In a world of low interest rates and volatile stocks and shares, investing in buy-to-let property is an attractive option. This, coupled with the fact that renting is at an all time high, has resulted in more people buying a property with the sole purpose of letting it.
While borrowers are able to fix low interest rates for up to five years, we should bear in mind that interest rates may rise one day and this should be accounted for in your financial projections and expectations.
There are many questions one should look into before venturing into the Buy-to-Let market, so we have gathered the following hints and tips will get you on your way.
Do Your Research
Research is key, especially if you are a new landlord. Doing your research applies to both the current property market and also the area. This is not a time to overlook anything, as you obviously want be made aware of any risks and avoid pitfalls.
Think about the investment that you want to make and what you expect to get out of it. If this venture is purely for investment, then consider if this is the best place for your money to be to gain the best return. You will be putting hundreds of thousands of pounds into this venture and you need to be clear from the start what you are expecting to get out of it. You should ensure that you have enough money to finance it all as an ongoing investment, including mortgage repayments, insurance and any repairs and maintenance.
It is a good idea to arrange a meeting with someone you may know who has experience in a letting investment. Find out about their highs and lows, there may be things they would do slightly, or a lot, differently next time. The more research you do the more prepared you will be for making good solid decisions when the time comes.
It is not just the financial aspects that have to be researched, but the area and property type too. Finding a cheap or affordable property that is easy to do up for letting out is not enough to secure a tenant and an income. Research the area and find out how much similar properties are being let for in the locality. Also ask yourself, who are the types of people living in the properties? Are the properties snapped up quite quickly or are there properties lying empty? Is this area where people want to come and what is likelihood of the property being easy to rent out?
Keeping in mind the type of property that you can afford, your overall budget, the area and the type of tenants likely to move into your property, consider what the aspects are that will attract people to rent your property in that specific area.
Shop for the right mortgage; at Mackenzie Smith we have a dedicated Mortgage Advisor who will listen to your aims and objectives and advise on what is best for you.
House auctions are free to attend and a great place to do research on what kind of bargains can be picked up, but be sure to look around any property you are interested in if you can.
Be clear on your prospective tenant
When viewing property and considering a purchase, many people get carried away and automatically react and make decisions as if they are buying it for themselves. It is important to keep in mind that you are buying the property to appeal to a certain type of person, who will be your tenant.
In the early stages, think very hard about who your tenant might be. If you do this in the research stages, you can view properties from their point of view and ask yourself if this is somewhere that they would like to live. Build up a profile of the potential tenant, who are they and why will they want to live there?
If it is students that you plan to rent to, then you will be looking to rent it out in a simple and easy to clean and maintain style.
If your property is more geared toward the luxury end of the market then you may have to renovate the bathroom and kitchen to reflect this, as people will expect it.
If you plan on renting the property out to a family, then consider making the property inside as plain as possible, ideal for them moving in with their own furnishings and belongings.
Long-term renters can be a real asset and will appreciate being able to put their own stamp on the place, perhaps decorating to their tastes. The main advantage of this is that if they are happy and feel at home, then they will be more likely to stay longer and look after the property.
Look at the location in terms of the type of tenants that you intend to attract. If you do want to let to students, then you should be looking to buy in a ‘student’ type area, near a university, where students will be actively looking for accommodation. Likewise, if you are looking to let to young professionals, then look for good commuter locations, with convenient transport links and perhaps a private parking space.
Younger renters might be more attracted to somewhere where there are bars, restaurants and a bit of nightlife, but not necessarily. They may also prefer not to have to maintain a garden, while on the other hand a family would probably favour having a garden. Other things that families will look for when renting a home are proximity to local schools, local amenities, and safe places to walk and play.
There are many costs to take into account when purchasing your buy to let property from solicitors and mortgage lenders fees to stamp duty, bearing in mind that stamp duty on second and multiple homes is due to increase in April.
When you apply for a mortgage your lender will take the money that you have forecasted to receive in rent into account and this along with your other income will determine how much they are prepared to lend you for your property purchase. Due to the fact that these types of buy-to-let mortgages are higher risk, they can be more expensive in terms of borrowing, as a consequence, you may have to put down a larger deposit and perhaps pay a higher arrangement fee.
The cost of the property itself is not the only finance to be set aside in the budget. You should also have money set aside for necessary renovations, repairs, and what you will need to do to the property in order to make it suitable for letting out. For this, always allow more funds than you think you will need in case you run over budget. It is better to be prepared for such things.
You will also need to set aside money for other legal obligations, such as a registered electrician and a Gas Safe registered engineer to check and certify that all installations and appliances have been correctly installed and are safe, checked and legal. The tenant will also have to be provided with an energy performance certificate prior to moving in.
It is important to work out how much potential rent you can collect each month and make sure this will cover not only the mortgage repayments, but any other monthly costs that you have to pay as a landlord, including money put aside for a maintenance fund.
Consider your investment return
If house prices rise, so will your investment and when you sell you will make a profit. As a general rule of thumb, your rent should cover 125% of the mortgage repayments. The Capital Growth is how much a property increases in value as the years go by. Rental Yield is the amount you receive in rental income, divided by all the associated costs of the year; these will include not only mortgage repayments, but maintenance costs, insurance, letting agent fees and any other costs related to the property. It is recommended that you only account for about 10 months of the year in income when working this out in order to give a careful and realistic figure.
Some landlords will seek a property that produces both Capital Growth and Rental Yield, however the majority of the time the type of property that has a good Capital Growth will not have a great Rental Yield, and vice versa. Desirable homes in good areas tend to have good Capital Growth, however due to their prices being high from the start, it makes Rental Yield lower. Good Rental Yield can be found on a cheaper and less desirable home.
It is important to be realistic, experts recommend letting for the Rental Yield and not the short term Capital Growth. There will be long term Capital Growth, but rent should be the main income goal. Once you build up a good rental return that rises over your mortgage repayments, then you can build up a cash reserve to pay toward the loan.
Be realistic about potential risks
Investing in buy-to-let property is not without considerable risk, for one thing, the rent you will have coming in can and will vary for a number of reasons, most of them out of your control. The rent you receive will depend on the property market as a whole with fluctuations in value affecting how much you will be able to ask for rent and if house prices fall this also affect your overall investment.
There is always the possibility that you may have periods where the property is without a tenant or perhaps you may have tenants who fail to meet the rental payments. This is where it is important to instruct a responsible agent to manage your property. Our experienced lettings department will accurately price your property to attract the right tenant and we also scrutinise and match only good quality tenants with our properties.
Major repairs could arise that may not only cost money to put right and you may lose rental income if the repairs take time. Landlord insurance isn’t necessarily a legal requirement; however taking out a policy can help protect you and your investment somewhat. Buildings insurance is compulsory and this will help toward protecting your investment also.
It is clear that alongside the financial element, research is a vital component if you are looking to invest in the property and rental market. Researching the area, the market in that area and the type of tenant that you aim to attract are all aspects that will help you make the right decisions in the initial stages.
As well as the initial research, a budget has to be carefully worked out, allowing for contingency and careful consideration as to what you expect to gain out of the investment. It is important to remember that this is ultimately a financial investment and not just a project.
Don’t forget that our experienced and friendly lettings team are on hand to offer advice and help no matter what stage of the process you are at. We can help with advice on purchase and rental prices, details on the locality and the types of property management we can offer to help you make the right decisions.
Please do not hesitate to contact us on 01252 514000 or firstname.lastname@example.org.