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Pros and cons of a buy-to-let property

Posted on 2014-07-03

In an era of record lows for buy-to-let mortgages, with some rates fixed at as little as 2.4 per cent, and continuing strong demand from tenants, many people are choosing to invest their money in bricks and mortar.

Around 10 million people now live in homes rented from private landlords - double the figure for 2000 - making investing in rental property seem like a very attractive option. The number of buy-to-let mortgages has nearly doubled in the last seven years, with rental yields consistently beating inflation. Annuity rates, on the other hand, have dropped to record lows, and savings pay a pittance.

Now is the opportune time to break into the market, before property prices escalate. With interest rates on banks and building society deposits remaining low, it’s not unrealistic to expect an income stream of 6 to 7 per cent.

However, that doesn’t necessarily mean that investing in a buy-to-let property is the right choice for you. It is important to always understand an investment before ploughing money into. Unlike many other investments, property is familiar to us all, and this can lure people into a false sense of security when it comes to understanding how this complex process must function in order to be profitable.

Here at HomeLet, we always recommend you do your homework before making any significant investments, and ensure that you’re aware of all of the pros and cons. To help you to make an informed decision, we’ve highlighted some of them below…

The Arguments For

* Lending rates | Mortgage rates are currently at an all-time low, with two-year fixed-rate buy-to-let mortgages available from just 3.69%. This makes it much easier to negotiate a rent which will fully cover your mortgage repayments. Unlike the residential market, plenty of interest-only mortgages are still available too, and these can lower monthly repayments even further.

* Demand for property | At the moment, demand for rental homes is high in many areas. Many aspiring buyers find that they’re unable to get onto the property ladder and are forced to recourse to renting instead. This demand has helped to keep rental yields consistently high.

* Long term investment | For those who are looking to invest, property tends to be a safe option. Although property values rise and fall over time, they tend to increase as the years pass, meaning that rental homes can provide you with a long-term means of making money, and a high-value asset should you want to release the equity in the future.

The Arguments Against

However, as enticing as those manifold advantages are, don’t fall into the trap of viewing property investment as a safe, simple way to make money. When people do this, they tend to forget about the scale of the risks, but they’re not to be taken lightly…

* Geared investment | You’ll be required to take out a very large loan that accrues interest to buy something that costs money to maintain (you’ll need to pay insurance and maintenance costs as a bare minimum) and offers an uncertain income stream (the property may not be let for the duration of your ownership).

* Asset liquidity | If you need the capital at some point in the future, it’s locked into the home and can take a long time to release.

* Tax and regulation | The money you invest is all taxable. Rent is taxed at the same level as income, and any increase in the value of the property by the time you sell it will fall under capital gains, meaning that up to 28 per cent of the profit could be taken from you. 

The conclusion...

So where does this leave would-be landlords? What would we advise them to do? Here at HomeLet, we believe that it all comes down to your personal circumstances and the amount of time you’re willing to expend researching your investment. Thousands of people across the country have successfully invested in property and enjoy a good return on their investment, but the same is not true of every investor. Provided that you take your time and do your research, you too can enjoy letting success, but a large amount of effort on your behalf is absolutely vital, and property investment is not for the faint of heart.

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