Buy-to-let has come under the cosh recently from a tax crackdown but many still see property as an attractive investment at a time of low interest rates and volatile stock markets.
Tax changes mean extra stamp duty on purchasing a buy-to-let and will soon mean the end of the ability to offset all buy-to-let mortgage interest against income tax.
But investing in a buy-to-let can still pay off. If you do want to invest in buy-to-let – or improve returns on a property you already own as a landlord – it’s vital to do things right.
Here are Property Stream’s top ten buy-to-let tips – your essential guide to property investing and being a good landlord.
Why buy-to-let?
As an income investment for those with enough money to raise a big deposit, buy-to-let looks attractive, especially compared to low savings rates and stock market swings.
Meanwhile, the property market bouncing back has encouraged more investors to snap up property in the hope of its value rising.
Mortgage rates at record lows are helping buy-to-let investors make deals stack up.
But beware of low rates. One day they must rise and you need to know your investment can stand that test.
There is also a tax rise coming, as buy-to-let mortgage interest relief is axed and replaced with a 20 per cent tax credit. Additionally, from April 2016 landlords now have to pay an extra 3% stamp duty on property purchases.
Recent history provides an important lesson in how returns can be hit. Many buy-to-let investors who bought in the boom years before 2007 struggled as mortgage rates rose.
A sizeable number were thrown a lifeline when the base rate was slashed to 0.5 per cent. Rates stuck there until this summer and then were cut again after Brexit, but remember they will rise.
Yet despite the tax changes and potential for buy-to-let mortgage costs to rise, there are positives. Greater demand from tenants, rents that should rise with inflation and the long horizon for interest rate rises, mean many investors are still tempted by buy-to-let.
Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares below are Property Stream’s top ten tips.
1. Research the buy-to-let 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?
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.
The more knowledge you have and the more research you do, the better the chance of your investment paying off.
2. Choose a promising area to invest in property
Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons.
Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
You need to match the kind of property you can afford and want to buy with locations that people who would want to live in those homes would choose.
In most cases people tend to invest in property close to where they live. On the plus side, they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Yet it is also worth bearing in mind that if you are a homeowner then you are already exposed to property where you live – and looking for a different type of home in a different area might be a good move.
3. Do the maths on your buy-to-let
Before you think about looking around at 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 and many are now demanding 25% deposits. Also note that the best rate buy-to-let mortgages can come with large arrangement fees.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment will work out.
Don’t forget to factor in maintenance costs and what will happen if the property sits empty for a month or two?
These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker that allows for rates to rise.
4. Shop around and get the best buy-to-let mortgage
Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.
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. (contact us for a recommendation)
You should still do your own research though, so that you can go into the conversation armed with the knowledge of what sort of mortgages you should be offered.
5. 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 if you allow tenants to make their mark on a property to some degree, such as decorating, adding pictures, or you taking out unwanted furniture will make the property feel more like home for them. These tenants will stay for longer, which is great news for a landlord.
6. 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.
If you can get a rental return substantially over the mortgage payments, once you have built up a good emergency fund, you can start saving or investing any extra cash.
7. Consider looking further afield or doing a property up
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 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, that are popular with families or have a sizeable university.
It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be negotiated hard on to get at a better price and then spruced up to add value.
This is one way that it is still possible to see a solid and swift return on your capital invested. If you can add some value to a home straight away, then it gives you a greater margin of safety on your investment.
8. Haggle over price when investing in a property
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 of a sale falling through.
It pays to know your market when negotiating. For example, if the market is softer and homes are taking longer to sell you will be better able to negotiate. It is also useful to find out why someone is selling and how long they have owned the property.
An existing landlord who has owned a property for a long time – and is cashing in their capital gains -may be more willing to accept a lower offer for a quick sale than a family that needs the best possible price in order to afford a move.
9. Know the pitfalls of buy-to-let
Before you make any investment, you should always investigate the negative aspects as well as the positive.
House prices are on the up right now but growth has slowed and they could fall again. If property prices dip will you be able to continue holding your investment?
Meanwhile, rates are low at the moment and that is encouraging people to invest, with rent comfortably covering the mortgage, but what will you do when rates rise?
