Ten tips for buy-to-let
Bricks and mortar: Buy-to-let is a popular option for those who would rather grow their wealth through property than shares or cash
If you are considering investing in property – or improving your returns on a buy-to-let you already own – it’s important to do things right.
Read top ten buy-to-let tips – the essential guide to successful property investing.
Buy-to-let may not be quite the hot property of the boom years, but it has seen a resurgence in recent times.
As an income investment for those with enough money to raise a big deposit buy-to-let looks attractive, especially compared to low savings rates and stock market volatility.
But beware low rates. One day they must rise and you need to know your investment can stand that test.
Many investors who bought in the boom years before 2007 struggled as mortgage rates rose, a sizeable number were thrown a lifeline when the base rate was slashed to 0.5 per cent.
Rates have stuck there since 2008, but remember they will rise again.
Despite the potential for costs to rise, lower house prices, more tenants in the market, rising rents and improving mortgage deals have tempted investors once more.
If you are planning on investing, or just want to know more, we tell you the ten essential things to consider for a successful buy-to-let investment.
Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares below are top ten tips.
1. Research the market
If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits.
Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. In recent years a high-rate savings account would beat most investments. Now rates are lower, but investing in buy-to-let means tying up capital in a property that may fall in value.
Remember that the return from an investment in funds, shares or an investment trust through an Isa will see you paying just 10 per cent tax on income and getting capital growth tax free. You will also have the ability to sell up quickly if you want.
The flipside is that you cannot buy an unloved investment fund and set about renovating it and adding value yourself.
Investing in buy-to-let involves committing tens of thousands of pounds to a property and typically taking out a mortgage. When house prices rise, this means it is possible to make big leveraged gains above your mortgage debt, but when they fall your deposit gets hit and the mortgage stays the same.
Property investing has paid off handsomely for many people, both in terms of income and capital gains but it is essential that you go into it with your eyes wide open, acknowledging the potential advantages and disadvantages.
If you know someone who has invested in buy-to-let or let a property before ask them about their experiences – warts and all.
The more knowledge you have and research you do, the better the chance of your investment paying off.
2. Choose a promising area
Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons.
Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
You need to match the kind of property you can afford and want to buy with locations that people who would want to live in those homes would choose.
Asking yourself these questions might sound over simplistic, but they are probably the most important aspect of a successful buy-to-let investment
In most cases people tend to invest in property close to where they live. On the plus side, they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Yet it is also worth bearing in mind that if you are a homeowner then you are already exposed to property where you live – and looking for a different type of home in a different area might be a god idea.
3. Do the maths
Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.
Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees
Once you have the mortgage rate and likely rent sorted be clinical in deciding will your investment work out?
What will happen if the property sits empty for a month or two? These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.
4. Shop around and get the best mortgage
Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.
Check some of the latest buy to let mortgages on the internet
If you are looking for advice consider using a specialist buy-to-let mortgage broker. Remember asking them for information means you are under no obligation to use
5. Think about your target tenant
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.
Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious.
If they are young professionals it should be modern and stylish but not overbearing.
If it is a family they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as painting, or adding pictures or taking out unwanted furniture makes it feel more like home – these tenants will stay for longer, which is great news for a landlord.
It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance poliicy, available from This is Money’s landlord insurance finder
6. Don’t be over ambitious – go for rental yield and remember costs
HOW TO WORK OUT THE RETURN ON YOUR INVESTMENT
Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return on investment subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.
For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.
£75k mortgage at 5% interest rate = £312.50
£500 rental income x 12 = £6,000
Difference = £2,250
Deposit + buying costs = £27k
Annual return = 8.3%
Don’t forget tax, maintenance costs and other landlord expenses will eat into that return.
We have all read the stories about buy-to-let millionaires and their huge portfolios. But the days of double-digit house price rises are gone, so experts say invest for income not short-term capital growth.
To compare different property’s values use their yield: that is annual rent received as a percentage of the purchase price. For example, a property delivering £10,000 worth of rent that costs £200,000 has a 5% yield.
Rent should be the key return for buy-to-let. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.
If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.
Remember though, people rarely buy a home outright and they come with running costs, so mortgage costs, agents fees must be worked out and they will eat into your return.
Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term.
This means you will have benefited from the income from rent, paid off the mortgage and hold the property’s full capital value.
7. Consider looking further afield or doing a property up
Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. The advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you.
Cast your net wider and look at towns with good commuting links, that are popular with familes or have a sizeable university.
It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be negotiated hard on to get at a better price and then spruced up to add value.
This is one way that it is still possible to see a solid and swift return on your capital invested. However, remember to ensure that the price is low enough to cover refurbishment and some profit and that you allow for the inevitable over-run on costs.
A good rule to follow is the property developers’ rough calculation, whereby you want to the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.
Where possible, Affirmative Finance will help property developers, property investors, and individuals with development projects to find funding. Visit their website http://www.affirmativefinance.co.uk
You can speak to them on 08701 123 111 or send an email to firstname.lastname@example.org.
8. Haggle over price
As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount.
If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through. This can be a major asset when negotiating a discount. Make low offers and do not get talked into overpaying.
Read This is Money’s buying and selling guides for tips.
9. Know the pitfalls
Before you make any investment you should always investigate the negative aspects as well as the positive. If House prices fall, will you be able to continue holding your investment? What will happen if you can’t remortgage?
Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year – this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.
10. Consider how hands-on you want to be
Buying a property is only the first step. Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.
You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.
If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.
Select a shortlist of agents big and small and ask them what they can offer you.
If your simply looking for a Surveyor why not give Taylor Wilkinson Surveyors call on 0845 463 8979
We have in excess of 140 Surveyors nationally
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