Buy to Let
For many people buy-to-let mortgages and the facility to enable you to buy an investment property is an attractive income investment in a time of low rates and stock market volatility, unlike an investment fund or stock, property is typically seen as a tangible asset.
So Buy-to-let: Is it worth doing?
Buy to Let has been over the last decade a hot bed of action, but while buy-to-let may no longer be the hot property it once was, as an income investment for those with enough money to raise a big deposit it looks attractive, especially compared to low savings rates and stock market volatility.
However before we continue it should be mentioned that the base rate has been massively slashed over the last couple of years, this has happened to help combat the credit crunch, but beware, lenders have already started increasing their svr rate (standard variable) despite the base rate still remaining at 0.5%, so one day interest rates must rise again.
However lower house prices, rising rents and improving mortgage deals are tempting 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 10 top tips we have researched to help you get the best from this investment option:
1. Research your market
Make sure buy-to-let is the investment you want, we have various help guides which explain lots of different investment options, this is always worth looking before you set your mind on an investment property. 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. This compares to the possibility of a 5% annual return on a fixed rate savings account.
You could also get a similar return from an investment in funds, shares or an investment trust – paying just 10 per cent tax on income and getting tax-free capital growth through an Isa – with the ability to sell up quickly if you want. If you know someone who has entered the buy-to-let market, ask them about their experiences.
2. Choose a suitable area
This does not mean most expensive or cheapest, or it doesn’t mean a certain type of property. Suitable 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? Asking yourself these questions might sound over simplistic, but they are probably the most important aspect of a successful buy-to-let investment. A popular option of late has been being investment properties near university where this a high demand for rooms for students, this can be a great option however their are plenty of other risks associated with this type of investment property.
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. Traditionally buy-to-let lenders wanted rent to cover 125% of the mortgage repayments, although many had relaxed this in the tail-end of the boom years. Most also looked for a 15% deposit, which protects against falling prices.
After the financial crisis, many are 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 sorted – and remember to allow yourself leeway for rate rises in years to come, 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
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. 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 them. Our Index is clearly a great way to find a local adviser in your area, who has the right expertise to help explain your options, an independent mortgage adviser can be a great source of information, especially when they typically have helped hundreds of people achieve getting an investment property
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 policy.
6. Don’t be over ambitious
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.
Return on 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 rentand then work this sum out as apercentage of the deposit you put down.
For a £100,000 property that could rent for £500 per month:
£75k mortgage at 5% = £312.50
£500 rent 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 the return.
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
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.
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 sizeable asset when negotiating a discount, especially in a tough market such as the one we have now. Make low offers and do not get talked into overpaying.
9. Know the pitfalls
Before you make any investment you should always investigate the negative aspects as well as the positive. House prices are falling and if this continues, 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. Y
ou 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.