The Complete Guide to Property Investment: How to survive & thrive in the new world of buy-to-let

by Rob Dix

Gross yield is the annual rental income generated by an asset, divided by the price of acquiring it – so a property that brings in £10,000 per year in rent and cost you £100,000 to buy gives a gross yield of 10%. (On your calculator, that’s 10,000 divided by 100,000. The result is 0.1, which expressed as a percentage is 10%.)

Net yield is the annual rental profit (rather than income) generated by an asset, divided by the price of acquiring it. So if the property cost you £100,000, the annual rent is £10,000, and you have costs (including mortgage costs, management fees and maintenance) of £5,000, that’s a net yield of 5%.

That calculation is Return on investment (ROI) – calculated as the annual rental profit divided by the money you put in. If you buy wholly in cash, the money you put in is the same as the cost of acquiring the asset, so your ROI and net yield will be identical. But if you use a mortgage, your ROI will be higher than your net yield. For example, our hypothetical property cost £100,000 and generates a £5,000 annual profit, giving a net yield of 5%. But say that you only put in £20,000 in cash, with the rest of the purchase price being funded by a mortgage. Your ROI is therefore £5,000 profit divided by £20,000 cash invested, which equals 25%.

This example shows us the power of using leverage in the form of a mortgage – which we can see by comparing this strategy to a couple of alternatives. By the time we’d bought ten properties, we’d invested £250,000 and generated an income of £22,000 per year. If we’d saved up until we could buy properties in cash instead of using mortgages, we’d have only been able to buy two properties – which would give an income of £10,200. On the face of it, using leverage has doubled the returns – but it’s actually better than that. Firstly, buying instantly instead of saving up for extra years has brought in thousands of pounds of extra rental income. Also, if property prices go up by 10%, we’ve got ten properties to gain in value (for a total gain of £80,000) instead of two (a total gain of £16,000). (Using leverage has its risks too, and those mortgages will need to be paid off at some point, but those concerns are less significant than you might think. We’ll talk about this a lot more in Part 2.)

The strategy we’ll look at next is sometimes known as “recycling your cash”, because you reduce the amount of cash you need by taking one deposit and re-using it for multiple purchases. How? By refurbishing and refinancing.

So a mortgage won’t work, but we don’t want to put in that much cash either. Instead, we’ll use bridging finance – a form of short-term funding (usually up to a year), which is specifically intended for this kind of situation. Whereas mortgages are typically for up to 75% of the property’s value, bridging normally goes up no further than 70%. It’s more expensive than a mortgage – the interest rate is usually in the range of 0.75%–1.5% per month, plus fees of around 2% of the total loan amount – but it’s quick and easy to arrange.

Firstly, back to basics. With any property you buy, you have two potential sources of “return” on that investment: Profit left over after receiving the rent and paying out your expenses Growth in the property’s value over time When some people calculate their “ROI”, they combine their rental profits with a projected percentage uplift in capital growth every year. Personally, I don’t see the sense in this: for a start it doesn’t reflect reality (there’s no way property will go up by exactly the same steady percentage every year), and also that increase in value doesn’t do you any good until you either sell or refinance to access the extra equity.

Other than demonstrating the power of time on leveraged property investment (and giving capital growth some attention after we’d ignored it in previous strategies), the purpose of this example was to get you thinking about where and what you buy.

you’ll generally need to choose a property with some kind of yield/growth compromise in mind.

(A multi-let is also known as a House in Multiple Occupation (HMO),

Firstly, terraced houses in student areas tend not to be the most desirable, so (in accordance with what we’ve seen in previous examples) they’re unlikely to give much in the way of capital growth. If you consider “total profit” (rental profit plus equity gain) over the entire time that you own the property, it could end up lower than a single let even though the month-to-month income is higher.

To demonstrate this strategy, we’ll use £50,000 as the amount of starting capital. This £50,000 won’t be enough to buy a decent chunk of rental income, even with HMOs. Realistically then, the only way to get an immediate income is to look at trading in property (rather than investing in property): buying, refurbishing, and selling on at a higher price. “Trading”, “buy-to-sell” and “flipping” are all used pretty much synonymously to refer to this process.

Deciding on interest only vs capital repayment When taking out a mortgage on a buy-to-let property, you’ll be able to choose between repaying a small amount of the loan each month until you owe nothing at the end of the mortgage term (a “capital repayment” loan), or just paying off the interest each month so that at the end of the term you still owe exactly as much as you borrowed in the first place (an “interest only” loan).

Still uncomfortable with the idea? Here’s the point that most people miss: having an interest-only loan doesn’t mean you can’t repay chunks of the capital if you want to. Yes, fixed-rate deals (to be explained shortly) will have an initial period when you’re penalised for overpaying, but after a while (when the fixed-rate period ends or you remortgage) you’ll be free to pay off capital at will.

Interest rates, however, are just one component of the cost you end up paying: loans also come with arrangement fees, which can either be a set amount (like £995) or a percentage of the total amount you want to borrow (often from 0.5% to 2%). There are also various valuation fees, account set-up fees and “because we feel like it” fees.

You need to use a solicitor for any remortgage transaction, who will take care of the mechanics of adding and removing legal charges and repaying the previous lender (if there is one). I’m often asked how remortgaging actually works in practice, and that’s the answer: you’ll agree a loan with the new lender, your solicitor will receive the money and use it to pay back the old lender, and any balance left over is deposited in your bank account.

