due and when;

Check the construction timeframe of the project - Ensure you can afford to have a sizeable portion of your capital tied up in an asset which will not immediately generate income;

Know what will happen to your property once the development has completed - Some companies have lettings and management companies already in place once the property has completed, but others let the responsibility fall on the landlord;

Take into account the valuation of your property - If you do go down the mortgage route, many lenders will require a valuation at the start and end of the project, which may result in the fluctuation of the loan amount if the property value alters considerably;

Can properly finance your purchase Sometimes the purchase price doesn’t reflect all the costs associated with property investment, so be sure you have budgeted for things like additional furniture packs, conveyancing fees, Stamp Duty Land Tax and ground rent.

Buy-to-Let Guide 2016/17

THE DO’S AND DONT’S OF PROPERTY INVESTMENT Before stepping into the lucrative world of buy-to-let investments, make sure you compile a checklist of vital things you need to consider. These include: A basic understanding of the UK buy-to-let and rental market.

Knowledge of the basic responsibilities of being a landlord in the UK and what this entails.

Choosing a suitable location with high tenant demand.

A rough calculation of how much it will cost to buy and manage a buy-to-let property.

An idea of what kind of tenant you want to attract students, young professionals or families.

If you are unfamiliar with the market or unsure of any of these elements, be sure to speak to an industry professional like an estate agent or a buy-to-let specialist for expert help and advice.

DO’S: Recognise buy-to-let (especially off-plan property) as a medium- to long-term investment.

Seek specialist advice from estate agents or property professionals on local market demands.

Have a sound financial plan in place, not just for the purchase but also for a contingency fund (it is advisable to save 2-3 months’ rental income for maintenance work and/or void periods).

Furnish the property to a high standard but keep it neutral in order to attract the bestquality tenants quickly.

Use an ARLA-accredited lettings agent that has necessary insurance like Client Money Protection and Professional Indemnity Insurance, as well as staff trained to ARLA’s high competency standards, so that they are kept up to date with the latest legal and regulatory requirements.

DONT’S: Treat the property like it’s your home - personal tastes shouldn’t cloud your judgement, so ensure that your property meets market requirements.

Purchase a property that requires a lot of maintenance and upkeep - not only will this take up a large portion of your time, it will also considerably eat into your profits;

Subcontract any maintenance work in your property to friends and family - tenants require a full management service by someone who knows what they are doin.

Leave all documentation to the last minute - ensure you have all the appropriate paperwork checked over by a professional and signed by both yourself and your tenant.

Try to cut corners by furnishing your property cheaply - all furniture in rental accommodation has to comply with the Furniture and Furnishings Regulations.

FREQUENTLY ASKED QUESTIONS

crashed and sterling took a nose-dive. However, since the event, the mentality across Britain is very much ‘business as usual’. Property investors should be encouraged by the fact that - unlike the volatile stocks and shares market - the UK property market has fared extremely well in the face of political uncertainty, with house prices remaining stable and even increasing in some areas of the UK.

uying a property - whether you are a first-time buyer, a seasoned home-mover, an ‘accidental landlord’, or a professional buy-to-let investor - requires careful consideration to ensure you are making the right move at the right time.

This just goes to show the resilience, security and buoyancy of property, especially against other more volatile investment markets. Furthermore, the fact that interest rates have dropped to their lowest-ever rate shows that savings rates are not offering the same profitability and security.

The potential returns in the buy-to-let market are evident but - as with any investment, be it stocks and shares, government bonds or crowdfunding - having a clear and carefully thoughtout strategy is essential in order to achieve the desired yields and capital gains from your asset.

In short, the property market has hardly been affected in the post-Brexit world - in the past, property has come through market crashes and global recessions relatively unscathed, and is faring against widely uncertain political conditions with relative ease. Tenant demand is still rife throughout the UK, so with this supply-demand imbalance still very much prevalent, prices will continue to rise regardless of Britain’s decision to leave the EU. Property is proving to be a stable safe haven for investments against a world of uncertainty.

You have to be 100 per cent sure before making the commitment to buy a property for investment purposes. Here are the top five frequently asked questions about UK buy-to-let:

1. What is the UK property market like, postBrexit?

2. How much Stamp Duty will I have to pay on a buy-to-let property?

A lot of pre-referendum press coverage - both domestic and international - surrounding Britain’s potential exit from the European Union was pure speculation, with the majority dismissed as scaremongering. The truth was that, before the result was announced, nobody really knew what would happen if Britain left the European Union.

