Buy to Let Building Insurance

If you look at the most stressful events in a person’s life, buying a home is on the top ten list. After all, it’s a big decision – both emotionally and financially. Many home buyers go through an anxious period after they’ve arranged for their mortgage and get ready to move into their new home. Knowing you’ll get a pocketful of cash would sure help, wouldn’t it?

That’s a big part of the attraction of cash-back mortgages. A plump cheque is a psychological boost to home buyers who have just made one of the biggest financial commitments of their lives. As mortgage brokers, we like to work with our clients to ensure that they look beyond the temporary “feel good” of the cash, and weigh their options wisely.

Remember that the cash-back option comes with a trade-off: if you choose not to take the cash back, you can get a lower interest rate. Over time, you could see substantial savings in interest payments.

So, start with the most important question: What will the cash be used for? Is this purchase a priority, and is it worth the difference in the rate? Perhaps you have a plan to take advantage of the cash-back to purchase the household appliances for your new home. The extra $3,000 for new kitchen or laundry appliances may be an urgent immediate need and a higher priority overall than the lower interest rate for your mortgage term.

But here is the second question to discuss with your mortgage broker: What will be the impact of the rate difference over time? You’ll need real-life figures to work out the details for your personal situation, but let’s look at an example*:

Let’s say that your cash-back option pays 1% of the mortgage amount on a two-year deal, 3% on five years, and 5% cash back on a ten-year closed mortgage. And let’s assume that you’re looking at borrowing $100,000 for a 5-year term, amortized over 25 years. Not long ago, you might be looking at the difference between cash back and a rate of 6.60%, or a discounted interest rate of 5.29%.

So what’s the bottom line? Your cash-back option would give you $3,000 up-front, but over your 5-year term, you would pay a little over $6,300 more in interest costs than you would have with the discounted rate. The exact cost of the cash-back option in this example is $3,330.44 – paid out over 5 years.

Is that a good deal? It depends. Did you get the much-needed appliances for your home… or use the funds to manage a high-priority expense? Then you probably got good value from the option. If – five years later – you can’t remember where the money went, then perhaps you didn’t make the best trade-off.

At some point, every buy-to-let investor will face the spectre of rental voids but it’s what you do about them that makes you either a victim of circumstance of a savvy investor. The smart investor takes action to minimize such down periods and here are a few tips I’ve found helpful in doing so:

Seasonality: There are certain times of the year when people stay put because they’re focused on other things. Summer holidays and Christmas are just a couple of those “things” that affect large numbers of people at the same time. After summer, you’ll find that September should see more activity (and you can probably write off most of January, too). The summer dip is particularly relevant in areas of high student density, e.g. university towns, especially if your property might normally be let to these types of people or people related to this business. Wherever possible, then, ensure that your existing tenancy doesn’t end around these times.

Apathetic Letting Agents: Try and gee them up by telling them that you’re placing your own ad and if you introduce the tenant you want a reduction in their fee. You could also make your property available to more than one agent and promise that the first one to fill the vacancy gets the management for the next year. If an agent thinks they’re the only one, they won’t be inclined to try so hard.

Be Proactive: Don’t just sit back and wait for others to do the work. Remember, it’s your money that’s dripping (or gushing) away all the time the property is empty. Here are some ideas of actions you might take:

• place your own ad
• directly contact large employers and accommodation officers in local hospitals and universities
• offer an incentive (free TV/DVD player/holiday/champagne, etc)
• drop the rent to just below market for the area (a reduction of £5 a week for the year = £260, compare this with how much you’re losing each month the property is empty and you have to continue paying the mortgage)
• find out what people are looking for that would make your property more attractive than others that are currently vacant

To Furnish or Not? Only consider furnishing the property if you’re getting people asking for it to be furnished. If you just do this on the off chance, you could end up with a bunch of furniture to get rid of if they then want it unfurnished. You might list as “will furnish if required”. Quite frankly, the achievable rental will be barely affected, if at all, and you’ll then be liable to replace things as they wear out (although you will be able to depreciate the costs of furnishings by about 10% per annum off your tax bill – see my article on “Reducing Property Income Tax”). If you do go the route of furnishing, get new (IKEA, perhaps) rather than second hand. Although the 1950s furniture will be around forever, people prefer new and modern rather than old and sturdy. In addition, if you do buy from IKEA, the products are cheap and stylish and it’s probably the only store that will be able to fill your order quickly (even though you have to do the legwork yourself). Here’s a tip you’ll appreciate if you’ve ever gone the flatpack route… get a professional to do the assembly for you, it’ll be done quicker, to a better standard and they’ll probably have spares if any of the fittings are missing. And a tip within the tip is, if you’re buying at IKEA, ask around among the loading staff in the aisles whether they know anyone who does such assembly, some IKEA staff have side businesses doing just this.

