Last week, I outlined the first few steps required to get into Real Estate Investing in the UK.
Just as a recap, the first 3 steps were- Deciding on if it is a Buy-To-Let or a Residential Property, deciding on your budget and choosing a location.
These are the next steps of consideration that I believe are necessary for a property purchase in the UK
4) Decide on if you aim to make profits or just aim get on the ladder – The reason(s) for investing in real estate, influences the methods of investing.
If one solely aims to get onto the property ladder, equity building, cash-cow, and prime locations don’t really matter, because the aim is to make a first-time purchase.
However, if the aim is to make profits, there are various ways to increase profits on a property:
Lodger Agreements (specific to residential properties)- A lodger agreement is a way to rent out a second room within a residential property without a typical landlord-tenant agreement. With a lodger agreement, the owner of the property lives within the property and rents out one or more extra rooms.
Example
Adam owns a two-bedroom flat in a prime location within London, with a monthly mortgage repayment price of £1000pcm. Adam could decide to use his spare room as a guest room/ study, or he could rent out the second room to his friend James, for a price of £1000pcm inclusive of bills- which a steal for a nice en-suite room in the current market.
Assuming Adams bills initially cost £300, and his mortgage was £1000pcm, his monthly property expenses were £1300.
His is new ‘lodger’ brings in £1000pcm which covers his mortgage, so Adam only pays £300 towards his bills and has £1000 to spare! Unless Adam decides to evict James, or stop accommodating lodgers, he could live in the property rent free until his mortgage is paid off.
Note- In real life, there will be some extra costs incurred and unforeseen issues in a property, but it is the best interest for the landlord to save a small stipend separately for such issues, to avoid a loss of profit.
HMO’s (specific to buy-to-let properties)-
There are two common ways of carrying out buy-to-let property rentals.
Option 1- Rent out the whole property to one tenant/group of tenants on one contract. This is usually done with families or closer friends who live together.
Option 2- Rent out each room to each tenant (usually on separate contracts)- House in Multiple Occupation (HMO).
HMOs are allowed in properties with 3 or more rooms, two-bedroom properties are usually rented out on standard tenancy agreements.
HMOs are usually inclusive of bills (which is why they are more profitable with a higher number of rooms), and they are very common in university towns , where BTL mortgages are highly leveraged.
An HMO licence is needed for the execution of a HMO tenancy agreement for compliance to regulations and to keep all tenants protected from unhabitable living conditions.
Decide on if you want to have a lodger or do a HMO prior to your purchase. It heavily influences your choice of property.
5) Savings for the Extra Costs of Buying
Most people forget that there are various extra costs associated with property purchases, the upfront cost are outlined below (correct as of 2023)
· Stamp duty – It is tax paid on properties costing more than £250,000 for residential properties unless you’re a first-time buyer. Eligible first-time buyers pay no stamp duty on properties costing up to £425,000. If one is buying a second home, an extra 3% Stamp Duty is payable on properties costing more than £40,000 at the relevant rate at that time.
This tax applies to both freehold and leasehold properties – whether you’re buying outright or with a mortgage.
· Valuation Fees - The mortgage lender will assess the value of the property to establish how much they are prepared to lend you. It can cost between £150-£1,500 based on the property’s value.
· Surveyor’s Fee- Surveys range from a basic home condition survey costing around £250 to a full structural survey from £600 or more.
· Legal Fee- You’ll normally need a solicitor or licensed conveyancer to carry out all the legal work when buying and selling your home. Legal fees are typically £850-£1,500 including VAT at 20%.
· Electronic Transfer Fee - This usually costs £40-£50.It covers the lender's cost of transferring the mortgage money from the lender to the solicitor.
We are looking at about £4000 to budget for aside from stamp-duty. A rule of thumb Is to allocate as much leeway for extra costs associated with property purchases taking the most expensive Fees as your benchmark.
My Favourite things this week
What I have been Reading: A Little Life- Hanya Yanagihara – An amazing, complex novel covering the lives of a group of friends from different backgrounds living in New York. I am only part- way through and it is so thought-provoking-one of those books that I have to highlight-and scribble on. I LOVE authors from minority backgrounds, because they bring a level of depth and robustness to their literature. I highly recommend.
Youtube Channel : Jamie York
In my opinion, Jamie is the go to person for all things property (UK). He has thousands of pounds in real estate equity, alongside a youtube channel and some courses.
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