As you may already know, the Stamp Duty Land Tax in the UK has recently changed - as of April 2016, a three per cent levy is now applied to the tax payable on the purchase of all second homes or buy-to-let properties. Stamp duty is payable via a slab system, with properties in different price brackets commanding different levels of tax. The current stamp duty is calculated using a tiered system, whereby you pay a different rate of stamp duty on different portions of the property’s value.

Now this has become a reality and Britain has voted to leave the EU, the situation is much the same now as it was then - nobody can be sure of what happens next. In the days following the shock announcement, the stock market

UK Stamp Duty Land Tax (SDLT): Residential vs. Buy-to-let rates Property price brackets

Standard rate (Owner-occupation)

Buy-to-let / second home rate

Up to £125,000

£125,001 - £250,000

£250,001 - £925,000

£925,001 - £1.5m

10%

13%

Over £1.5m

12%

15%

(As of April 216)

Source: HMRC, 2016

Buy-to-Let Guide 2016/17

Many people thought this would sound a death knell for buyto-let property, but too many investors are enamoured with the high yields, low void periods and potential for substantial capital appreciation that buy-to-let offers to be seriously dissuaded by the rising stamp duty. Research shows that property has still outperformed all major asset classes for years, and is the only mainstream asset class to have recorded a huge 47,000 per cent growth rate for nearly a century. Investors, instead of steering clear of the market, are just being smarter with the properties they invest in - savvier purchases ultimately mean a smaller tax bill (see case study below).

3. How can I fund a buy-to-let property with my pension? Since the pension landscape has changed beyond recognition as of April 2016, many people are looking for an alternative source of retirement income. The landmark decision from thenChancellor George Osborne to give those nearing retirement age full control of their pension pot for the first time has led to a surge of people looking beyond the once-mandatory annuities for something more lucrative.

Naturally, buy-to-let is high on many pre-retirees’ agendas. Now that there are flexible options in the pensions marketplace namely flexible drawdowns, which allow pensioners to release some or all of their pension pot as a cash lump sum - property investment is for the first time an option for many people who want their money to work for them in retirement. And with monthly rental income and the potential for capital appreciation when the time comes to sell, or an inheritance to leave to named beneficiaries upon the owner’s death, property is proving incredibly popular as an alternative pension pot. However, it is advisable to speak to a professional accountant or financial adviser before drawing down any money from a pension pot, as this may have tax implications on the remainder of your pension funds.

4. Why isn’t it possible to get a mortgage on offplan properties? While all lenders are different when it comes to their rules and lending criteria, off-plan properties are not generally eligible for a mortgage because there is no iron-clad guarantee that the property will get built. UK lenders are still jittery from the financial crash of 2008, so are far more cautious in this post-recession economy than ever before. Even for a normal residential mortgage, applicants have to go through rigorous stress tests and affordability checks to ensure they can afford to pay back the loan and have a proven track record of properly managing credit in the past. With this trepidation in mind, lenders are especially dubious about off-plan properties as a whole. Their logic is that if they agree to lend a considerable sum in order to fund a construction project which doesn’t end up getting built, they have lost money. Another theory is that it’s impossible to quantify and accurately value a property that has not yet been built. This is a worry for mortgage lenders because, if property values have dipped in the area by the time construction is complete or the building has had some aesthetic changes that affects its value, the lenders are again out of pocket. No matter the legitimacy of the off-plan construction company, and no matter how convincing their past portfolio, many highstreet lenders will only lend against something they can see, something tangible and easily appraised. However, this isn’t to say there aren’t off-plan buy-to-let lenders out there: you may just have to venture off the high street to find them.

5. What financial considerations should I take into account before investing in buy-to-let? No matter your personal motivation for investing in buy-tolet, the fact is that you will need to consider all the financial implications that it will bring. During the purchase process, you as an investor will face a series of ancillary costs that you need

to be aware of before taking the next step on the buy-to-let ladder. These include: Solicitor/conveyancing fees. Valuation fees. Ground rent. Lettings and management fees (usually between 10 to 15% of the property’s rental income).

many billable hours the exchange process has taken. As a general rule of thumb when investing in property, it is advisable to keep between two to three months’ rental income aside per year for any due maintenance in the property - that way, if you have any unexpected costs like a broken washing machine or leaky roof, this will not negatively hinder your expected returns. However, it’s worth sitting down with a notepad to work out how much you can realistically afford, taking into account

Landlord and Rental Guarantee Insurance (not mandatory but advisable). Capital Gains Tax (only applicable if you eventually sell the property on for a profit). There is no blanket amount for each of these fees - the prices depend entirely on the cost of the property. Some fees like stamp duty, capital gains tax and letting/management fees are taken as a percentage of the property’s value, while other fees like conveyancing all depend on how

More people of pension age are looking for an alternative source of retirement income

Case Study: Stamp duty rates (London vs. Manchester)

Central Manchester

Central London

Average house price (2016):

Stamp duty payable:

Total cost of purchase:

By investing in Manchester, you can save over:

This brings total savings to

£32,000

£467,000

on stamp duty fees compared to London.

