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Equity release: FAQ
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Ten tips for buy-to-let

Ten tips for buy-to-let: the essential advice for property investors

For many, buy-to-let looks an appealing income investment at a time of low interest rates and stock market unpredictability, especially for those with enough money to raise a sufficient deposit.

However, if you are considering investing in property it’s important to get it right.

With mortgage rates at record lows, buy-to-let investors have been able to obtain some great deals – with some fixing mortgages for five years at just over 3 per cent at the biggest deposit level.

But bear in mind that with low rates, at some point they must rise and so you should make sure that your investment can stand the test of higher interest rates.  Recent history provides an important lesson in that many investors’ who bought in the boom years when rates were low, struggled when mortgage rates started to rise. Luckily for many, they were thrown a lifeline when the base rate was slashed to 0.5 per cent.  Although rates have stuck there since 2008, you should always be mindful that they will certainly rise again.

Although there is the potential for costs to rise, more demand for rental properties, along with rising rents and much better mortgage deals have tempted investors once more.

Like any investment, there are no guarantees when it comes to buy-to-let, but if you feel you would have more confidence in bricks and mortar than stocks and shares, below are Ten tips for buy-to-let:

1. Research the market

How much do you know about the current market? Are you aware of the risks, as well as the benefits?

Be sure buy-to-let is the investment right for you. There may be other ways in which your money would perform better. Previously, a high-rate savings account may have outdone other investments, but now that rates are lower, investing in buy-to-let means tying up money in a property that could fall in value.

It is worth remembering that the return from an investment in funds, shares or an investment trust through an ISA will be free of tax on income and capital growth.  You also have the ability to retrieve funds quickly if you need to.

One on the positives about investing in property is that you can add value yourself by renovation.

Investing in buy-to-let involves committing a great deal of money into a property and would usually involve taking out a mortgage.  When house prices rise, it becomes possible to make big leveraged gains above your mortgage debt, but if they fall, your deposit gets hit and the mortgage stays the same.

Investing in property has paid off for many people, in both income and capital gains but it is essential that you go into it aware of the potential advantages and disadvantages.  If you know somebody who has invested in buy-to-let, ask them about their experiences – good and bad. The more knowledge you have and the more research you do, the better.

2. Choose a suitable area

This means deciding a place where people would like to live and this can be for a variety of reasons. Don’t choose an area just because house prices are expensive or cheap.

Where in your town is most appealing?  Which area has good transport to attract commuters? Which location has the best schools for young families?  Is there an area which would be well suited to students?

You need to look at the kind of property you can afford and want to buy with locations where people are most likely to want to live.  This is probably the most important aspect of a successful buy-to-let investment.

Most people prefer to invest in property close to where they live.  This is usually because they know this market better than anywhere else and can recognize the type of property and location that will succeed.  It is also much easier for them to keep an eye on the property.

3. Do the maths

Before you think about looking at properties, note down the cost of houses you can afford and the rent you are likely to receive from them.

Buy-to-let lenders typically ask for rent to cover 125% of the mortgage repayments and many now request at least 25% deposit.  Also rates will usually be considerably more than residential mortgages and the best rate buy-to-let mortgages typically come with large arrangement fees.

Once you know the mortgage rate and likely rent then you must then decide whether your investment would work out?  Make sure you know how much the mortgage repayments will be and if it is a tracker, allow for rate rises.

Bear in mind there will also be maintenance costs and consider whether you can afford for the property to sit empty for a month or two.

4. Shop around for the best deal

Don’t just go straight to your bank and building society and ask for a mortgage.  One of the reasons why banks make billions in profit is because people go straight to them when they need a financial product, rather than shopping around.

It is a good idea to speak to a good independent broker when looking for a buy-to-let mortgage. They can talk you through what deals are available and also help you weigh up which one is right for you and whether to opt for a fixed rate or tracker.

It is still worth doing your own research though, so that you can go into the conversation with some knowledge of what sort of mortgages you might be offered.

