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

by Rob Dix

For the purposes of this example, we’re going to use a three-bedroom terraced house in Eccles, Greater Manchester – just west of Salford. Here’s a link: propgk.uk/eccles-buy

“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). If you’re not overly comfortable with debt, capital repayment will seem like the “safe” choice. But I’m going to try to convince you that “interest only” is actually safer. Why? Because if you’re repaying a chunk of the capital each month, it means your monthly payments will be higher and your cashflow will therefore be lower. And, as we’ve already seen, the real danger is that you’re stuck in a position where prices have crashed and the property is making a loss (because your rental income doesn’t cover your expenses). Paying off just the interest gives you more income each month. Yes, you need to find the money to repay the mortgage in the distant future

to extend the loan term any further – but you’ll get a major helping hand from inflation. Inflation is an extremely powerful force, but it’s easy to miss because, year to year, it’s barely noticeable. Over a 25-year mortgage term though, its effect is huge. Let’s say you borrow £75,000 today (to buy a house worth £100,000) and pay off nothing but the interest. Assuming annual inflation of just 2%, its “real value” by the time you pay it back in 25 years will be only £45,000. At the same time, let’s assume house prices increase by 2% per year too – so the house you bought for £100,000 will be worth £164,000 in 25 years. As a result, even though you haven’t paid off a penny of the amount you borrowed, your loan-to-value proportion has dropped from 75% to 27%. Looked at like that, paying off your mortgage in the future seems a much less scary prospect.

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. That’s truly the best of both worlds. Benefit from the extra monthly cashflow with an interest-only deal, let the cash build up in the bank, then you can decide to use those savings to pay off capital or not – dependin...

The other big factor is the interest rate. This is a reflection of the risk the lender is taking on, which is a combination of factors around the property, you, and the amount of security they have. As a general rule, interest rates will be higher for 75% loans than 60% because the risk is higher. The interest rate offered may be fixed or variable. Fixed rates range from two years up to as many as ten; their obvious advantage is that your monthly payment will remain the same for the entire time, so you can have certainty about what your biggest cost will be. Variable rates could just be the lender’s “standard variable rate”, which they can change whenever they fancy (although usually prompted by changes to the Bank of England base rate), or they could be a “tracker” rate, which moves precisely in line with either the Bank of England rate or the LIBOR rate. Variable

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. So as you can see, this isn’t just a matter of seeing who appears at the top of the “lowest rates” table and giving them a call: you need to first look at each lender’s criteria to see who will accept the circumstances surrounding you and the property, then think about how much you want to borrow and how long you want to fix for, then start comparing the various combinations of interest

And finally, there are multi-lets. Every lender will have a slightly different definition of what they’ll lend on: some will allow a certain number of unrelated occupants if they’re all on the same tenancy agreement, some will allow separate agreements but insist that bedroom doors don’t have key-operated locks, others will go up to a certain number of rooms but not beyond… it’s complicated. By the time you get into the realm of licensed HMOs with more than five bedrooms, you’re looking at a few specialist lenders only.

By having a broker on your team, you’ll also have someone to sense-check any potential investments before you go too far with them. For example, I recently spotted a property that I thought I might be able to buy quickly with cash then refinance later. I pinged an email to my broker, and ten minutes later she told me that (for a reason I’d never have thought of) it’d be impossible to get lending. None of my time was wasted, and I didn’t damage my relationship with the estate agent by making an offer that I’d have needed to withdraw later. A final advantage of a broker – a really good broker – is that he or she will be in a position to keep your application on track when something weird and unexpected happens. And maybe it’s just me, but something weird or unexpected always seems to happen at some point during the process.

Not all brokers are as good as mine, but there are a fair few around if you look hard enough. So what does constitute a really good broker? They have access to the whole of the market. A “whole of market” broker will scour every available lender to find you the most suitable product, which of course is exactly what you want. This is why it’s a truly terrible idea to walk into your

high street bank and speak to the in-house broker there: they’ll only be able to offer you products from their own range, which will probably be inferior to other options that they’re not allowed to tell you about. Even outside of banks, some independent brokers are “tied” to offer only a limited range, so should be avoided. They do the majority of their business in buy-to-let rather than residential. Buy-to-let is a totally different ball game from residential, and someone who only does a couple of buy-to-let cases each month isn’t going to have the same depth of experience as someone who does it day-in day-out. They aren’t just a “processor”. Much like solicitors (which we’ll come to later), those brokers who work for big national companies often just process what they’re given without thinking about it too much –

