Looking to invest in property and become a successful landlord?
Our 10 tips for buy-to-let guide is the ultimate resource for both novice and experienced investors.
Packed with expert advice and regularly updated to ensure you have the latest information, this guide has helped millions of landlords over the past decade. Discover the key strategies for maximizing rental returns, keeping tenants happy, and navigating the complex world of property investment. Start your journey towards buy-to-let success today with our comprehensive guide.
1- Research the market on buy-to-let If you’re considering buy-to-let as an investment option, it’s important to understand the market and weigh the risks against the benefits.
It’s crucial to ensure that buy-to-let is the right investment choice for you, as your funds may perform better in other avenues. Investing in buy-to-let requires tying up your capital in a property that may decline in value, especially during times of economic uncertainty. Alternatively, income-based investment funds may offer a 5% annual return, and fixed rate savings accounts may offer 4% returns.
Keep in mind that investing in funds, shares, or an investment trust through an ISA allows you to escape income tax and receive tax-free capital growth.
Additionally, you have the flexibility to sell your investment quickly if needed. On the other hand, unlike buy-to-let, you cannot purchase an underperforming investment fund and improve its value through renovation. Investing in buy-to-let requires a significant sum of money, typically in the tens of thousands, and often involves obtaining a mortgage.
Although rising house prices can result in substantial leveraged gains beyond your mortgage debt, falling prices can harm your deposit while leaving the mortgage amount constant. While property investing has proven lucrative for many people in terms of both income and capital gains, it is essential to approach it with a clear understanding of its potential advantages and disadvantages. If you know someone who has invested in buy-to-let or has experience letting out a property, ask them about their experiences, both positive and negative. The more information you have and the more research you conduct, the greater the likelihood that your investment will pay off.
2- Choose a promising area to invest in property Being a promising location does not necessarily equate to being the most expensive or cheapest. Rather, it means being a desirable place to live for various reasons.
Consider the areas in your town that possess a unique appeal. For instance, if you are located in a commuter belt, seek out locations with good transportation links. For families with young children, look for areas with quality schools. For students, target neighborhoods where they typically reside.
Ensure that the type of property you wish to purchase and can afford matches the locations where people would like to live in those homes. These questions may seem straightforward, but they are fundamental to a successful buy-to-let investment. In most cases, people tend to invest in property close to where they reside. This has the advantage of allowing them to be familiar with the local market, identify profitable property and location combinations, and keep track of their investment. However, it is also essential to remember that if you already own a home, you are already exposed to property in that area. Hence, purchasing a different type of property in a different location may be a wise choice.
3- Do the maths on buy-to-let Before embarking on property viewings, take some time to sit down with a pen and paper to calculate the cost of the homes you are interested in and the anticipated rental income.
Buy-to-let lenders typically require that rent covers 125% of mortgage repayments, and this figure has now increased to 150% in many cases. Additionally, most lenders demand 25% deposits, or even larger, and offer rates that are significantly higher than those offered on residential mortgages.
The best buy-to-let mortgage rates may also come with high arrangement fees. After determining the mortgage rate and anticipated rent, it is crucial to make an objective decision about whether the investment is worthwhile. Don’t forget to include maintenance expenses in your calculations, and consider the possibility of the property sitting empty for a month or two. All of these factors should be taken into account when making a decision. Ensure that you are aware of the mortgage repayment amounts, and if the mortgage is a tracker, allow for the possibility of rate increases.
4- Shop around and get the best buy-to-let mortgage Avoid simply walking into your bank or building society and requesting a mortgage. This may seem obvious, but individuals who do this are one of the reasons why banks earn billions in profit by providing financial products.
It is beneficial to consult a reputable independent broker when seeking a buy-to-let mortgage. They can assist you in not only identifying the available deals but also determining which one is best for you, whether it should be fixed or tracked, and other considerations.
Nevertheless, it is still essential to conduct your own research so that you are aware of the types of mortgages you are likely to be offered before entering into a conversation with a broker.
5- Think about your target tenant Instead of envisioning yourself living in your investment property, consider the perspective of your target tenant. Who are they and what are their preferences? If they are students, prioritize ease of maintenance and comfort over luxury. For young professionals, opt for a modern and stylish space that is not too imposing. For families, provide a blank canvas that accommodates their personal belongings.
Allowing tenants to personalize the property, such as by decorating or adding pictures, or removing unwanted furniture, creates a sense of home and encourages them to stay longer – which is beneficial for landlords. Additionally, you can take out rent guarantee insurance as protection against a tenant’s failure to pay rent. This can be obtained for as little as £50 and is available either as a standalone product from a specialist provider or as part of a broader landlord insurance policy.
