Buy to Let Basics – Property Investing for Beginners

First of all, you might think, well why on earth should I be investing in property? When you do it correctly, property can give you an extra income stream, maybe even enough to replace whatever you're earning at the moment from your job or business. That's what I was able to do in 2001. I was able to leave my senior management position at Cadbury's in Birmingham, the chocolate manufacturer, because I had enough money to cover all of my living expenses. I hadn't completely replaced my income, but I had enough to make the choice and the decision to leave my full-time work.

By 2008, I'd completely replaced my former salary. It took me 8 years from 1995 up to 2003. Many of my students using my formula and strategies managed to achieve it much quicker than I did. I hope you can also do that as well. So replacing your income is a pretty good goal to go for first of all. But the other reason for investing in property is that you can buy an asset.

Which by the way, someone else can cover the cost for, because the whole point is this is different from your own home. You're going to rent this property out to someone else, they're going to cover the insurance, the mortgage, the maintenance, all of the costs and give you some profit if you do it correctly. The value of that property goes up over the long term. In the UK, typically property prices double on average about every 10 years.

Listen carefully to what I'm saying. I'm not saying they do double every 10 years. It kind of depends what 10 years you look at. But over a long enough period, property prices on average double every 10 years. You can go onto Google, you could type in land registry house prices, and go and check it for yourself. You'll see over the last 60 years or so, that's absolutely what's happened. I started in 1995.

The very first house I bought was my home that I lived in. I bought it for £48,500 pounds and 25 years later, in August 2020, I had it valued. It had doubled in value, doubled again and almost doubled again to £330,000. So this is a great reason to be investing in property because you're going to build your long-term wealth. This is also great pension planning for the future. Now, just to be clear, I'm not giving any financial advice here. I'm just trying to educate you so you understand why you should be investing in property.

The way you actually make money is a number of different ways. A lot of people think that you have to buy a property, renovate it, and then sell it to be able to get out some money in profit. While you can certainly do that, and in a rising market, that can be a great strategy. The only problem with buying, doing up and selling on, is what we call flipping property, is it once you've sold it, you're never going to make any more money from that property. You're crystallising the profit and you've got to go and buy another property and do it again to make more money. That's why I prefer long-term buy and hold. What that means is that we buy a property and we might add some value to it, but we're not planning to sell it. We make money every month from the rental profits and also for the long term capital growth.

Let's talk a little bit about that rental profit now. So the idea is that you buy a property in an area that has got a good, strong demand so people want to live there. You can check that by speaking to local letting agents to see what kind of properties people want and how much they're paying for it. Whatever you pay on the mortgage, and all the costs that are involved, that should be less than the rental income that comes in every month. There should then also be some profit left over for you every month, and that's your cash flow, the positive cash flow. So we look at how much is the rent? Might be £800 a month, take off the mortgage, which might be £350. Maybe the management is another £150, so it's £500 plus £50 pounds for insurance. So maybe the total cost is £550. The rate is 800, that then makes us £250 per month. So most people start with what's called a Single Let property. That's where you have a house or an apartment or a flat and you rent it to either a single person or a young couple or a family or an old person, but it's all on one contract, Now that tenant is responsible to pay all the bills. They pay the council tax, they pay the gas, electric and water.

What you pay as a landlord is the mortgage, the insurance, and you must have Buy to Let insurance. So if someone has an accident in your property, and they try to sue you, you will have public liability insurance to cover that. Also if the property burns down, you want to make sure that there's money to cover the cost of that. So you must have insurance in place. Then there’s also a management fee. A lot of people worry about collecting the rent and doing those kinds of things. You can get a letting agent to do that for you. Now, a letting agent will typically charge about 10% of the rental income. They will charge that on a monthly basis to look after the property, to take the calls about any maintenance that's required and also to collect the rent and they then pass on to you.

If you have a newer property, there'll be less work to do. If you have an older property, there will be maintenance. You've got to factor that in as well. If it's a freehold property, you've got nothing to pay, but if it's a leasehold property, often apartments or leasehold properties, you might have a service charge to pay. That’s something you pay to the freeholder which is covering the cost of the electricity or cleaner for the communal areas. You might have a fund that puts money into cover maintenance on the property and fixing the roof, those kinds of things.

So if you have a leasehold property, bear in mind you're always going to have a service charge that you need to pay, which helps contribute to the communal facilities. After working out all these costs, add them together, and that must be less than the rental income that comes in.

If you have a Single Let property which is what most investors have, you might make anywhere between a hundred to a couple of hundred pounds a month. You can maximise the rental income by a more advanced strategy called HMO Property Investing (Houses of Multiple Occupation). This Is where instead of having one single tenant on one contract, you might have a large house that's got a number of bedrooms and you rent the individual bedrooms out to people, each person has their own single let contract. So you might have five people in the property, each with an individual AST (Assured Shorthold Tenancy) contract. That's the standard contract we have in England. They then rent the property from you.

In that scenario where it's a House of Multiple Occupation, you will get the tenants paying you one amount each month. It includes the bills, which you as the landlord pays. There's an important difference, with a Single Let property, where the tenant pays the bills and a HMO where you pay the bills, the gas, the electricity, the TV licence, the broadband internet, the council tax for the whole house as well. A HMO is a more advanced strategy, but you can absolutely learn how to do HMO’s to achieve a much higher cash flow.

Often when people are new, they think, well maybe I should get a Single Let property. They want to try that out themselves, then move on to a more advanced HMO. I kind of understand that thinking, but my view is why on earth would you tie up some deposit money in the property and only make a couple of hundred pounds a month, when you could get a HMO and make a thousand pound profit a month? Yes, you heard me right, an HMO could make a thousand pounds, maybe more, two, even £3,000. So the great thing is you don't need many of these HMOs to replace your income, whereas you might need a lot more Single Let properties to replace your current income.