Property due diligence
January 16, 2019
Welcome to the next instalment of “Lifecycle of a Landlord” and, for this article we are entering into the “Acquisition phase”, the period where a landlord is assessing properties, putting in offers, and going through the legal process of purchasing a property, known as “conveyancing".
In previous blogs, we have given an indication of the types of properties and areas to look in to find a property suitable for investment, but now we need to drill down on how to assess actual property deals.
By now, you should have chosen your investment area and decided the type of property you are going to purchase i.e. a three bedroom house on the outskirts of a city, for example.
One of the best ways to assess individual properties is to contact local estate and lettings agents and ask for their thoughts on a particular area or even street.
They can advise you on sales and rental comparables and tenant demand to help you to find the most suitable property.
Local intel is the most valuable thing when assessing property deals, so speak to as many local agents as you can, picking their brains and leveraging their local knowledge.
You can also attend local landlord networking events to speak to landlords about their experience of the area, and also look at on-line property forums like Vesta’s partner forum, propertytribes.com.
You should also leverage the many on-line data and platforms available to assess property deals.
Look on Rightmove and Zoopla for sales and rental comparables, by selecting the same property type as the one you are interested in and seeing how they compare. This will give you a basic understanding of how your potential purchase stands in the market and what rent you could hope to achieve.
It always makes sense to be conservative in your figures, so err on the side of caution and take the lower figures as your reference.
The other thing you can do to assess a deal is to stack it on the numbers, as numbers can never lie.
Buy to let mortgages are based far more on the borrowing that the rental income can support, than on your personal financial circumstances.
Most lenders use a basic calculation when deciding how much to lend on a property, and you can use that calculation as well to see if a deal “stacks up”.
The calculation is as follows:
Monthly rent x 12 divided by 5.5% divided by 145%.
So, if a property is priced at £100,000 with a rental income of £450 per calendar month, that rental will support a BTL mortgage of circa £67,700. This creates a loan to value of circa 67%, which most landlords would regard as comfortable in the current market conditions.
This calculation tells you that you would require a deposit of £33K for this property, along with your stamp duty charges and acquisition costs. You can read more about the cost of starting a buy-to-let here.
If you want to put in less of a deposit, you would need to negotiate a discount on the property or look for the same priced property that is achieving a higher monthly rental. Most lenders will typically lend up to 75% of the value of the property, requiring you to put in a 25% deposit.
Visiting the area
When you visit potential properties, you need to assess the area around them such as proximity to transport links like bus routes and train stations, as well as amenities like supermarkets, local shops, and leisure facilities.
You should also look at the area in general. Are the streets clean and well kept? Do people in the area maintain their properties? Are there any noise issues such as busy roads, railways, pubs, or aircraft flying overhead?
At Vesta, we always recommend that you visit the potential property at different times of the day and night.
Is parking a problem on the street in the evenings when everyone is home from work? Does it feel safe walking around the area at night? Are the streets well lit?
It makes sense to put yourself in the shoes of your prospective tenant and view the property through their eyes. What would they want of a rental home? If you put the needs of your tenant at the heart of everything you do, then you are going to greatly mitigate your risk. Due diligence also greatly mitigates risk, and you need to become an expert at it.
Buy a tenanted property
Of course, if all this seems a bit daunting, another option is to buy a property that is already tenanted through the Vesta platform. Check out our latest properties.
A tenanted property is somewhat due diligence proof, as you will already be able to understand:
- How much rent the property can achieve.
- The type of tenant demographic that the property appeals to.
- The fact that there is tenant demand, as a tenant is already in situ in the property.
As you will be receiving rental income from day one of ownership, your risk is also greatly reduced, not to mention that your costs of setting up the property will also be less, as a tenant is already living there. The current landlord will simply pass the existing tenancy across to you, a simple legal process that your solicitor will undertake for you.
You can meet your tenant in advance and introduce yourself to them and reassure them about your intentions for the property. As good landlord/tenant communication is one of the greatest contributors to successful and long-lasting tenancies, this gives you a great head start as you embark on ownership of this property.
The Vesta platform is simple to use and we provide our own raft of due diligence to assist buyers in assessing the property.
We always recommend that buyers double-check this themselves as part of risk mitigation, but a copy of the tenancy agreement will show you the actual rent being received and this can be taken as cast in stone.
You can also check the payment history of the tenant and how they are treating the property, and this again is a great way to mitigate risk, as you can see an actual tenant living there, not have to guess about how a prospective tenant might behave. Many of the “unknowns” that can trip landlords up, become “knowns” when you buy with tenants in situ through Vesta!
All in all, buying a tenanted property is a great way to get off to a flying start with any investment property and Vesta is THE place to look for one!
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