STRATEGY FOCUS: How to get started in buy to let in 2023

Alex Daley goes back to basics with a focus on the bedrock strategy behind simple, as passive as they come, property investment. Plus, do they still work with interest rates on the rise?

Sometimes property isn’t super cool. Sometimes the numbers don’t appear to be life-changing (at first). Sometimes it’s not about the massive refurbs, pulling 117% of your initial investment back out, going full time and all that.. Stuff. For the vast majority of readers, whether experienced, early staged or even soon-to-be investors - basic, vanilla, buy to lets (BTL) will be the chosen strategy. There’s less hassle than HMOs, certainly less stress than serviced accommodation and a lot less capital intensive compared to big commercial to residential.

WHY BTLS AND DO THEY STILL STACK?

The reality is, many areas around the UK will have plenty of properties on the market that will work for BTLs - whether you’re looking at doing a fair bit of work to properties to raise their value before you rent out or if it’s just a light refurb or even a ready-to-rent number.

As far as initial cash is concerned, excluding rent-to-rent and sourcing, simple BTLs are likely the least capital-intensive properties you’ll find. Especially if you start looking to the north of the UK. On-going maintenance is much lower than higher traffic strategies like HMOs and serviced accommodation

where you’re providing places fully furnished and there’s less of a ‘home’ mentality when it comes to taking care of the place (generalising of course). This means as a model, it’s arguably the best if you’re seeking predictable income. But as interest rates sit higher than we’ve been used to for a good long time, profit margins get squeezed. Are they still able to stack up as the right strategy for most investors who seek a balance between good profits and less hassle?

We think so. Although not all will work. Two years ago most properties stacked up to do quite well as BTLs. Interest rates were sitting below 3% which was a curse as well as a gift. It meant that investors were sucked into deals that wouldn’t hold up in their own right when rates rose. The art of finding good deals became, for a few years, less important. Simply because everything worked. Where this strategy article differs from our previous ones (serviced accommodation, commercial investing) is that we don’t need to spend time explaining what a BTL is. Instead, we can focus on what it takes to build a BTL portfolio that does well when times are tough as well as when things are great.

MORE IMPORTANTLY, HOW TO MAKE THEM WORK

So, how do we make BTLs work in 2023? We’ve got you covered and we’ll also lean on Buy To Let Facebook group founder Wes, to weigh in on a few points. We call this, ‘Wes says’ - whether it sticks or not depends on how easily amused we all are.

BUYING LOW AND ADDING VALUE

Whilst it can be tempting to buy properties which are ready to rock and roll, there can be a lot of benefits (both short and mid-term) in buying properties with a bit of work needed. As long as that work is reflected in the price and you have the opportunity to raise the value. That doesn’t need to be extensive renovations, but in many properties, a new bathroom, new kitchen, carpets and a once over with a paint roller can be all you need for a good value increase. This means you’ve got a more expensive house (and all the perks that come with it) for a much lower entry point. As well as an equity buffer. And who doesn’t love an equity buffer? You *must* make sure there’s fat in the deal though, you can’t buy a property that needs work at the same price as a property that’s ready. It sounds obvious but often people just assume because a house needs work, that it’s a good deal. Wes says: “Now more than ever you need to make sure you are able to add value to a property before you purchase.

This can be in the shape of title splits, refurbishment, development or conversion. If you can’t add value there is absolutely no point in purchasing this, it’ll leave you very exposed in the current economic climate.” Be selective about what you buy, and make offers, lots of them.

This is probably the main strategy point. ‘You make your money when you buy’ is a phrase thrown around from time to time. And it’s spot on. Choose the right properties and you can make it work. We spoke about stress testing in the last beginner’s corner article, but it’s worth touching on that again here. We’d suggest stress-testing your deals with interest rates of at least 8%. If your deal cashflows (produces excess income after finance, costs and maintenance) at 8% interest rates then you’re looking at a property that can likely survive the ups and downs of the market over the years. This will likely mean most of the properties you look at won’t work, and that’s fine. Not every property should work. Properties close to working can still be looked at, you just need to get a price that the property works for you on.

This brings us to the second point within this. Offer, offer and offer more. Those properties on the fringe of working are still worth a shot, at prices that work. Some investors actually set targets for the number of rejected offers to accepted, ie 10 rejected to 1 accepted. For them, this shows their offers are low enough.

Wes weighs in: “Bog standard properties no longer stack and with stricter lending criteria, banks won’t even entertain this… A few years ago we were told we were mad for stress testing our acquisitions at 7%. We now use a 9% metric. That way we know there is meat on the bone. Most will say that’s not viable. My answer to that will be - ‘ you need to find better deals’!”

BE PREPARED TO EXTEND YOUR SEARCH

We’ve spoken about this in the past, if you can invest locally to you, there’s very little reason not to do so - unless you don’t want to bump into your tenants in Aldi. As investing becomes harder, it may be that you need to extend your search in order to find properties that work. Instead of within 30 mins from your home, that may mean 60 mins. In the grand scheme of things, the extra travel time isn’t the end of the world, especially if the alternative is a property that actually doesn’t really stack up. Wes’ way: “Again this will certainly help cast a bigger net. Due to the market shift in lending criteria, it is more challenging to find deals that in fact will work in the current climate. By moving further afield you are certainly giving yourself a better chance however be prepared for the challenges which come with managing property remotely.”

KEEP ON TRACK OF RENT INCREASES

We discussed rental increases all the way back in issue 3, rent increases (which are done by many investors annually) are a great way of improving the performance of your properties over time. With UK rental figures increasing annually by 4.4% and most mortgages fixed for two-five years, it’s not crazy to expect your first year to be your most tight when it comes to profit margins and if you opt to increase rents annually, over the years, your investment will perform better and better. Of course that means selecting the right tenants, tenants who are more comfortable with income stress tests at the start and likely won’t be as stretched when rents are increased. And so tenant selection, as always, is at the heart of building a predictable, profitable property business.

Sure, this isn’t the complete guide to making BTLs work in 2023 and beyond. It is, however, the outline of a business plan that can give you a good chance of success, something to tip the odds firmly in your favour. But make no mistake, many landlords aren’t making a lot of money right now. Many have really struggled since the interest rate hikes. It’s not a license to print money, but it can be a great way of doing so if you get the basics right and set your business up for success from the beginning.

As always, if you want any further advice, the team are always here to help.

For more property investing help and support head to https://linktr.ee/btlgroup