OVERALL

£164,428

£5,721 (5%) £170,149

£600,076

£38,006 (8%) £638,082

The information depicted in this case study is intended as a guideline and for illustrative purposes only. Whilst the financial information submitted in this case study is correct at the time of printing (October 2016), Knight Knox cannot be liable for any fiscal loss or expense occurred by relying on the information supplied. Any information in this report should not be used in lieu of financial advice from an IFA or similar qualified financial professional.

Buy-to-Let Guide 2016/17

the property’s purchase price and all its associated costs.

TOP LANDLORD CONSIDERATIONS

hen all is said and done, property investment eventually comes down to two key decisions the costs involved in both the initial purchase and eventual upkeep of the property, and the role you would like to play in the maintenance of your property. Buying a property is only the first step on the buy-to-let journey. You need to ask yourself what will happen when you purchase your property - will you rent it out on your own, or get an agent to do it on your behalf? Many people like to be handson landlords, while others feel more comfortable hiring a management company to oversee the property. Naturally, you can make more money by renting the property out yourself, but it is important to be aware that you will be required to find and fully reference tenants; advertise the property and organise and conduct maintenance and repairs, as well as potentially sacrifice evenings and weekends for viewings. Being a hands-on landlord is incredibly time-consuming, with a recent study revealing that a huge 66 per cent of landlords find managing their properties themselves more stressful than their day jobs. Therefore, it is unsurprising that most prefer to use a professional lettings and management company to take on these responsibilities on their behalf. Lettings agents take away a huge proportion of worry for landlords, dealing with the day-to-day management of the property, including: finding and fully referencing tenants, collecting rent, as well as liaising with tenants on behalf of the landlord and organising any due maintenance and repairs on the property. The fee for a lettings agent is on average between 10 and 15 per cent of the property’s monthly rental value, which many landlords think is a small price to pay for peace of mind and less hands-on work. However, if you are considering going it alone, be sure you are familiar with all of the procedures, regulations, and maintenance required to be a hands-on landlord.

A recent study has revealed that a huge 66% of landlords find managing their properties themselves more stressful than their jobs

LETTINGS AGENT RESPONSIBILITIES: Pre-tenancy 1. Vetting and referencing potential tenants - It’s the responsibility of a letting agent to conduct all viewings in the property, vetting and fully referencing each applicant to ensure the best possible tenants for your property. 2. Drafting all necessary documentation Comprehensive tenancy agreements and tenancy deposit agreements need to be completed and signed, which lettings agents will do on your behalf. 3. Securing the tenant’s deposit and storing it securely - In keeping with current legislation, lettings agents will organise the process of putting the tenant’s deposit into a secure protection scheme.

During the tenancy 4. Facilitating the quick move-in of the tenant - Your lettings agent will be on-hand on the day of a tenant’s move in to ensure all necessary paperwork is signed, and conduct a comprehensive check-in. 5. Ensuring the property adheres to all necessary regulations - Each rental property in the UK has to adhere to strict rules, so the lettings agent is best-placed to ensure the property complies with all relevant regulations. 6. Collecting the rent on time and in full Lettings agents must collect the tenant’s rent every month and liaise with the tenant if the payment has not been made. It is also the responsibility of the lettings agent to conduct regular rental reviews to ensure the property is achieving its true rental potential. 7. Responding to any maintenance issues quickly - A lettings agent is in charge of ensuring all due maintenance work is done on the property quickly and efficiently.

HOW TO INVEST CASE STUDY: Phillip and Sara are looking to invest in property for the first time. They own their own home worth £500,000, having paid off their mortgage, and are now looking to remortgage to release a cash lump sum against the value of their home.

Remortgage amount:

£125,000

After looking at their finances, Phillip and Sara have decided to release £125,000 from their home. Using a high street mortgage lender, they have procured a 25-year, interest-only mortgage to fund their off-plan property investment.

Average property costs:

£2,254.50 Including property costs such as management fees, maintenance and ground rent.

