Thinking of investing in a buy-to-let property?

Thinking of investing in a buy-to-let property? Follow these 10 golden rules from Ajay Ahuja and you too could become a property millionaire.

The buy to let mortgage was first introduced to the UK in 1996, 10 years on over 1 million households (5-6% of all households) live in buy to let properties and 20-30,000 additional households will be bought to let over the next decade. With the aim of securing at least 10% rental return per annum plus capital gain it is clear to see that investing in bricks and mortar can be very lucrative over the long term but with thousands of properties and mortgage products to choose from where do you start? Self-made property millionaire and owner of 150 buy to let properties, Ajay Ahuja, shares his 10 golden rules for successful buy to let:

Do your research –
Before embarking upon any purchase you need to ask yourself if buying to let is right for you? Do you have the determination, perseverance and self discipline for a long term project? Can you budget well, can you deal with people from a range of different backgrounds, do you really like property, are you responsible? Remember that buying a property to let is not just about your needs, by renting a property to others you are affecting their lives and have a role of responsibility.

Raise the initial investment –
Most people think that to become a professional landlord you need mountains of cash, this is just not true, I started with a mere £500. The key is a good knowledge and understanding of the financial products available to you. Of course it is ideal if you do have some personal funds to invest but if not consider the 100% loan-to-value residential mortgage.

Find the right buy to let mortgage provider –
With hundreds of buy to let mortgage products on the market it can be a baffling place. The traditional buy to let mortgage requires 15-25% of the purchase price as a deposit, the larger your initial investment the more you are able to borrow. Do your research as you would for a standard mortgage by comparing interest rates, repayment structures, fees and penalties etc. It is often advisable to approach a provider with whom you have a good financial history or a buy to let mortgage specialist.

Find the right property –
As they say location, location, location. I see many people buying in “up and coming” areas only to be disappointed by the rental returns on their investment. My property choices are based in price, price, price. Getting to know a local market will give you the knowledge to spot if a property is a bargain or not. Speak to local agents and establish the rental value of different property types so if you see a cheap property which could command the going rental rate for the area then you know it’s a bargain.

Look to achieve 12% rental return –
Some landlords are happy to receive 8, 9 or 10% rental return however I feel that a 12% return is achievable and that is my benchmark. I use the simple “rule of 12” when deciding if a property is worth investing in; take the purchase price, divide by 100 thus giving the monthly rental figure that needs to be charged to obtain a 12% gross yield. For example if a property is priced at £100,000, divide by 100 giving £1000. If the monthly rental figure (£1000) can be achieved in the area then go for it.

Don’t spend unnecessary money refurbishing your property –
If you are new to property investing then I would advise not to spend time and more money refurnishing a property. Inevitably refurbs cause stress and for you to lose money whilst the property is un let. Instead just make sure your property is neutrally decorated and clean. Don’t personalise it with your taste as this can put off potential tenants. Let them feel that your property is a blank canvas for them to make a home.

Find the right tenant –
So, you’ve bought your buy to let property but now you need a tenant, where to look? Firstly match your ideal tenant with your property type. For example a 1 bedroom flat in the city centre will suit a single professional or a couple whereas a 5 bedroom house in the suburbs will be aimed at a family. Once you have decided who would best suit your property advertise for that type alone either yourself or through a letting agent. It is important to meet your tenants and feel comfortable as they will be living in your property.

Minimise void periods –
Your buy to let property is not fulfilling its function and generating income unless it is let. There will of course be times between your old tenant leaving and the new one moving in but you can minimise this period by having neutral decoration, investing in high demand areas, seeking a new tenant as soon as notice is given ad invest in a property type which is in high demand in the area.

Work with an agent –
If you have more than one property or have invested outside your local area then it can be an inefficient use of your time and resources to manage the property yourself. Take advantage of local letting agents who will know the area inside out and let them source tenants, collect rent and undertake any repairs. If you do this it is essential however that you form a strong relationship with your agent but if this can be done the 12-20% + VAT of rent collected can be well worth it.

Expand your portfolio –
The majority of buy to let landlords own more than 1 property. Once you have gone through the process once you are able to draw on your experiences to invest again. The key to expanding is the ability to release the equity in your property through remortgaging. Be careful though, building a portfolio can increase risk if not managed property.

The average buy to let property rose in value by 5% in 2006 (according to figures from Paragon’s buy to let index) due to an uplift in capital values, stable rental yields and positive economic backdrop compared to a mere 0.8% uplift in 2005. This trend shows no signs of slowing in 2007 as the high demand from tenants continues, especially the immigrant worker population. For more information about buying to let, visit ahuja.co.uk.