5. Think about your target tenant

Rather than thinking about whether you would like to live in the property yourself, think about whether it would appeal to your target tenant.

If they are young professionals it should be modern and stylish.

If you are looking to rent to students, it needs to be easy to maintain and comfortable but doesn’t have to be luxurious.

If it is a family home they will likely prefer a blank canvas and plenty of space.

You can make a property feel more like home to tenants if you allow them to make their mark on a property, such as by decorating, adding pictures, or you taking out unwanted furniture.  This may make tenants want to stay for longer, which is good news and much easier for landlords.

6. Don’t be over ambitious – go for rental yield and remember costs

We have all read the stories about people who have made millions through buy-to-let.

But while you may hope that in the long term house prices will rise, experts advise to invest for income not short-term capital growth.

Many buy-to-let mortgages are done on an interest-only basis, rather than repayment, so the sum borrowed will not be paid off over the term of the mortgage.  This is tax efficient, as you can offset mortgage payments against your tax bill.

If you can get a rental return considerably more than the mortgage payments, then you can start saving or investing any extra cash.

It is worth remembering that people rarely buy a home outright and they come with costs, so mortgage costs, agent’s fees and maintenance must be worked out against your return.  You may then decide that an investment fund or trust would be more beneficial, once these costs are taken into account.

Once all costs have been considered, the rent should build up over time and then you could potentially use it as a deposit for further investments, or alternatively pay off the mortgage at the end of its term.  This means you could benefit from the rental income, pay off the mortgage and also hold the property’s full capital value.

7. Consider looking further afield or doing a property up

Most investors look for properties near to where they live, but the town you live in may not be the best investment.  Obviously with having a property close by you are able to keep an eye on it, but if you will be employing an agent they should take care of that for you anyway.

It is also worth looking at properties that would benefit from renovation, as this can be a good way of boosting the value of the property.  A better price can usually be negotiated for properties that require some work and then improvements will add value.  However, you should ensure that the price is low enough to cover refurbishment costs and some extra to allow for the inevitable over-run on costs.

The property developers’ rough calculation is a good rule to follow, whereby the final value of a refurbished property should be at least the purchase price and cost of work, plus 20 per cent.

8. Haggle over price

Being a buy-to-let investor gives you the same advantage as a first-time buyer when it comes to negotiating price, as you’re not relying on the sale of another property and therefore not part of a chain.  This puts you in a good position when it comes to negotiating, so start by making a low offer and try not to get talked into overpaying.

It’s also good to know your market. If the market is slow and homes are taking a long time to sell it will make it easier for you to negotiate.  It is also useful to know why a person is selling and how long they have owned the property, as this will give you more of an idea of how willing they might be to reduce the price.

9. Know the pitfalls

Before you make any investment you should always consider the con’s as well as the pro’s.

House prices may be on the up right now but if growth slows down they could fall again.  If property prices dip, where will that leave your investment?  Would you still be able to cover the costs if interest rates rise or the costs of the standard variable rate one the fixed rate period has ended?

Properties can still sit empty for some time, even in the most popular areas, so how would this affect your investment?

You should also factor in costs of repairs to the property, if you don’t have enough in the bank to cover them then you should consider this before thinking about investing in buy-to-let.

10. Consider how hands-on you want to be

Once you have bought the property, your next step is to decide if your will rent it out yourself, or get an agent to do it for you.

Agents will deal with any problems and should have a good network of plumbers, electricians etc. in case things go wrong, but they obviously incur a fee for doing so.

Renting the property out yourself will make you more money, but be prepared for the time you will have to give up to make repairs and maintenance.

If you decide to use an agent you do not have to go for a well-known presence, there are many independent agents who can also offer advice and excellent service.

If you are considering doing it yourself, think about where you will advertise and where you can go to get documents, such as tenancy agreements from.

Try to build a good relationship with your tenants, it pays to do so.  Keep up with maintenance and make sure your property is a nice place to live.

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Post courtesy of This is Money.

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