29th June 2021
Take the first few steps to property investment
The buy-to-let market in the UK is still thriving. With property prices going up across most of the country, many people still turn to living in rented accommodation. This demand has led to a rise in monthly rent payments, meaning buy-to-let can be a profitable investment (it’s generally outperformed shares for the past 20 years).
If you’re thinking of taking your first step on the buy-to-let property ladder, then it’s a good idea to do your research before you do anything else. Keep a close eye on the property market, get to know the areas you’re interested in and consider the types of tenant that tend to live there. Get it wrong and it could be hard to make the profit you’re after. Worse still, you could make a loss.
Andy Banner, Lettings Manager at Alexander & Co in Aylesbury explains: “From the outset, you need to be clear about which market you want to aim at. Will it be families? Students? HMO (house in multiple occupation)? Understand that and you can be selective about what you buy. It’s a financial decision, but it’s also about who you want to rent to.
“Young professionals are usually interested in apartments that are more central; and if the property’s near a train station for commuting purposes, that’s even better. The family market continues to develop, especially where homes are near good schools. Families will move from nearby towns to access these schools.”
How you could make money over time
You should think about a buy-to-let property as a medium to long-term investment, and very different from owning your own home. You could earn a profit in two different ways:
- Rental yield: this is the amount your tenant pays in rent, minus your maintenance/repair costs and any agent fees
- Capital growth: if the local housing market is on the up and up, it might be that you sell your buy-to-let property for a profit in the future. Your profit comes from selling the property for more than you originally paid
If you make a profit when you sell your buy-to-let property, you’ll be liable to Capital Gains Tax, and it’s highly likely you’ll pay income tax on the rent payments you get in too. Andy adds: “Flats will usually deliver a better gross yield. With a house, there can be less short-term benefit, but capital growth can come into play on the back of these types of property.”
What’s different about a buy-to-let mortgage?
A buy-to-let property needs a buy-to-let mortgage. This type of loan may carry a higher interest rate than a mortgage for your own home. Your residential mortgage and the amount you can borrow is based on your salary and outgoings. When it comes to a buy-to-let mortgage, it’s dependent on the rental income you’re hoping to get in.
As with a residential mortgage, the bigger the deposit, the better deal you can get from the lender. A lower mortgage rate lowers your monthly mortgage payments, so you’ll end up with a greater difference between your rental income and mortgage costs. If you’re buying a property with the intention of renting it out to students, the mortgage process may be more complex.
You’ll also need buildings insurance with a buy-to-let mortgage.
What other costs are involved?
You will pay all the usual costs that come with buying a property, such as survey fees, solicitor’s fees and stamp duty. “In blocks of flat and apartments, the service charge can be in excess of £100, so it’s important to factor this in when you’re looking at your yield,” Andy adds.
“Void periods (where there is no tenant in the property) used to be, on average, a minimum of one month out of twelve for let properties. Now that the average tenancy lasts more than two years, these void periods are less frequent, which is good news for the landlord.”
Remember: if a tenant comes to the end of their agreement and moves out, and there’s no rent coming in for a period of time, you still need to make your mortgage repayments and cover any other ongoing costs you have. It’s worth considering a landlord’s insurance policy that covers the non-payment of rent.
Andy explains the value of landlord’s insurance, particularly relevant today: “The risk of non-payment by tenants is, unfortunately, a lot higher than it used to be after the developments of the past 15 months.”
Landlord insurance isn’t a legal requirement, but taking out a policy can help protect you and your investment.
There’s more to being a landlord than you might think
With being a landlord comes important legal and safety responsibilities before you can move a tenant in, including regular gas and electrical checks. It’s about more than just taking care of the odd repair and giving the place a lick of paint every few years. A practical space that’s presented well and feels safe will help you achieve the best monthly rental figure possible.
Andy highlights the benefits of moving fast and efficiently once you’ve completed your purchase: “For first time investors, it can be a good idea to keep it simple. Perhaps look for somewhere that doesn’t need a lot of work. Then, you can learn from the process, get more experience and, in the future, consider properties that might need a bit of work. A quick turnaround so that the property isn’t left empty is important to ensure a good return.”
So, is buy-to-let for you?
- Do you like the idea of an investment that feels more tangible than investing in stocks and shares?
- Is tying your money up for a medium-to-long period of time something you’re comfortable with?
- Property prices can go down as well as up, which could affect your financial ambitions.
- There’s the chance that you may not achieve a profit month-to-month on your buy-to-let property, or when you come to sell it.
- Are you fully aware of all the costs, time and responsibilities that come with owning and maintaining an additional property, and being a landlord?
There is money to be made in the buy-to-let market, and investing in bricks and mortar rather than the stock market is the way to go for many people. Taking the next step, purchasing a property and becoming a landlord could be right for you too!