They have strong relationships. As I’ve explained, weird things happen – and when they happen, you want your broker to be able to fire off a quick email to their person on the inside and straighten it out. This is something you’d never be able to do on your own, so for me it’s one of the biggest strengths of using a broker. They invest in property personally. A fellow investor will understand your priorities better than someone who only deals with investors in the abstract. They’ll be able to ask the right questions at the outset to determine your priorities, and match you with a product

You’ll notice that I haven’t mentioned fees anywhere – and that’s because it just isn’t as important as everything I’ve mentioned. Getting the right advice could save you thousands of pounds over the life of a mortgage, so I’m not going to start quibbling over £100 here and there. When a broker successfully arranges a loan for you, they’ll usually be paid a commission by the lender. Some brokers will charge you a fee too, while others won’t. My slight preference, oddly, is for brokers who charge me a fee – because it means they have less of an incentive to place me with the lender who pays them the biggest commission, rather than the one that’s best for my needs. It’s also the case, logically, that if they’re getting paid more per transaction, they’ll need to do

Where do you find a good broker? Recommendations are by far the best way – by which I mean recommendations from investors who operate the same kind of model that you want, rather than from your uncle who’s just remortgaged his own home. There’s also unbiased.co.uk which contains a directory of mortgage brokers (as well as financial advisers and other professions) along with ratings from their past clients. Or of course, ask me. I know a few very good brokers, and while they’re unlikely to be based near where you live, that’s really not an issue:

Quick note: when buying through an estate agent, you’ll sometimes be put under pressure to use their in-house broker. Occasionally you might even be told that they’ll only put your offer forward if you speak to their broker first. This is because it generates extra income for the branch (at the low end of the market, this can sometimes be more than the fee they’ll get for selling the property), and also partially because they’re used to having their time wasted with offers from people who it turns out can’t get finance. If you don’t want to do so, don’t be afraid to say no: they must pass on your offer to the vendor whatever the circumstances, and a confident

“I have my own broker who I always use”

can buy with cash, then remortgage (coming up in the next section) in the future to pull some of your funds back out. Bridging finance is short-term lending (lasting usually six to 12 months), which carries a higher interest rate than a mortgage but is much quicker to arrange. As a rough rule of thumb, you can normally borrow up to 70% of the property’s value. It’s quicker because a bridging lender really doesn’t care about you (other than basic checks that you are who you say you are, and haven’t been declared bankrupt): their security is the property you’re buying. As a result, a bridging loan can be arranged start-to-finish within a week (whereas it can take months for a mortgage to go through).

I said that it carries a higher interest rate than a mortgage, and that interest rate is usually in the range of 0.75%–1.5% per month. On top of that you can add an arrangement fee of 1–2%, a valuation fee, their legal fees, and a grab-bag of

Bridging, then, can look expensive by the time you’ve factored everything in. But if cash and mortgages aren’t an option and it allows you to do a deal that’s ultimately going to make you a lot of money, is it really expensive? Just factor the costs into your projections and see if it still stacks up. Be aware, though, that you need to be very confident that you’ll be able to exit the bridge at the end of the term by either refinancing or selling – otherwise they’ll crank up the interest rate or could even repossess.

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.

1. You want to let out a property that you’ve previously lived in yourself. At this point it’s worth reiterating that YES, you do need to switch from a residential to a buy-to-let mortgage if you’re no longer living there, and NO, it’s not true that “the lender doesn’t care as long as they’re getting paid every month”. It might be the case that they don’t notice right away, but when they do notice (and they’re in the habit of

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

gym though: 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. Places like Chester, Oxford and London fall into this category. Of course, “expensive” doesn’t necessarily mean “poor ROI” if the rents are equally high, but it’s generally the case that in areas with very expensive housing, the rents aren’t increased by an equivalent amount to make investments stack up. If you bought a house for £500,000, you’d need to rent it out for £2,900 per month to get a 7% yield, which in most cases just isn’t going to happen – whereas a £250,000 house renting for £1,450 (achieving the same yield) is easily possible.

I’ll usually start with something as basic as Googling a phrase like “areas in [town]”. Somewhere on the first page or two – beyond the Wikipedia and local council links (which can be useful in their own right) – there will normally be some kind of message board thread discussing the pros and cons of different parts of town. While any single post should be taken with a barrel of salt (and there are usually completely contradictory opinions of the same area within the same thread), over time you’ll start to see patterns emerge. Which are the areas (or postcodes) where people always say “avoid”? Which are recommended to people with young families?

