Is a Buy to Let a good Investment?
We asked Rob Graves, director of Smart Estate Agents to give us the lowdown on buy to lets. Is a buy to let a good investment? With over 30 years of experience in the property market, Rob began his career in London, where he worked his way up to director level for a large corporate estate agent before heading to Devon to start his own business with a young family. With an undeniable passion for property, Rob relocated to Exeter several years later with his young family and launched his own business, Smart Estate Agents approximately 7 years ago and the rest… is history.
“I’m often asked, when is a good time to purchase a rental property, but buy to lets are not a get rich quick solution. It is more to do with what you do with them over time. Take the current climate where I have rarely seen rental price rises so much over a short period of time. This would suggest that now is the time to buy, however, property purchase prices have also risen dramatically; Making it harder to get the returns. As a rough rule of thumb, you are looking for a gross return of 5.5% with the Holy Grail being 6% or over. But it is rarely as simple as this.
To demonstrate the complexity involved and the effect of careful management I will share a potted history of 1 Bedroom flat I purchased 10 years ago. I bought the flat for £111,000 and it was rented out at £550 PCM. So with an annual income of £6,600, the gross return is 5.95%. But this is a return on the actual price. I bought this property with a Buy To Let (BTL) mortgage. So I invested £30,000 including purchase costs and a redecoration. My mortgage back then was approximately £300.00 per month. This reduced my return to £3000 per year on a £30,000 investment so my personal return is 10%.
Now with all these things, there are ups and downs. I have always avoided vacancy periods. Typically I do this by being competitive with the rents I ask and fussy about the tenants I take. I’ve remortgaged and taken back some of my initial investment. I improved the property with a new kitchen and increased the rent so see that as further investment. I’ve been efficient with my tax arrangements by investing in expert advice.
Today my investment in the flat, taking into account what I have taken out and put in sits at approximately £16,000. While the rent I receive has increased to £795 PCM or £9,540 per annum. With the help of a couple of remortgages, despite the size of the mortgage going up my monthly mortgage payments have decreased to £250 per month. This means my investment of £16,000 gives a return of £6,540 pa or a staggering 40.88%. Not forgetting I have a capital increase in value from £111,000 to £150,000.
As you can see this has been a journey and property investment is not a quick fix. It is also not a passive income. I love the line, ‘it takes a lot of hard work to create a passive income.’ But it has been far more about what I have done and what the market has done over the 10 years than the moment that I bought the property. During a time of low interest rates, I have maintained a return of over 18% per annum. For this return, I have had to forgo access to my money for 10 years. Property is always a long-term investment.
So is now the right time to buy a property investment? Well, it depends on what the market and you are planning to do over the next 10 years. But everyone always says, “well you were lucky to buy 10 years ago”. But funny enough I didn’t feel lucky at the time. And yes with my money that I don’t need access to in the next ten years I will use to buy another property to add to my portfolio. And, hopefully, in 10 years’ time, everyone will be telling me how lucky I am again.”