Rental Assisted Tenants? In certain areas rentals predominantly go to such tenants. The only implications I’ve found is that the proportion of the rent paid by the council doesn’t always come on the same day each month. However, if you have claimants screened in the usual way (as they have to make up the shortfall and be trusted to pay the assisted monies if it’s paid directly to them), then you should be fine.

Remember to get references from the landlord PRIOR to the one they’re about to leave as their current landlord might be glad to be rid of them and will provide a glowing reference in order to do so. Look for longevity in their past rental history. If they flit every few months it could be a bad sign. Don’t be scared to consider such tenants. Most people don’t enter a home in order to trash it, no matter who’s paying the rent.

Renting Room by Room: If you do this, the property could be classified as an HMO (home in multiple occupation) if it’s let to 3 or more tenants who form two or more households and who share a kitchen, bathroom or toilet. Each council will have an HMO Officer and you can check with them if you’re unsure where your property stands. If it is so classified, as of April 2006, your property will need to be registered. This carries a fee and has requirements covering room square footage, kitchen food security (yes, really), fire system, fire escapes, etc. You also have to prove that you’re a “fit and proper person” to hold the license. Even after the license is granted, running an HMO involves more management and might not be a route you want to go down. You might wonder, then, why anyone bothers with them. Well they can yield high income, you just have to weigh up the pros and cons. More info on HMO licensing can be found on the government website: http://www.propertylicence.gov.uk.

When It Just Won’t Rent: If this is the case, you will want to look at other options such as:

• is the property suitable for conversion to self-contained flats (if they’re not self-contained, they still fall into HMO territory)

• is it best to sell up and buy something with higher yield in a higher demand area where, this time, you do your research first? See my article: “Before You Buy-to-Let”at http://www.womeninpropertyinvestment.com.

The process of purchasing an investment property is very different to that of buying a home for example, for you and your family to live in. There are many other considerations that must be taken into account before making this big step.

The buy-to-let boom of recent times has seen many more competitive mortgage deals become available, adding fuel to an already blazing fire. Many borrowers have found that they have come unstuck whilst jumping on the bandwagon without properly researching the proposed venture.

Thorough research of the market is essential. Even if you decide to borrow a substantial segment of the purchase price of the house, it will usually cost you a considerable amount to set yourself up as a landlord.

The location and the type of property you are going to purchase are the two most important factors to consider – for example, demand might not match the number of rental properties in certain areas and one bedroom flats may be easier to rent out than two bedrooms.

It is always a good idea to approach a number of letting agents in the proposed area you wish to buy, in order to gain an insight into rental demand – this is also a good way of finding out how much rental income you can expect.

When you look to purchase your own home, a lender will look at your income in order to assess how much they would be prepared to lend. With a buy-to-let mortgage however, mortgage lenders calculate how much they are willing to lend in a different way.

Many lenders will expect rental income to cover at least 130 percent of your monthly mortgage repayments – so make sure that you calculate your sums correctly. Once you have made your calculations and found a suitable area you wish to buy in, you can start shopping around for mortgages.

Many lenders offer mortgage advances on buy to let purchases of up to 75 percent of the property value. On certain buy to let schemes however, it is possible to borrow as much as 85 percent of the value of the property.

There are many different buy-to-let mortgage deals that can be arranged – You can choose between fixed, discounted and variable rates.

Some lenders may insist that you use an agent to manage the property. If this is the case then you could expect to pay up to 15 percent of the gross rental income on management fees. By using the services of an agent you can expect them to source tenants on your behalf, check references and collect the rent.

As with other types of mortgages, it will be a condition of the lender that you have in place a buildings insurance policy at the very least. Contents cover is also highly recommended however it is not usually obligatory.

Buy To Let Action Plan

1. Stay clear of areas that are already saturated with buy-to-let properties – supply can often outweigh demand, which could make finding tenants a difficult task.

2. It pays to negotiate! It may seem as though competition is fierce for property although if you are prepared to be patient then you could land yourself a bargain at well below market value.

3. When decorating, it is a good idea to invest that little bit extra. Ask yourself, could you see yourself living there? If not then you may wish to review your decor.

4. Join a landlords association. For about 100.00 a year you will have access to help and assistance on matters such as tax issues and legislation.