Buy to Let investment tips
Lower house prices, rising rents and improving mortgage deals are tempting investors to either enter the buy to let arena for the first time or to expand an existing portfolio.
If you are planning on investing, or just want to know more, we would like to help by providing some essential tips to consider for a successful buy to let investment.
But to Let, like any investment, comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares here are our top tips.
1. Research the buy to let investment thoroughly
If you are new to buy to let, are you aware of the risks, as well as the benefits?
Make sure buy to let is the investment you want. Could your money perform better elsewhere?
If you know someone who has entered the buy to let market, ask them about their experiences.
2. Choose the right area
Which parts of your town have special appeal? Does the area have good transport? Where are the good schools for young families? Where do the students want to live?
These questions may sound over simplistic, but they are probably the most important aspect of a successful buy to let investment.
3. Doing 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% of the mortgage repayments on an interest only basis and many demand a 25% deposit, or even larger, for rates which are higher residential mortgage deals. The best rate buy to let mortgages also often come with large arrangement fees. Talk to us about which deals would be the best for you.
What will happen if the property sits empty for a month or two? Can you still maintain the mortgage payments? Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.
4. 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.
First of all, 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 painting, adding pictures or taking out unwanted furniture makes it feel more like home. These tenants are likely to stay longer, which is great news for a landlord.
5. Go for rental yield and remember costs
The days of double digit house price rises appear to be a thing of the past, so experts now say to invest for income and not short term capital growth.
In order 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 that costs £100,000 and produces £5,000 in rent has a yield of 5%.
If you can get a rental return substantially over the mortgage payments, then once you have built up a decent emergency fund, you can start investing any extra cash.
Remember though, a home comes with running costs, so mortgage costs, buildings insurance, agents fees, repairs and annual gas safety inspections must be taken into account when calculating your return.
Once the mortgage cost, tax and other running costs have been taken into account, you will want the rent to build up over time and then potentially be able to use the excess as a deposit for further investments, or to pay off the mortgage at the end of its term.
This means you will have benefited from the income from rent, paid off the mortgage and benefit from the property’s full capital value.
6. Consider looking further afield or renovating a property
Most buy to let investors look for properties near where they live. But your town may not be the best investment. The advantage of a property that is close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you.
Cast your net wider and look at towns with good commuting links, which are popular with families or have a sizeable university.
It is also worth looking at properties that need improvement as a way of providing some instant capital growth. You may be able to negotiate hard on a tired property or one in need of renovation.
This is one way that it is still possible to see a solid and swift return on your capital. However, remember to ensure that the price is low enough to cover the refurbishment costs and allow for unforeseen costs.
A good rule of thumb is for the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.
7. Haggle over the 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 for a sale to fall through. This could be a major advantage when negotiating a discount.
8. Letting agent v Self management
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 workers 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.