Buy-to-let mortgages have long been seen as a reliable method to make a good return on an initial investment, mainly due to the low interest rates payable and the ability to offset certain expenses on the dreaded tax bill. Despite the government announcing a number of changes to the way a landlord can reduce their tax bill, the third quarter of 2015 saw tremendous growth in the uptake and re-mortgaging of buy-to-let mortgages. In September there was a 36.4% increase in the value of buy-to-let mortgages for house purchases than in September 2014. For the quarter, gross lending on buy-to-let rose 49% year-on-year and 24% compared to the three months prior.
This is the initial and arguably the most important stage. You first of all need to satisfy yourself that you are aware of what is happening within the market and the potential risks when making an investment. With this type of investment you are looking at tying up your cash in a way that makes it inaccessible in comparison to other investments, such as stocks and shares. The draw however, is that you can add value to a smaller investment yourself and if it works you can see great returns.
The other area of research that should be undertaken is into the type of tenant, the area and the property. You need to match the demand for properties in the area you are looking to invest with the property you purchase. This comes with local knowledge of the area and the general demographic that makes up the population of the area. Suburban areas may well attract professionals, whilst a city centre near a university would see a large student population – each of these have completely different needs and any buy-to-let purchase should reflect this.
Know your costs & margins
Doing the maths before looking at purchases will make sure that you do not overstretch yourself on any purchase. You need to take into account the purchase price, potential cost of renovation, maintenance costs and the amount of rent that you are likely to receive. Ultimately these costs will be dependent on the mortgage costs, so it is a good idea to shop around and discover the best rate for your potential purchase.
As a landlord you also need to account for periods where the property will be empty, with no rental income and a mortgage that still needs paying. When calculating your costs and possible margins this is something you must account for, or at least know that you will not be in a position where you cannot afford the monthly repayments if you do not have a sitting tenant.
Don’t base a purchase on future sales value
A lot of people see the property sector as an area that you can buy ‘low’ and sell for a profit further down the line, in the past few years this has certainly been achievable with house prices in almost every part of the country now matching, or higher than the pre-downturn prices. Demand is high and supply is low, which is why house prices are increasing, however the housing market is quite hard to read and it may lose value at some point down the road. If you make a purchase now whilst prices are at a high level you do risk not being able to sell at the same price if the market took a downturn.
Look after your tenant
Every landlord wants a good, long-term tenant that is easy to manage and does not cause too many headaches. This is often harder to achieve than it may seem, but a lot of the time it is down to the initial checks on the tenant and the way the landlord treats them. If you allow a tenant to decorate the property in their own schemes, use their own furniture and make it feel more like their home, you are likely to find the tenant will grow more of an affinity to the property and stay for a greater length of time. Having a good tenant should make your life easier and guarantee a regular income for you throughout that period.
There are bound to be ups and downs but if you take it upon yourself to do the research and pay attention to how the market develops it can be a fun way to invest your money. Couple in the fact that you have interaction with your tenant and have the ability to build in value, whilst adding your own personal touch, a buy-to-let property becomes much more than an investment. It should provide you with a regular monthly income and help you supplement any other earnings. Buy-to-lets are increasingly popular and it is understandable why many are looking to make their first investment.
This article was provided by Mike James, an independent writer and marketer representing a selection of UK based property and investment companies – including Prime Centrum, who were consulted with regard to the information covered in this post.