Buy-To-Let

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10 tips for buy-to-let

For many people the idea of investing in property still appeals, as they trust bricks and mortar and may feel that they can add value to a home in a way they can’t to an investment fund.

However, the buy-to-let market is much tougher than it once was. Interest rates are forecast to rise, the 3 per cent stamp duty surcharge eats a large amount of money, while the tax raid on landlords rental income with the loss of full mortgage interest tax relief all takes its toll.

Nonetheless, buy-to let remains popular.

Research the market

If you are new to buy-to-let, ensure that you have thoroughly researched the market to ensure that this is the right investment for you. Do you know the risks as well as the benefits? Investing in buy-to-let involves committing tens of thousands of pounds into 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 you may have to cover any shortfall as the mortgage will stay the same no matter what. The more research you do, the better the chance of your investment paying off.

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. Is there a main employer in the town? Where are the Schools for young families? Where do students want to live? You need to match the kind of property you can afford and want to buy with locations that people would want to live in.

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. Set a realistic rent.

Don’t be greedy

Whilst you may be hoping for long term house prises to rise, invest for income not short term capital growth. A good comparison is looking at the property’s yield – that is annual rent received as a percentage of the purchase price. For example, a property delivering £10,000 worth of rent that cost £200,000 has a yield of 5%. Rent should be the key return for buy-to-let.

Looking further afield

Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. 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 a better price and then spruced up to add value. However, remember to ensure that the price is low enough to cover refurbishment and some profit and that you allow for the inevitable overrun costs.

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.

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 per cent of the mortgage repayment (often 150 per cent and now most demand 25 per cent deposits). The best buy-to-let mortgage also come with large arrangement fees. Don’t forget to factor in what will happen if the property sits vacant for two months? Repair costs?

Shop around and get the best mortgage

Do not just walk into your bank and building society and ask for a mortgage. It pays to speak to a good independent broker when looking for a buy-to-let mortgage. They can not only talk you through what deals are available but they can also help you weigh up which one is right for you. You should still do some research, so that you can go into the conversation armed with the knowledge of what sort of mortgage you should be offered.

Know the pitfalls to buy-to let

Before you make any investment, you should always investigate the negative aspects as well as the positive. House prices are either steady or on the up right now but growth has slowed and could fall again. If property prices dip, will you be able to continue holding your investment? What will you do when interest rates rise? Even in popular areas, properties can sit empty. What happens if the property is vacant for two months? Homes often need repair and things can go wrong. Plans need to be put in place to cover major repairs, such as a new boiler.

Consider how hands on a landlord you want to be

Buying a property is only the first step. Will you rent it 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 may make slightly more money doing it all yourself, but be prepared to give up your evenings, weekends and what you are going to do when you receive a telephone call at 2am in the morning and need a plumber and electrician because there has been a flood.

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