By Bea Patel, Director of Shop for an Agent – The Estate Agent Comparison Site
Buy-to-let, for many, looks like an appealing investment option. And while it may not be as ‘hot’ as it once used to be, it’s re-emerging as a lucrative income investment if you can put down a big deposit. Investors are, yet again, tempted by better mortgage deals, low interest rates, rental price increases, lower house prices and a surge of tenants. But many investors who bought during the boom – before 2007 – struggled as mortgage rates increased before base rates were slashed to 0.5 per cent – and it has stuck there since 2008, but interest rates will rise again and you need to be sure that your investment can cope with this.
As with any investment, there are no guarantees. But if you believe in bricks and mortar, there are two revenue streams you can capitalise on through buy to let:
- The capital growth strategy – where the value of the buy to let property increases over time (but consider that it can also decrease).
- Rental yield – where you receive money from a tenant as rent, and if market conditions improve, you can increase your rent (but consider that this can go the opposite way).
So if you’re interested in this investment option, here are some things to consider:
1. Conduct Market Research
Research the market and identify the benefits and risks – the internet is a good place start. Seek advice from an estate and/or letting agent, speak to any buy to let investors’ you may know and look at/ask questions on appropriate forums.
Get as much advice and personal experiences of others buy to let investment journeys. Think about if your money could achieve a return elsewhere, for example, in a savings account. Be open to various options and do your research.
Ask yourself: What do you really know about the buy to let market? Have you conducted extensive research? Do you understand the risks involved? Have you considered the work involved?
2. Match location with your target tenants
Decide who your target tenant is – a student, professional, commuter or young family? The area you choose should be the area your target tenant would want to live in, and not what’s more or less expensive. Identify what would be important to them: being close to a town centre, college, school or nursery; close to transport links whether these are trains, buses or road links; or being close to their place of work.
Stay focused when choosing a location so it meets your target tenant’s needs. For example, a stylish modern property close to the train station may suit a young professional. A simple, comfortable property that is easy to clean, close to transport links and the supermarket/shops may suit a student.
3. Look Further Afield
Many investors look for buy-to-let properties close to where they live. A key benefit of this is that you’re close by to manage it. But if you know you’ll be employing an estate or letting agent to manage your property, you can look further afield. This widens your scope and means you can be precise with the property you’re looking for to meet the needs of your target tenant.
4. Work out the Calculations
You need to know exactly how you stand financially before you start to look at properties. Work out the costs of houses you’re looking at and find out what rent you’re likely to receive. Once you have a buy-to-let mortgage arranged, think about negative situations that could arise and work this into your calculations. Consider possible interest rate rises over the coming years, your property being vacant for a couple of months while you source a new tenant, and work you may need to do on your property before a tenant can move in.
5. Shop around for your mortgage
There are many buy-to-let mortgage offers available so shop around for the best competitive deals. You’re considering taking on a huge financial obligation, so getting the best deal that’s right for you is crucial. Compare mortgage deals online and approach lenders directly via their website. If you’re new to buy-to-let investment, seek specialist advice.
6. Negotiate Prices
Buy-to-let investors are fortunate, as they’re not part of a chain so there’s a lower risk of you dropping out from buying that property. This puts you at an advantage to negotiate on the price of a property or your estate or letting agent can do this for you.
7. Consider the Negatives
It’s essential that you’re aware of the problems associated with buy-to-let investments, and ensure you factor these into your calculations. Things can go wrong at any time. The boiler needs replacing, a leek needs fixing or you could have problems with appliances. Can you cover these costs yourself? How will you be affected if your property needs repairing? Can you cover the mortgage payments if there’s a gap before you can place a tenant in your property?
If houses prices fall, you have to evaluate if you’ll be able to hold onto your investment. Consider what position you’d be in if you couldn’t re-mortgage or sell your property. How would this affect you and your investment?
8. Hands-on or Estate/Letting Agent?
Once you’ve bought your property, you’ll need to decide if you’ll be renting the property out yourself or using an estate agent. Both will have benefits so you’ll need to decide which works best for you based on your current commitments.
Some investors like to be hands-on when it comes to their properties. They want to keep an eye on their investment and know exactly what’s going on. For many, this is their job so they can focus on all areas of their investment, source tenants, ensure rent is paid, and deal with any problems that arise with their property. This can mean a lot of running around, conducting viewings, chasing plumbers and builders and acting as the ‘go between’ between the tenant and workers. Yet very stressful, some investors prefer it this way. If you have a job, this could be disrupting for you. Being hands-on could involve getting phone calls from tenants while you’re at work if there’s a problem with the property. They’ll want the job done as quickly as possible so you’ll have to juggle this with your job. You’ll also have to be prepared to give up your evenings and weekends for advertising purposes, viewings and repairs.
10.Employ an Estate Agent
If you have a full time job, a family to look after or you don’t want the hassle that comes with a buy-to-let investment, going through an estate or letting agent has its benefits. Not only are they experienced in this field, they can deal with as much or as little as you choose. It will cost you, but they will advertise your property, carry out all viewings and run all the relevant checks for you. You’ll have all the paperwork in place, including the tenancy agreement, and they’ll carry out the move-in. Estate and letting agents also provide management for your property for a management fee. If you choose this option, the agent will deal with any problems that arise. They’ll do all the chasing and ensure the problem is fixed. Estate agents also have a huge network of builders, plumbers, electricians among other workers. They also deal with any tenants who haven’t paid rent, and they can issue eviction notices and assist you with this if need be. This is something worth considering. If you decide to use an estate or letting agent, or pay for property management, shop around as the fees and services can vary. You can compare estate and letting agents’ fees and services on Shop for an Agent (www.shopforanagent.co.uk) or contact a specific agent directly.
Understanding Return on Investment:
Yield PercentageThe ‘yield percentage’ of a property will tell you how much annual return you’re likely to receive on an investment, expressed in the form of a percentage of how much the property costs. Example: Net Yield The formula is:Net Rent (annual rent minus annual costs) / Property Value x 100 = Net Yield %
If a flat costs £100,000 to buy, the annual rental income was £10,400 and the annual costs were £3500. The net yield will be 6.9%. This is worked out as follows using the above formula:
£10,400 – £3500 = £6900 divide £100,000 x 100 = 6.9% Net Yield. The higher the yield, the higher the income.
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