Poor old buy-to-let. Once upon a time it was David Beckham, Wayne Rooney and Kate Moss all rolled into one - making headlines on a daily basis with every move endlessly analyzed
Buy-to-let: Is it worth it?
Buy-to-let is no longer the hot property it once was, and many investors who bought in the boom struggled as mortgage rates rose.
But lower house prices, rising rents and improving mortgage deals are tempting investors once more - although they will need a big deposit and find life much tougher than in the boom years.
If you are planning on investing, or just want to know more, we tell you the ten essential things 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 our top ten tips:
1. Research the market
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.
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. 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 your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
3. Do the maths
Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get. Traditionally buy-to-let lenders want rent to cover 125% of the mortgage repayments, although many had relaxed this in recent years. Most also looked for a 15% deposit, which protects against falling prices. But in the wake of the problems in the mortgage market many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees.
Will your investment work out? What will happen if the property sits empty for a month or two? These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.
Can you still get into buy-to-let?
Existing investors should now be benefiting from lower rates, many will have fallen on to their lender's standard variable rate and the slashing of base rate down to 0.5% has done them a favour.
This is especially true for many as a lot of buy-to-let deals do not have typical SVRs but a revert rate that tracks the bank rate.
However, new mortgage deals remain expensive in comparison to residential deals and industry experts acknowledge that now is a tough time for buy-to-let.
Jeremy Tyler, Managing Director of Tyler Estates in Billericay says, ”Buy to Lets look attractive when the mortgage rates are low, but you must allow for the inevitable rate rise.”
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.
If investors are willing to accept that the value of their property may slide in the short term, and can ensure their property meets the criteria of at least 75% to 85% loan-to-value and returning 125% of monthly mortgage payments then it can be a good long-term investment.
4. Shop around
Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit. If you are looking for advice consider using a specialist buy-to-let mortgage broker. Remember asking them for information means you are under no obligation to use them. We will happily recommend a suitable company.
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 students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and need a blank canvas. It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance.
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 value use their yield, that is annual rent received as a percentage of the purchase price. For example, a property delivering £10,000 worth of rent that cost £200,000 has a 5% yield.
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.
Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term. This means you will have benefited from the income from rent, paid off the mortgage and hold the property's full capital value.
7. Consider looking further afield
Most buy-to-let investors look for properties near where they live. But your town 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.
Cast your net wider and look at towns with good commuting links, that are popular with families or have a sizeable university.
8. 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? What will happen if you can't remortgage? 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.
