Buy To Let
People are investing in buy to let due to poor pensions, low rates on savings, growing rental market and rising capital growth. The two ways you make money from buy to let are capital growth and rental income. Not everyone makes money from buy to let though and in our opinion; it is because people fail to prepare which in turn you prepare to fail. You need to know what you are trying to achieve, how you are going to do it and what your exit strategy is before doing anything. Below are a few points to go through whilst choosing your buy to let property.
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.
In previous 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 – bricks and mortar.
A good investment location is somewhere with plenty of employment opportunities, transport links, and good amenities as these factors create housing demand. Places with average house prices but above average rental prices will bring profitable rental yields if you want reliable income.
Do your homework and thoroughly research the market, from potential locations, to your target market, to the kind of properties you think might offer you the best return for your money. 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.
The more knowledge you have and the more research you do, the better the chance of your investment paying off. For Leasehold purchases, ensure you check the lease length, ground rent and service charge amounts as these can affect your income.
There are three standard ways that property investors pay for a property: cash purchase, full repayment mortgage and interest only mortgage. Interest only mortgages are the most popular because they are tax allowable and they also create cash flow which can be used to finance additional properties.
Buy to let mortgages
The most common way of buying a property to let is to arrange a dedicated buy to let mortgage. There are plenty of mortgages available from buy to let lenders, all designed to ride the waves of short to mid-term changes in rental sector demand. Remember, buy to let mortgages tend to be more costly than traditional mortgages. Lenders relaxed their lending criteria at a time when the UK property market was surging upwards; the loan to value requirements for buy to let mortgages became much less restrictive for example only needing 20 %- 30% deposit. This significantly reduced the capital required to make the investment possible. 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 and whether to fix or track. Crossmeads works closely with a local Independent Mortgage Broker who finds mortgages for our clients with no upfront charge if recommended by us.
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 by decorating, or adding pictures, or you 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 a rent guarantee policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £60.00 and Crossmeads can arrange the Rent Guarantee for you.
Don't be over ambitious - go for rental yield and remember costs
We have all read the stories about buy-to-let millionaires and their huge portfolios. But while you may expect long-term house price rises, 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. Don't forget tax, maintenance costs and other landlord expenses will eat into that return. 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, maintenance and agents fees must be worked out and they will eat into your return. Once mortgage, costs and tax are considered, 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 benefitted from the income from rent, paid off the mortgage and hold the property's full value while gaining capital growth!
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 contractors 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 you are considering going it alone look at where you will advertise your property and where you will get documents, such as tenancy agreements from. It really pays to look after your tenants. Do this and they will look after you. The biggest drag on many buy-to-let landlord's investment returns is the void period. A time when you don't have anyone in the property. Good tenants who want to stay help avoid this - and if they move on they may even recommend your property to someone they know. Keep up with maintenance, make sure your property is a nice place to live and try and build a good personal relationship with your tenants.