Buy to let
How can you ensure success in the buy to let market? A specialist mortgage broker could prove invaluable. There is a great deal of choice with a multitude of buy to let mortgages available, so having an expert on hand to ensure you select the best option for your needs is essential, particularly as some lenders only take on new business through brokers. Most buy to let mortgages will require a deposit of at least 25%, but there are some products where a deposit of 20% or occasionally just 15% is required.
There can be little doubt that, right now, the outlook for buy to let investors looks good, smells good and tastes sweet. According to recent research, the average buy to let investor this year saw a 6% annual return on the capital they invested, as well as a 10.5% increase in the price of their property.
But, if you're not careful, you could find your first experience of buy to let is the investor equivalent of opening a box of chocolates and finding it is full of worms. Pick the right buy to let property and the right mortgage deal and you'll enjoy delicious returns on your investments in the years to come. Pick the wrong one, and you could find you are unable to swallow the consequences.
Invest for success
One of the biggest hurdles that novice buy to let investors face is figuring out which properties are good investments. Remember, you're buying this property to make money so treat it purely as a business decision. Approach properties dispassionately and evaluate their commercial potential Look at the demand for and supply of rental properties in your chosen area. Will the rental yield be enough to pay the mortgage, or are you going to subsidise the rent out of your own income to make the mortgage work?
Investors should do their homework before they buy. The experienced investor has a checklist of priorities and processes to ensure a safe purchase, a process called performing due diligence.
Experienced landlords will ask local letting agents about the levels of demand from different types of tenants and enquire about what rental yields have been achieved on similar properties. They would also check with planning departments about whether there are any developments pending that could affect the price of the property and carry out an assessment of the condition of the property.
Before you buy, it is also a good idea to decide whether you are investing because you hope to see an increase in the property value (known as capital growth) or whether your priority is to gain an extra monthly income (in the form of rent). You are likely to want both, but one may be more important to you than the other, and this should determine your overall investment strategy.
If rental income is your top priority, ask yourself: how much money am I prepared to invest in the property as a deposit? The bigger your deposit, the smaller the mortgage, and the smaller the mortgage, the lower your monthly outgoings will be, leaving you with a larger proportion of the rental income every month.
If capital growth is your top priority, ask yourself: how long am I prepared to wait until I get the growth in my investments I desire? And then ask an expert what is predicted to happen to rental yields, property prices and mortgage interest rates over that time.
Another common problem landlords come across is dealing with the raft of new Government legislation governing buy to let. For example, landlords of shared houses may need to apply for a House of Multiple Occupancy (HMO) licence from their local authority, and if the building doesn't comply with regulations, you could be forced to carry out expensive building work. Make sure you are informed about how this legislation can affect your investments.
Buying and renting out a property also has significant tax implications, as you may be liable to higher income tax payments as well as capital gains tax and inheritance tax. But the good news is, if you take professional advice, it is easy to reduce your tax liability. People who rush into buy to let without taking advice can easily fall foul of Government legislation, tax policy and the rental market.
If you are an experienced landlord with a large portfolio of properties, you may feel confident that you know what you are doing. But it is still vital that, as you grow your portfolio, you seek advice to ensure that you are getting the best buy to let mortgage deals and planning effectively.
The maximum loan to value for buy to let mortgages is usually around 75% or 80%, but a small number will sometimes go to 85% LTV.
With a bit of help and advice, you should find yourself well on the way to making a profitable buy to let investment and smelling the sweet scent of success.
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The Financial Conduct Authority does not regulate tax advice or buy to let mortgages.