From this, you can draw up a shortlist of a few areas to look at in more detail. Your shortlist will depend on your strategy. If you’re looking for dirt-cheap properties that are likely to yield well, the areas that people say “avoid” might be the first you want to explore. If flipping is your strategy, you need an area with high buyer demand – so you’ll be looking for places that families or young couples want to move to. A niche strategy like students or HMOs might take you in a different direction again – with proximity to universities/colleges and transport links respectively being the factors to look for. The next step for me is always to establish a rough idea of price norms in each area of interest. The quickest (and least accurate) way of doing this is to use a site called home.co.uk. Head over there,

renovation or conversion

build your relationships over time. And until you’ve achieved speed-dial status, I’ve got four simple rules for getting the best out of your local agents. 1. Useless agents are your best friends There are all sorts of estate agents, from big national chains down to solo operators who don’t even have an office. The corporates normally do at least a semi-respectable job of marketing properties, but the quality of some smaller agents’ efforts is truly shocking. Which is great news for you! 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. A good first filter for poor marketing is finding properties that aren’t on the online portals like Rightmove and Zoopla. Failing to put properties online is

inexcusable, given that it’s where 97% of buyers start their search. But it happens – and because many investors will only ever search online, your competition has already reduced to a fraction of what it would have been. So drive around your target area looking for “for sale” boards, note down the addresses, then cross-reference them against the portals. You can also check the local paper, which will normally have a property supplement on a specific day of the week where small ads will run. With properties that have made it to the portals, I always get excited when I see ones with either just a sole external photo or internal photos that make it look like an absolute tip. Marketing like this is going to put off almost all potential owner-occupiers, and a good number of lazier investors too – so these are the first ones I call up about. Also look out for properties listed with “online agents”. As these agents are basically “listing only” services for a set

This is an opportunity to get in there and make your case to the vendor directly, cutting the agent out of the loop.

Around 30% of properties that are “sold subject to contract” will fall through and end up back on the market again (which is why agents value buyers who don’t mess them around so highly). Sales that have fallen through are brilliant opportunities, because by that point the vendor is emotionally invested in moving (and has maybe even committed to another purchase), and will be far more open to a low offer than they would have been a couple of months previously. So if you’ve viewed a property and been outbid (or enquired about a property that was already under offer by the time you called), follow up.

But it could be because it has a very short lease, or sitting tenants on a protected tenancy, or major structural problems, or is subject to a strange covenant that restricts its use. Any of these may or may not be fine, depending on your area of expertise and appetite for risk, but you need to know – so you can factor the cost of remedial action into your maximum bid. If you haven’t worked out what the problem is, you can’t bid effectively. Rob’s Golden Rule Of Auctions #2: Just because it’s in an auction doesn’t make it a bargain.

In fact, there’s a small sub-set of investors who pick up shabby properties that have been poorly marketed by estate agents (where demand is low), then stick them straight into auction (where demand is high) without doing anything to them at all. Their profit margin comes from the fact that amateur auction buyers will unwittingly bid more than they’d have paid by just buying through an estate agent – because they assume that because it’s in auction and looks like a bit of a wreck it must be a bargain. For disciplined and serious investors, this is the major problem with auctions: you can set yourself a very sensible maximum bid based on the property’s realistic value, then get outbid by amateurs who’ve either got their sums wrong or just want “a project”

How do you get in front of the vendor in the first place? Some of the typical approaches include: Putting “we’ll buy your house for cash” adverts through letterboxes Advertising in the local paper Putting up small ads in shops Advertising on billboards Driving around in a branded car

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

propgk.uk/ricardos-law.)

Because property prices increase faster than wages do, property eventually becomes unaffordable for the majority of people. When this happens, the bust comes: property prices plummet, causing chaos for the banks (which have been lending money secured against high-priced property). The banks withdraw lending, building activity stops, and businesses shut down – which all have obvious knock-on effects for stock markets and employment levels. Eventually of course, prices drop to a more sustainable level and everything gradually goes back to normal – at which point the whole cycle starts again. Importantly, each cycle starts from a higher “bottom” than the previous one – so the long-term trend is always upwards, even though there’s a lot of volatility along the way.

