Buy-to-lets are an attractive investment for many but, if you’re considering investing in property, it’s important to carefully consider your options. If you’re investing in property – or even if you’re attempting to improve the returns on a buy-to-let you already own – being as best informed as possible is key. Here are our top tips and resources to help you make the most beneficial plan.
Researching the market
If you’re investing in buy-to-let, then you have to know the market you’re entering. You need to be aware of the risks as well as the benefits.
Essentially, investing in a buy-to-let project means that you’re tying up your capital in a property that may experience either a fall or rise in value.
In previous years, high-rate savings accounts used to beat a great number of investments, such as property. However, falling interest rates have made many turn towards buy-to-let investments rather than fixed rate savings accounts.
If you’re investing in a buy-to-let, then you’ll be committing tens (if not hundreds) of thousands of pounds to a property, and may typically have to take out a mortgage, unless you can pay all the money upfront. This means that, if house prices rise while you own the property, you could make big leveraged gains on your mortgage debt, but if they fall, your deposit can get hit and your mortgage may stay the same.
Most (but not all) buy-to-let mortgages are done on what’s known as an ‘interest only’ basis. This is tax efficient, and you can offset mortgage payments against your tax bill in this instance.
The higher the rental value you can receive above the mortgage repayments, the quicker you will be able to build up an emergency fund and reinvest some money. Crucially, remember that you shouldn’t start reinvesting straight away. Houses often come with initial teething issues, so make sure you’re prepared.
Take these costs into account when budgeting. After doing so, you may think that an investment or trust fund is a better option as an investment.
This, of course, isn’t to say that investing in buy-to-let property is a bad idea, or that you’re unlikely to be successful. Property investment has proved to be profitable for many investors, but it’s vital to know there can be significant pitfalls as well as positives. Because of this, if you know someone who’s invested in buy-to-let previously, ask them about their experiences. The more research you do, the higher the chance of your investment being successful.
Resources: Finding the best buy-to-let mortgage
Choosing the right area
If you do decide to opt for a buy-to-let as an investment, location’s a key factor in your planning process. Here, ‘best’ doesn’t necessarily have to mean the cheapest or most expensive. It should instead be an area where a high volume of people are looking for properties, and potentially one where prices are starting to rise, if possible.
There are certain factors you should look for in a location. Consider the following when looking at your options:
- Are there commuting options? Are the roads to main towns and cities good, or are there major transport links such as train and bus stations?
- Are there schools in the area, and if so how good are they?
- What are the local amenities like? Is a convenience shop easily accessible?
- If you’re buying in a city centre, are there parks nearby?
In selecting an area, you’ll also need to keep in mind the amount you can afford and the types of tenant you want to attract.
If you’re looking to rent to students, you’ll want a property that’s easy to clean and comfortable, but there’s certainly no need for it to feature unnecessary luxuries. Young professionals will likely want something modern and stylish, while many families will want a blank canvas for their belongings. Finally, older renters may be slightly more concerned about safety and security; having this as a main priority when looking for a new home. As a result, you’ll want to think about the crime rates in certain areas and the availability and costs of alarm systems.
In addition to this, remember that allowing tenants to make your house their home, either by decorating or adding pictures will make it feel more homely, which in turn makes them more likely to stay for longer, which is great news for any landlord.
Do the maths
Before you pursue your investment plan in detail, you simply have to sit and do the maths to calculate what you can afford.
When doing the sums, you’ll have to not only think about how much the property costs, but also how much you’re looking to receive in rental returns to ensure your investment’s financially viable.
It’s more than likely that both you and your mortgage provider (if you need one) will want your rent to cover around 125% of the mortgage repayments. With most lenders now wanting to receive 25% of the property’s value as a deposit, you’ll need to be confident in your investment, so be sure the sums add up so you know your price range.
Remember to look for rental yields
When you’re investing in property, you should look for income and not short-term capital growth. This means that, if you’re comparing properties with different values, you should compare them using what’s known as their ‘yield’. This is the annual rent received as a percentage of the purchase price.
So, for example, if you buy a property for £200,000 and it delivers an annual rental income of £10,000, it has a yield of 5%.
How much responsibility and time do you want to spend?
Finally, if you’re considering a buy-to-let, you need to make a decision about how hands-on you want to be. Here you’re making a choice about whether you want to rent the property out yourself, or whether you want to employ a letting agent to manage the property on your behalf.
If you’re a part-time or amateur landlord (someone who’s a landlord but still works), then a managing agent can be a great option; particularly if you don’t live near the property.
Of course, any agency will charge you a management fee. But, if they’re willing to deal with any problems that your tenant experiences and arrange for plumbers, electricians or handymen to solve them immediately, then they could be a valuable asset. Crucially, if they can deal with a problem quickly due to their network of contacts, they could keep the tenant happy and wanting to stay at the end of their tenancy. This reduces the risk of potential ‘void periods’ without a tenant.
However, if you live locally or have a large network of contacts, then you may be able to manage the property yourself. If this is an option that suits you, and you’re confident you can fulfil these duties, then there are a number of apps and tools that can help you manage everything effectively, too. The biggest drain will be on your time.