How To Buy Your First Rental Property (Step by Step)
OK, so you have seen countless episodes of Homes Under The Hammer and have decided you want to buy a property to renovate and then rent out. Which as we already know is a great thing to do to increase your wealth and start you on the road to financial freedom.
But, as you often see in Homes Under The Hammer, if you buy the wrong property of don’t keep a lid on renovation costs you can come unstuck and not make any money at all – or maybe far less than you first thought.
Therefore it is vital – absolutely critical in fact – that you chose the right property in the first place. Property purchase and renovation can have loads of potential pitfalls that you need to be aware of and minimise as far as you can.
For example, you don’t want to buy a property that has a big structural problem (something like subsidence) that is not apparent when you view the property but which can actually lead to far greater expense in renovation costs than anticipated – and which may even cause you to run out of money before you finish the renovation. Not a good thing to happen.
Before we go any further there is one very important thing that you need to understand. You will need some money to get started. You will need money to:
1. Buy the property in the first place – yes you will get a Buy To Let mortgage to cover the bulk of the costs, but you will need the deposit – typically 25% of the buying price.
2. Cover the costs of buying (this means solicitors, stamp duty, mortgage broker fees etc etc. These fees can typically run to between 3 to 5K depending on the actual cost of the house.
3. Money to carry out the renovation works. I am assuming that you will carry out the bulk of the actual work yourself rather than pay a builder or something. Having said that you will need to call of experienced tradesmen for the more specialist things such as electrical work and plumbing.
But firstly you need to find the house that you want to buy, renovate and rent out. Now you can endlessly search RightMove and Zoopla for a property, but unless you have a very specific location that you want to buy in then that will possibly take you days or months.
The smart thing to do is to subscribe to the FREE list of property renovation projects on the market now that we produce and send out to subscribers weekly. That service saves you loads of time and is free. It doesn’t cost you anything at all to receive it! And every week you become the first to see and become aware of the type of property you are looking for. It covers the whole of the UK and features properties of all types and price ranges – but all need a degree of renovation work.
Now if you are thinking that you only want to buy a property in the town you live because it would be easier to get to and work on etc then you are being a little optimistic.
Yes, you may get lucky and find a suitable property in your town with regard to cost and degree of renovation work needed – but to be honest it is unlikely (and could take years).
You need to be prepared to buy elsewhere. OK, so maybe you need to go and stay in the property while you renovate it, but what is wrong with that? Not a great hardship really is it? And it would be fun! An adventure if you like. Just think of the end result and how it would all be worthwhile in the end.
And also, typically the work we are looking to do doesn’t want to be too daunting. The reason being that to get a Buy to Let mortgage on a property that property will have to be in a relatively decent condition in the first place. That’s because to get a BTL (buy to let) mortgage the mortgage company will send a valuer to view the place before they agree to lend you money on it.
I think in reality the property you are looking to buy should be in a good enough condition (in the valuer’s opinion) to rent out as it is. Typically, at the moment, the mortgage company has to be sure that the rent you will achieve will be 125% of the monthly mortgage payment. So we are talking about getting an “interest only” BTL mortgage as this will lead to the lowest possible monthly mortgage payment.
So a quick example:
Property cost: £60K
Deposit required: £15K
Therefore you are borrowing £45K
Monthly mortgage payment (say 2.79% interest rate): £111 per month
125% x mortgage payment = £138.75 per month rent needed to satisfy mortgage company
Expected rent: £350 per month
Therefore profit after mortgage payment = £239 per month (£350-£111)
So in order to satisfy the valuer and mortgage company you need to find a property that is not a total wreck! It needs to be in rentable condition without much renovation work.
Having said that though, there needs to be some way you can add value to the property which a) makes it more valuable as an asset and b) makes it more attractive to possible renters.
Relatively minor things which can make a huge difference would be things like decorating throughout, changing the kitchen, changing the bathroom, tidying up the garden, which are all things you can do yourself without having to employ costly tradesmen.
And also these things should not take you too long to do – after all you need to rent the property out as soon as you can because you will be paying the mortgage from the start.
So that is a brief and simple explanation of how to buy your first renovation project / rental property.
Good luck, and don’t forget to register for our FREE weekly list of renovation projects available now in the UK here – https://renovationprojects.uk/