Buy To Let Updated:
The buy-to-let (BTL) market has been enjoying a boom of late with low interest rates and rising house prices helping investors maximise their gains.
New landlords have been created as people dip their toe into what can be a lucrative market to get away from meagre returns on bank savings. Profit from BTL potentially comes in two forms – rental yield (rent minus outgoings) and capital growth (selling for more than you buy). However, although many lucky landlords have been experiencing gains in both these areas recently, neither are guaranteed and like any business, market conditions can change - and so can your returns.
Mortgage interest rates have been at their lowest for a while now, but recently activity has seen them creeping up. And, with a Bank of England base rate rise on the cards the low rates will not remain forever, so investors will need to do even more careful planning to ensure they can afford repayments should rates increase. However, although caution should be taken with any kind of investment, there are still some competitive BTL mortgages available and if you do your calculations carefully you could still enjoy the rewards. Here are a few pointers to help you along the way.
Just as you would when starting any project or setting up any business you will want to do thorough research. Consider the entire concept from its plus points to its potential pitfalls and speak to people who are already doing it and glean their experiences.
Target area and tenant
It would help if you had some idea of the type of tenant you would like to have in your property and the area in which you would like to buy. Perhaps you are considering a property in a commuter belt, are you thinking of renting to students with the possibility of buying or creating a House of Multiple Occupancy (these can be more complicated so do your research carefully, but they can also bring in attractive returns), or are you considering the type of property that would make the perfect family house? Look into schools, public transport, facilities etc. within an area that will suit the type of tenant you are aiming at. These types of decisions can affect the initial asking price of a property as well as the rent you can charge.
Do your sums
The main aim of the project is obviously to make money, and if you are looking to draw an income from the let then you will want to work out the return – or yield – on your investment. There are many factors that can affect profits but with some simple maths you can give yourself a rough idea of what you will gain.
To work out yield you take your rental income, divide it by the cost of the property, and times the result by 100 to give you a percentage. For example, if your rental income is £10,000 and the property cost £200,000, then your rental yield will be 5%. However, this is only the beginning as many other costs then need to be factored in.
Unless you are lucky enough to be a cash buyer then you will need to take off mortgage costs. There will also be various insurances and legal fees involved (such as solicitors, stamp duty, survey fees), and you will probably need to pay income tax on the rental income too. Also remember that if a property stands empty for any amount of time you will still need to be making the mortgage repayments.
What kind of landlord do you intend to be?
Also affecting your returns will be any initial and ongoing work on the property. If you are confident doing building work then you may want to consider purchasing a property that needs some updating, as you will be likely to secure it at a lower price and could quickly add value to it – thereby increasing any capital investment.
Ongoing maintenance and management costs can also lower your return. Some landlords are comfortable dealing with most issues themselves, but you will need to consider whether you want to take such an active role in your project. Are you happy to carry out any maintenance work yourself or will you need to use local tradesmen? Do you plan to manage the property yourself or will you need to factor in agent fees?
Shop around for your mortgage
Lenders typically want the rental income from your property to cover 125% of the mortgage repayments, so you will need to find out what kind of deposit you will need to put forward. The rates tend to be higher than residential mortgages so the larger the deposit you can put forward the better, as you should be able to get a lower rate.
Large arrangement fees are often attached to these kinds of mortgages which can often run into the thousands, so these will need to be factored into mortgage costs too. You will then need to work out how much the repayments will be and make sure you can afford them at this rate and if rates rise. Ensure you shop around and compare deals as fees and rates can vary drastically. Take a look at our best buy tables to help.
Go for it!
Once you've done your research, crunched the numbers and got your mortgage approval in place you can really get the ball rolling. You may have already found the property you desire, or if you are struggling to find something within your budget don't be afraid to go a bit further afield in your search. It may seem handy to buy right on your own doorstep but if you can get a better bargain or buy in an area where rental yields are higher you may want to consider widening your search. Also remember when you are buying as an investor you are not reliant on selling a property and are therefore not part of a chain, so you should be able to use this as part of your negotiating power.
BTL is a big commitment, but when done right it can potentially be a lucrative investment (there will always be risks involved, of course) and with some great mortgage deals still to be had there is no time like the present to start enjoying the prospect of some real returns.
Use the Moneyfacts Mortgage Service and find the Best BTL mortagage for you
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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