5 Top Tips For Potential Buy-to-let Investors
For many buy-to-let looks an attractive income investment at a time of low rates and stockmarket volatility. But if you are considering investing in property – or improving your returns on a buy-to-let you already own – it’s important to do things right.
Buy-to-let has seen a resurgence in recent times. 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 volatility. 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 – you could fix a mortgage for five years at just over 3 per cent at the biggest deposit level. But beware 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 will have to pay an extra 3% stamp duty on property purchases.
Recent history provides an important lesson in how returns can be eaten into. Many 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 have stuck there since 2008, but remember they will rise again. Despite the potential for costs to rise, more tenants in the market, rising rents and improving mortgage deals have tempted investors once more. If you are planning on investing, or just want to know more, we tell you the ten essential things to consider for a successful buy-to-let investment. 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 our top five tips.
1. Research the 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. Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. In recent years a high-rate savings account would beat most investments. Now rates are lower, but investing in buy-to-let means tying up capital in a property that may fall in value. This compares to the possibility of a 5% annual return from an income-based investment fund, or 3 per cent on a fixed rate savings account.
Remember that the return from an investment in funds, shares or an investment trust through an Isa will see you escape tax on income and get capital growth tax free. You will also have the ability to sell up quickly if you want. The flipside is that you cannot buy an unloved investment fund and set about renovating it and adding value yourself. Investing in buy-to-let involves committing tens of thousands of pounds to a property and typically taking out a mortgage. When house prices rise, this means it is possible to make big leveraged gains above your mortgage debt, but when they fall your deposit gets hit and the mortgage stays the same.
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. If you know someone who has invested in buy-to-let or let a property before, ask them about their experiences – warts and all. 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
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. These questions might sound overly simplistic, but they are probably the most important aspect of a successful buy-to-let investment. 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
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 and many now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees.
You can see an example of best buy-to-let rates here.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment work out? Don’t forget to factor in maintenance costs. 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 allow for rates to rise.
4. Shop around and get the best 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. 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. This is Money’s carefully chosen mortgage broker partner London & Country offers fee-free advice, you can find out more and use our comparison tool to find the best buy-to-let mortgage for you here.
CAN YOU STILL GET INTO BUY-TO-LET?
Many long-term existing buy-to-let investors are sitting comfortably on low mortgage rates, having seen standard variable rates fall as base rate was slashed down to 0.5%. Some buy-to-let deals before the financial crisis did not have typical SVRs but a revert rate that tracks the bank rate. Long-term landlords are benefiting from that still. However, new buy-to-let mortgage deals remain more expensive than residential deals and require a big deposit. If investors are willing to accept that they may find the value of their property slides in the short term, and can ensure their property meets the criteria of 75% loan-to-value and returning 125% of monthly mortgage payments then it can be a good long-term investment. The key is to think long-term though.
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 that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home. These tenants will stay for longer, which is great news for a landlord. It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance policy.