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Ten Things You Should Not Forget When Buying to Let

Ten Things You Should Not Forget When Buying to Let

For many ‘buy-to-let looks’ an attractive income investment in a time of low rates and stock market volatility.

But while buy-to-let may no longer be the hot property it once was, as an income investment for those with enough money to raise a big deposit it looks attractive, especially compared to low savings rates and stock market volatility.

Beware though, many investors who bought in the boom struggled as mortgage rates rose before the base rate was slashed to 0.5 per cent - and one day interest rates must rise again.

Lower house prices, rising rents and improving mortgage deals are tempting investors once more.

If you are planning on investing, or just want to know more, we tell you the ten essential things you should to consider for a successful buy-to-let investment.

Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares here are Ten Things You Shouldn’t Forget:

1. Don’t forget to do research

If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits? Catch up with the latest news in our article database.

Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. In recent years a high-rate savings account would beat most investments. Now rates are lower, but investing in buy-to-let means tying up capital in a property that may fall in value. This compares to the possibility of a 5% annual return on a fixed rate savings account.

If you know someone who has entered the buy-to-let market, ask them about their experiences.

2. Remember to choose a promising area

Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons.

Where in town has a special appeal? If you are outside the center, where is good transport? Where are the good bars for the older crowd? Where do holiday families spend their time? Where do the students want to live? What are the facilities? Asking yourself these questions might sound over simplistic, but they are probably the most important aspect of a successful buy-to-let investment

3. Do the math

Before you think about looking around properties sit down with a pen and paper and write down the cost of condos or houses you are looking at and the rent you are likely to get.

Traditionally buy-to-let lenders wanted rent to cover 125% of the mortgage repayments, although many had relaxed this in the tail-end of the boom years. Most also looked for a 15% deposit, which protects against falling prices.

What will happen if the property sits empty for a month or two? These are all things to consider.

But with property prices having fallen to more affordable levels, those who stick to the tried and tested method of investing for rental returns rather than capital growth are tempted. You will need a big deposit though and should not expect instant riches.

4. Shopping around is important

Do not just walk into the first developer’s office and buy a few units. There are many different deals on the market, some more interesting for buy-to-let than others. Find a local real estate agent to help you.

5. Think about your target tenant

Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.

Who are they and what do they want? If they are retirees, it needs to be not too expensive, easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If they are holiday tourist you should offer extra services like cleaning, beach towel and an airport pick up or assistance.

Remember that allowing tenants to make their mark on a property, such as painting, or adding pictures or taking out unwanted furniture makes it feel more like home - these tenants will stay for longer, which is great news for a landlord.

6. Don't be over ambitious

We have all read the stories about buy-to-let millionaires and their huge portfolios. But the days of double-digit house price rises are gone, so experts say invest for income not short-term capital growth.

To compare different property's values use their yield: that is annual rent received as a percentage of the purchase price. For example, a property delivering B120,000 worth of rent that costs B2,400,000 has a 5% yield.

Return on investment

Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.

Don't forget tax, maintenance costs and other landlord expenses will eat into the return.

Rent should be the key return for buy-to-let. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.

If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.

Remember though, people rarely buy a home outright and they come with running costs, so mortgage costs, agents fees must be worked out and they will eat into your return.

7. Consider looking further afield

Most buy-to-let investors look for properties near where they live or like to stay. But the area may not be the best investment. The advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you.

8. Don’t get too excited at the last minute and forget to haggle over price

As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount. If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through. This can be a sizeable asset when negotiating a discount, especially in a tough market such as the one we have now. Make low offers and do not get talked into overpaying.

9. Know the pitfalls

Before you make any investment you should always investigate the negative aspects as well as the positive. House prices are falling and if this continues, will you be able to continue holding your investment?

Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year - this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.

10. Consider how hands-on you want to be

Buying a property is only the first step. Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.

You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs. If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.

Select a shortlist of agents big and small and ask them what they can offer you.

 

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