6- Prioritise Rental Yield and Factor in Costs to Avoid Greed in Buy-to-Let Investments Experts recommend focusing on investing for income rather than short-term capital growth, despite the expectation of long-term house price increases. To determine the value of different properties, calculate their yield by dividing the annual rent received by the purchase price and multiplying by 100. For instance, a property with an annual rent of £10,000 and a purchase price of £200,000 has a yield of 5%.
When it comes to buy-to-let, rental income should be the primary return on investment since most buy-to-let mortgages operate on an interest-only basis, with no reduction in the amount borrowed over time. If the rental income exceeds the mortgage payments by a significant amount, once an emergency fund has been established, investors can save or invest any additional cash.
However, since homeownership comes with running costs such as mortgage payments, maintenance, and agent fees, which reduce returns, it is worth considering whether buy-to-let investments remain competitive with investment funds or trusts once these costs are taken into account.
After mortgage costs, expenses, and taxes have been considered, the ideal scenario is for the rent to accumulate over time, potentially serving as a deposit for additional investments or to pay off the mortgage at the end of its term. This approach enables investors to benefit from rental income, pay off the mortgage, and maintain ownership of the property’s full capital value.
7- Look further afield or doing a property up While many buy-to-let investors tend to focus on properties in their local area, it may not always be the best investment strategy. Although proximity to your rental property can be convenient, if you plan on hiring an agent, they can monitor the property for you.
Consider expanding your search to towns with strong transportation links, family-friendly areas, or those with a sizable student population. Another strategy to consider is investing in properties that require some level of improvement or renovation. These types of properties can often be purchased at a lower price point and offer the opportunity to increase the value of the investment.
However, it’s important to ensure that the purchase price and renovation costs leave room for a profit. Property developers often use a rough calculation to determine the final value of a refurbished property, aiming for at least 20% above the total purchase price and cost of renovations.
8- Negotiate price when investing in property If you’re a buy-to-let investor, you can use your lack of reliance on selling a property to negotiate a discount just like a first-time buyer.
Being chain-free means you represent less of a risk for a sale falling through, making you a more attractive prospect for sellers. Therefore, don’t be afraid to make low offers and avoid overpaying. It’s important to understand your market when negotiating. For instance, if the market is weak and properties are taking longer to sell, you’ll have more bargaining power.
Furthermore, finding out why the seller is selling and how long they’ve owned the property can be useful. An existing landlord who’s owned a property for a long time and is looking to cash in on their capital gains may be more willing to accept a lower offer for a quick sale than a family that needs the highest possible price to facilitate their move.
9- Know the pitfalls of buy-to-let It is essential to evaluate both the positive and negative aspects before making any investment, including in real estate. While the current trend indicates an increase in house prices, it is worth noting that growth has slowed, and there is a possibility of prices falling again in the future. Hence, it is essential to consider whether you can continue to hold your investment if the property prices dip.
Low rates are attractive to investors, and rental income typically covers the mortgage payments comfortably. However, you should consider what you will do when the interest rates rise. Additionally, after a fixed-rate period, you may move to a standard variable rate. If you cannot remortgage, it could lead to financial difficulty.
Even in popular areas, rental properties can sometimes remain unoccupied. To mitigate this risk, many buy-to-let investors factor in the property being vacant for two months of the year to maintain a financial buffer. Maintenance and repairs are also crucial factors to consider. Unexpected costs, such as repairing a faulty boiler, can be financially challenging if you do not have sufficient funds in the bank. Hence, before making any investment, ensure that you have enough savings to cover such expenses.
10- Consider how hands-on a landlord you want to be Purchasing a property is just the first step. Afterward, you must decide whether to rent it out yourself or enlist an agent to do so. Agents will levy a management fee, but will handle any issues and have a reliable network of tradespeople on hand if anything goes wrong.
You may earn more money by renting out the property yourself, but you should be prepared to give up evenings and weekends to manage viewings, advertising, and repairs. If you decide to use an agent, you don’t have to choose one with a physical storefront; many independent agents provide excellent and personalized service.
Make a shortlist of both big and small agents and inquire about the services they offer. If you’re considering going it alone, consider where you’ll advertise your property and how you’ll obtain essential documents like tenancy agreements. Taking good care of your tenants can pay off. Doing so may encourage them to stay, lowering the risk of a void period that can eat into your investment returns.
Additionally, if they relocate, they may suggest your property to a friend. Keep the property well-maintained, ensure that it is a pleasant place to live, and work to establish a good personal relationship with your tenants.