This is a really, really (really) important point: remortgaging is great, but you’ve got to strike a balance between releasing equity and maintaining cashflow.

The best investment areas are underpinned by solid fundamentals: jobs, schools, shops, leisure facilities and transport links.

some areas have an abundance of fundamentals yet still make for poor investment locations. Why? Because of a “prestige” factor that makes them relatively expensive places to buy.

The next step for me is always to establish a rough idea of price norms in each area of interest.

Useless agents are your best friends

If they’re failing to market a property effectively, that means fewer people are going to see it and the vendor is potentially going to be grateful for your (low) offer because barely anyone has been through the door.

Follow up

Be wary about over-promising, and make sure you always deliver.

Rob’s Golden Rule Of Auctions #1: There’s always a reason why a property has ended up at auction instead of going through the normal selling channels. Before you bid, you need to find out what that reason is.

Rob’s Golden Rule Of Auctions #2: Just because it’s in an auction doesn’t make it a bargain.

Armed with your maximum bid, you turn up on the day (or participate over the phone, or sometimes online) and don’t exceed it.

All in all, auctions are something of a double-edged sword: compared to the normal conveyancing process it’s wonderful to have the certainty of the sale immediately and the whole thing wrapped up inside a month, but it also forces you to make a decision with very limited information and no chance of backing out if you make a mistake.

My view is that any given property has two prices: its objective market value, and the price that it makes sense for you to pay in order to meet your objectives. You don’t want to pay anything higher than the lower of these two prices: you don’t want to buy a property that’s objectively overpriced, but you also don’t want to buy a property that’s priced fairly if it won’t give you the return you need.

if you get a mess of a property that’s being poorly marketed, or where the owner is desperate to sell and knows they have a limited target market, then a BMV opportunity can be created.

The thing to remember is that nobody sells a property at a bargain price because they’re feeling generous: there will always be a reason, and it’s your job to find out what that reason is.

So when you’re assessing a deal, it makes sense for you to calculate market value in exactly the same way: using similar properties, that are very nearby, and have sold recently.

Another tool you can use in your analysis, if you’re willing to spend a bit of cash, is a valuation report from Hometrack (hometrack.com). It costs £19.95, and is basically an automated version of the process I’ve just described. Many of the big lenders use it as part of their own research process, so using it can increase your level of confidence.

In fact, that’s a pretty good general rule for establishing market value: the less sure you are, the more conservative you should be.

Just to be clear: rents are determined by wages and local supply and demand – not by landlords.

Price you’re willing to pay = final price you can sell it for - costs - desired profit margin

Location factors

Condition factors

Situation factors

Of course, you don’t start by making your maximum offer: instead you want to make an offer that gets rejected. You read that right.

In a negotiation you can never go backwards. If you make an offer and it’s accepted immediately, it means you could have gone in lower. It’s too late to do anything about it now though, because the vendor knows that you’re actually willing to pay that amount – so backpedalling won’t work. By having your first offer rejected you can satisfy yourself that you’re not going in too high, and also “anchor” the conversation around your number. Even if the vendor is mortally offended by your offer of 40% below their asking price, somewhere in the back of the mind they’ll start to question whether, hey – if that’s the number you came up with, maybe it’s also the number that everyone else will come up with and their own valuation is way off base.

What you should remember when making your offer is that a negotiation is about more than just the price. The other key factors are certainty and speed – so if you have these in your favour, you should make this clear in your offer.

Still, however you put your first offer forward, it should be rejected – which is great, because you know you’re below the vendor’s lower limit, so now you can gradually work up towards your maximum price.

the person who needs the deal to happen will end up losing. In other words, the best negotiation tactic is to look like you’re willing to walk away – and the easiest way to pull that off is to genuinely be willing to walk away.

So what do you do if you reach your maximum offer and it’s still refused? My approach is to leave the offer on the table, but make clear that I’m looking at other opportunities and may need to withdraw it if I get an offer accepted elsewhere.

It’s worth noting that unless they down-value the property from the proposed purchase price, they will value it at the purchase price: if the property is widely marketed and the vendor accepts your offer of £80,000, that by definition sets the market price.

The legal process

When doing any kind of work, it’s important to know whether your plans will require approval in terms of building regulations, planning permission, or both.

For anything beyond the smallest job, the normal commonsense rules apply: get three quotes and trust your gut. To make sure you’re comparing like with like, ask everyone to be clear about the exact scope of work: you might find for example that one quote is more expensive because the builder anticipates needing to replaster, whereas someone else has just assumed that the old plaster will be fine. I always insist on a fixed price quote (rather than one based on how long the job takes) so I know in advance how much it will cost, and the builder has the incentive to get the job done and get paid rather than drag it out.

but ultimately, bright and clean is all that anyone ever wants.

In terms of record keeping, everything becomes a lot easier if you have a separate bank account that’s used solely for property transactions. Any normal current account will do: just have the rent as the only payment coming in, and expenses going out as direct debits or charged to the associated debit card. If you have a linked savings account, you can also get in the habit of regularly transferring funds across to cover tax and/or serve as a contingency fund. Whether you do the bookkeeping yourself or let your accountant handle it, it’s a lot easier when the transactions are separated rather than intermingled with your own finances.