Property purchase price:

£125,000 Based on a 2-bed, 2-bath off-plan apartment in Leeds

Monthly mortgage repayments:

£167.50 (Based on current interest rates)

Gross annual rent: Annual NET rental returns (after all costs):

£9,900 per year

£5,635.50

Summary Phillip and Sara were amazed that they could still generate £469 per month in profits, even after all property costs and mortgage repayments (equating to £5,635.50 per year). If the couple keep their property for 3 years, they have the potential to earn in excess of £16,900. Then after this time if Phillip and Sara choose to sell their investment property (following industry predictions that Leeds house prices will grow 12% in 3 years), their property could be worth £140,000 by 2019. This means that Phillip and Sara can pay back their original remortgage sum of £125,000, while still retaining the capital appreciation of £15,000. Therefore, over a three-year period, Phillip and Sara’s property could have earned them £31,900 and, having paid off their remortgage, the couple can then put their profits towards their retirement fund.

Buy-to-Let Guide 2016/17

WHAT SHOULD I DO NEXT?

egardless of the market environment, you need to decide if buy-to-let is for you. So ask yourself a series of questions: Do you have sufficient capital at your disposal? Are you happy to tie up this capital for a number of years? Have you the resources to manage the property, either yourself or with the help of an agent? If the answer to any of these is no, then you need to carefully consider whether to get involved. As with all property rentals, the benefits for a buy-to-let landlord can include a stable income from rental receipts, as well as an accumulation of wealth if house prices go up over time. The burgeoning housing market and healthy house price growth in the UK inevitably makes buy-to-let a popular way to invest. With interest rates at a record low and rents rising, many of those with access to capital will continue to turn towards property investment for an income. Radical changes that allow people aged 55 and over to access their pension savings as they wish during retirement are also expected to strengthen the market further. Experts predict that the pension regulation changes could see as much as £5 billion injected into the property market by people cashing in their savings. This is echoed by new research that has revealed that 32 per cent of people aged 45 to 64 with a pension would consider using some or all of their pension pot to fund a buyto-let property as an alternative to a more traditional pension fund. The study highlights that there could be a sharp rise in the volume of ‘silver landlords’ entering the market as a result of the changes in pension regulation. What’s never been in doubt is that buy-to-let has not only provided very strong returns for investors since 1996, but has enabled an influx of savvy investors to enter the market. Low savings rates and rising property prices and rents continue to make buy-to-let attractive to consumers, while lenders have been fighting to offer the best deals. The scene is perfectly set. For more information on becoming a first-time landlord, or if you are a seasoned investor already, call Knight Knox on (0)161 772 1370 or email info@knightknox.com to see how we could help.

TOP 5 REASONS TO INVEST IN BUY-TO-LET: 1. Low barriers to entry - Anyone can become a property investor: you don’t need specialist skills or knowledge, you just need the initial funds and a strategy for the ongoing management of your property. 2. Security - Especially in the wake of Brexit when the stock markets crashed, sterling plummeted and interest rates were forced ever-lower, house prices continued to grow, proving its security as a tangible ‘bricks and mortar’ asset. 3. Profitability - Property investments have outperformed all other major asset classes for over a decade, with average NET yields in the region of 6 per cent. 4. Buoyancy - The value of property has risen 47,000 per cent in nearly a century, which proves the market’s incredible growth and resilience. 5. Two-fold investment returns - Property investment offers investors two kinds of returns: rental income in the short to medium-term, and the prospect of capital appreciation in the long term.

KNIGHT KNOX

night Knox is a leading provider of buy-to-let developments to the private investor market. Specialists at sourcing investment opportunities in both new-build residences and high-end refurbishment projects, the company boasts an impressive portfolio of both completed and future stock - testament to the quality of the properties it brings to market. Boasting a track record of over 49 successfully delivered buy-to-let developments, Knight Knox works in partnership with four highly experienced developers. Together with them, Knight Knox has built an impressive portfolio of over 70 launched projects worth over ÂŁ730 million to date. These comprise of a mix of prime new-built residential buy-to-let apartments and high-yielding student accommodation projects in major cities throughout the UK.

Total number of UK projects launched

Number of completed and tenanted developments

Knight Knox Quay West at MediaCityUK Manchester M17 1HH United Kingdom +44 (0)161 772 1370 www.knightknox.com This report has been created by Knight Knox using information that is correct at the time of print (October 2016). The report should be used as a guideline only, and should not be used in lieu of financial advice from an IFA or similar qualified financial professional. Knight Knox will not be liable for any financial loss, cost or expense incurred or arising by reason of any person using or relying on information in this publication.

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