That, in a nutshell, is the property cycle. It would be more accurate to call it “the land cycle”, because the cost of building a house on a piece of land is much the same in London as it is in Leeds, and won’t cost more in 100 years (other than inflation) than it does today. But house prices are more accessible to us than land prices, so we can “read” property prices to tell us what’s happening in the land market – and therefore what’s ahead for the wider economy. The stages of the cycle The economist Fred Harrison was one of the first people to identify the existence of the property cycle. He traced it back for hundreds of years to conclude that the length of a full cycle averages out to 18 years, with each cycle divided into distinct stages.

still needs somewhere to live. Even if renters were brave enough to take advantage of the lower prices and buy, this is the toughest point in the cycle at which to get a mortgage because banks are struggling too.)

You obviously can’t know when the “final years” of the upswing are until they’ve already happened and it’s too late, but there’s no shortage of warning signs that we may be near the top if you know where to look. One such sign is the announcement of overblown building projects like “world’s tallest building”, “Europe’s largest shopping centre”, and other sorts of over-ambitious ideas. These projects are conceived at a time of supreme confidence and funded in a permissive lending environment. It’s often the case that the bust has already happened by the time they’re completed, and they sit mostly empty – a monument to the delusion that has just passed.

Because the market was being driven by sentiment rather than fundamentals in the frothiest years, it’s easy for confidence to suddenly evaporate and take the market with it. Prices plummet, and people who are over-leveraged go bankrupt – triggering waves of forced selling, which pushes prices down even further. It’s impossible to pinpoint the exact moment when this is going to happen, but you won’t need to be told when it does: nothing sells newspapers like bad news, so the media will stoke the panic with endless horror stories. The recession phase seems like it will last forever, but it never does: at some point the smart money will be tempted back in, and the whole thing can start all over

the media says, the message is always “everything’s great!” or “everything’s terrible!”

Not only that, but you can gauge where we are now (and therefore what’s coming next) by looking at signals out there in the world. For example, are you seeing more and more cranes as you walk around town, and prices seem to be taking a bit of a dip after a few years of slow and steady growth? Then you could surmise that we’re well into the recovery phase, and you can strap yourself in the explosive phase yet to come.

amateur investor behave differently from each other throughout the cycle. For example, just as casual investors are lining up a huge mortgage to grab their piece of the boom, those in the know are quietly selling their stock and stockpiling cash for the crash to come. In other words, most people buy high and sell low – exactly the opposite of what they should be doing. I can’t promise that knowing about the cycle will give you the degree of knowledge and mental toughness you need to buy at rock bottom and sell at the very height of the market. And nor do you need to – remember, each cycle starts at a higher level than the previous one, so “buy and hold for 20 years” is still a perfectly valid strategy. What’s more, if you sit around for years waiting for prices to fall, you’re missing out on a lot of income.

In this section I’m borrowing heavily from ideas put forward by my friend Ed Atkinson in his April 2015 report, “House of Cards? How property investors can avoid future recessions”. You can download a copy at thepropertyhub.net/crash – along with a spreadsheet that allows you to model how your portfolio would have performed during the last five major recessions. Hold property that yields well A portfolio that yields well will keep you out of trouble by giving you plenty of “headroom” for expenses to increase while you still remain profitable.

There’s no right answer to what “break even” interest rate is acceptable. Interest rates have historically been as high as 15%, and that could happen again. However, I consider that unlikely, and it’s even more unlikely that they would stay that high for more than a few months – meaning that my cash reserve would only need to make up the difference for a short period of time. There’s no right answer, but there is a wrong answer: “no margin for error at all”. I see people buying properties (often in London) that just about break even at a mortgage interest rate of 3%, which just seems crazy to me. Or I suppose, it’s not crazy as long as the buyer is aware of the risk they’re taking on: it’s a pure gamble on future capital growth,

the two most important ideas in property investment – even though I almost never see them discussed. The first is something I’ve touched on several times in this book: the triangle of capital, timeframe and effort. The less you have of one, the more you’ll need to lean on the others. If you’re working 60 hours per week, have £20,000 in savings and want to have a monthly income of £5,000 from property by this time next year, can you do it? Almost certainly not, because you’re low on all three key elements. What if you start with a million pounds in the bank? Then you probably can. Ditto if you extend the timeframe to ten years, or quit your job to work 100-hour weeks in property to make it happen, or some combination of the three. I consider this to be the absolute key to having realistic expectations about what you can achieve.