Property investment is thriving in the UK due to a large rental market and improved credit conditions. With an increase in mortgage lending thanks to government initiatives such as Funding for Lending and Help to Buy, along with the beginnings of an economic recovery, investing in bricks and mortar has perhaps never looked to so attractive. Buy to let is specifically enjoying a resurgence, delivering greater returns than most savings accounts, and offering more security than the stock market.
But if you're considering entering the buy to let market, it is important to understand each step of the process, from selecting a property to sourcing funding and managing your tenants. Here are Click4Quote.com's ten tips for success in the buy to let market.
1. Understand the buy to let market
Buy to let tends to offer good returns, but there are risks. Once your money is tied up in a property it is there for the long haul. Be aware of the long term nature of buy-to-let, because if you want to be able to sell up quickly, shares or savings might be more suitable. If you know anyone with a buy to let property, ask them about their experiences, or engage with other investors in online forums.
2. Select an area with potential
Rather than go for the most gentrified or the cheapest areas, look instead at reasons why tenants may wish to live in a given location. Is it near a university? Would young families be attracted by the property's proximity to schools? Is it located in a commuter belt? These are straightforward but important questions to ask, because without tenants your investment won't seem too prudent.
3. Do your sums
Be clinical about the mathematics. Work out the likely rents you will get from the type of properties you are looking at. Most investors aim to have the rent cover 125% of the mortgage repayments. Bear in mind that larger deposits and higher rates can come with buy-to-let mortgage deals. Consider what will happen if your property is not rented out for a month or two. Can your finances handles it?
4. Take care when choosing a mortgage
Banks make billions of pounds each year partly because so many people simply walk into their nearest branch and ask for a mortgage. Make sure you shop around and understand the terms and conditions of each offer fully.
5. Step into your tenant's shoes
Rather than thinking about how you would live in your new property, try getting into the mind set of your target tenant. A family will probably be looking for a 'blank canvas' on which to make their mark; students might be seeking a comfortable but simple property; and young professionals may require a more modern, stylish interior. Bear in mind that tenants who wish to modify or re-decorate are likely to be in it for the long term – which is great for you.
6. Focus on rental yield and be aware of costs
Below is an example of how to work out a rental yield based on a £200,000 property. A deposit of £50,000 is required, with around £2,000 of buying costs. A £150,000 mortgage must be taken out.
£150k mortgage at 5% interest rate = £625 per month = £7,500 per annum in repayments.
£1000 rental income x 12 = £12,000
Difference = £4,500
Deposit + buying costs = £52,000
Annual return = 8.65%
Be aware, however, that maintenance costs, tax and other landlords' costs will reduce this yield.
7. Cast a wide net
While buying a property near you means you can keep an eye on it, there may be better opportunities in other areas. Look further afield and seek out properties near good commuter links, schools, universities and other amenities. A letting agent can take care of your investment.
Look out for neglected properties; you may be able to bargain the price down, and if you can add value to the property by renovating or substantially re-decorating it, you may be able to make a fast return on your money. Ideally, you want any refurbished property to be worth the initial cost, plus the cost of work, plus 20 per cent.
In order to prevent a sale falling through many sellers prefer buyers who are not part of a chain (i.e. who don't have to wait for a house to be sold in order to buy). Use this advantage, if you have it, to negotiate a discount. They can only say no!
9. Be aware of the risks
Examine the various things that could go wrong before investing. Could you hold your investment if house prices start to fall? Could you re-mortgage?
What if you cannot rent your property out? Even properties in desirable areas can sit empty for some months. To address this, it's a good idea to expect your property to be empty for two months of the year, and build this into your sums. Make allowances for repairs and other bills, and if you cannot cover these with your reserves, consider if investing is actually for you.
10. Viewings, advertising and repairs take time. Do you want to handle them yourself or would you prefer an agent to deal with them? An agent will of course cost a fee, but if you manage the property yourself you will have to give up evenings and weekends frequently. If you do go for a lettings agent, remember the smaller outfits can meet and exceed the service offered by well-known lettings chains, and may be cheaper.
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