Property investment has become much more challenging over recent years, yet big rewards await those with the nous, knowledge and determination to navigate the market successfully. Legislative changes including the amendments to stamp duty tax and new rental taxes have caused big headaches for landlords, as have house price drops. Nonetheless, there are still big gains to be made.
Is the time right for you?
The buy-to-let market is synonymous with opportunities for investors such as cheap mortgages and low interest rates. However, landlords are now being taxed on their revenue rather than profit, with the 3% stamp duty surcharge also making many would-be investors think twice about making the leap. In this guide, we will supply you with a range of tips on making the property investment market work for you, even during these more challenging times.
Thinking about the pitfalls as well as the positives
Before you make your big jump into the buy-to-let market, it’s essential to do your homework and spend time reading up on the risks attached to investing as well as the positives. There’s always a chance that other opportunities may deliver bigger rewards. Remember, your investment could see a fall in value, which is why a considerable number of people have been looking at fixed rate savings accounts and income-based investment funds as alternatives. Nonetheless, there are ample opportunities for breathing new life into seemingly humdrum properties, renovating them, adding new features and seeing their value soar. Your profits can be sizeable when house prices are on the up, yet your mortgage payments won’t decrease when fees start to drop. Talk to as many property investment specialists as you can and gain as much knowledge as possible until you’re confident about making an investment.
Research upcoming changes
Keep on top of legislative changes. From the 2020-21 tax year, you won’t be able to deduct mortgage costs from your rental income. Instead, you will receive a 20% tax credit against your mortgage interest. You will need to add income from rent to your general income, pay tax at the appropriate level before claiming back the tax credit. Your lender will typically require your rent to cover 125% of your mortgage repayments, though this could be as high as 150%. It’s very likely that you will need to pay a 25% deposit – again, this could be larger if the rate is much higher than that of a residential mortgage deal. You can expect to pay considerable arrangement fees for the most preferable buy-to-let mortgages.
Select the right location
Area is a vital factor when looking for an investment. No matter how appealing the home is on the outside, there is likely to be less demand for it if it’s not located close to good schools, great transport links and high-quality amenities. Seek out the most in-demand properties that you can afford and think about where other people would like to live. Although thorough research of the geographic location is important to ensure a successful investment venture, try not to be overly biased towards your own area no matter how familiar you are with it. Even if you are emotionally attached to your own environment, it may not have a sufficient level of demand amongst others.
Mortgage and maintenance advice
There are many things you need to think about before you do go ahead and purchase a buy-to-let property. You will almost certainly need to cover maintenance costs and will need to cover yourself during tenant-free periods. The most affordable mortgage rates tend to be on two-year fixes – if you have a sizeable deposit you could source a rate of as low as 1.40%. Many landlords opt for five-year fixes for extra security and peace of mind. Tracker mortgages are determined by base rates plus an extra figure added by the lender. If the base rate is 2% and the lender adds 1% to this, the tracker rate will be 3%. Tracker mortgages can be risky, as your mortgage payments can go up as well as down.
How to impress the lenders
In order to secure the kind of buy-to-let mortgage that you desire, you will need to show strong earnings away from property, excellent rent to cover mortgage payments and offer a sizeable deposit. Rather than simply heading straight to a bank and asking them what they have to offer, consult an impartial independent broker who can introduce you to a range of products and identify the most suitable options for your specific needs. They can also take a close look at your current financial situation and help you decide whether to aim for a fixed or tracker mortgage.
Consider tenant expectations
Avoid thinking about what you would personally look for in a property and focus on what your target tenant is looking for. Your target tenant may live a very different lifestyle to yours, especially if you are renting out property to much younger people. Although many landlords shy away from this, allowing your tenants to decorate and personalise a home can make it more appealing and therefore enable you to charge more. Don’t forget to take out rent guarantee insurance to cover you if your tenants do fail to make the payments.
Be realistic on income
It’s also important to be realistic about income. Media stories about buy-to-let millionaires and their property empires have led to overly-high expectations amongst many would-be entrepreneurs. You are more likely to achieve the wealth that you desire if you focus on the long-term rather than aiming for vast short-term growth. Many landlords use the rent that they receive to fund a deposit for a future investment and grow their portfolios over time. Only a select few are able to purchase a property investment outright.
Calculate your yield
Chances are you’ve come across the term ‘yield’ on countless occasions when reading up on the buy-to-let market. The yield is worked out by dividing the cost of the property by the annual rent that it generates. This means a £150,000 home that delivers £15,000 of rent would have a yield of 10%. However, you will only see the full yield when buying without a mortgage. You can work out the yield for a home purchased with a mortgage by subtracting your annual mortgage expenses from your yearly rental income. Work out the yield as a percentage of your deposit, maintenance expenses and other costs will reduce your return.
Be the best landlord you can
Remember to be kind to your tenants and decide how hands-on you wish to be. You can save money by dealing with your tenants directly but you can also expect to be met with a much bigger workload if you head down this route. By making your home as appealing as possible and providing a quality service to your tenants, you can boost your reputation, grow your portfolio and enjoy greater yields.