For many buy-to-let looks an attractive income investment in a time of low rates and stock market volatility. Read on for Fife Letting Service top tips on Buy to Let.
Buy-to-let: Is now the Right Time?
While buy-to-let may no longer be the buzz word it once was, as an investment option for those who have large enough incomes and deposits is it still as attractive, especially compared to low interest rates and a poorly performaing stock market.
Caution must be taken however as there are many boom time investors now struggling with high mortgage rates whch were agreed before the base rate was slashed to its lowest rate ever – one day interest rates will rise again.
Lower house prices, rising rents and slowly improving mortgage deals are starting to tempt BTL investors once more.
If you are planning on investing, then keep on reading, our top ten tips will have you thinking along the right lines when it comes to buying into the rental.
1. Research your market
This is essential especially if you are new to the market, make sure you do your homework and do it properly, ensure you will get the required returns on your money and if you cant then should you be inventing in BTL, maybe there are better options out their, stocks, shares, high interest bank accounts or even keeping your investment for a raining day.
2. Choose a promising area
If you do decide to proceed then ensure that you buy in the right area, Do you want something close to where you live or are you happy to invest anywhere? Always try to buy in an area whre there will be high demand, this can be caused by a number of reasons;
– Good schooling nearby
– Excellent communter links, near train stations or on main commuter roads
– Reputable neighbourhood
– Close to local amenities
– In an area of high workforce mobility( do local businesses bring in overseas workers?)
– Near a college or University
Answering these questions will help you find the right area.
3. Do your sums.
Before you think about looking at properties sit down and work out what kind of rents you are likely to receive based ont he value of properties you are looking at.
It is common practise for buy-to-let lenders to have a rent coverage rate typically rents have to cover 125% of the mortgage repayments. Nowadays most also look for a minimum 15% deposit, which gives the lender a cushion if house prices fall.
Once you have the mortgage agreed you will know what your repayments will be, remember to allow yourself leeway for rate rises in years to come, be clinical in deciding will your investment work out?
Remember to factor in costs like, insurances, safety checks, agents fees, General repairs and maintenance, what if the property lies empty for a few months or the tenant doesn`t pay?
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.
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 High Street 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.
Buy to let is a specialist area of lending and your high street operators are not neccesarily the most competative in this area. We would suggest you speak to an independant mortgage advisor who will be able to take you through the current deals and match the best to your specific requirements.
5. What type of tenants are you looking for
The type of tenant you are aiming for will dictate how you present your property. Instead of imaginging yourself in the property with your own tastes put yourself in the shoes of your target tenants.
Students, it needs to be easy to clean and comfortable but not luxurious.
Young professionals it should be modern and stylish but not overbearing.
Families – it needs to be family friendly with plenty of space and preferable unfurnished.
Unemployed – Higher risks associated and we would not reccomend this route for novices.
Please remembner that your mortgage or insurance company may have conditions attached regarding the type of tenants you can have in your property.
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 generally stay for longer, which is what all landlord want.
6. Don`t reach for the stars
We have all heard about buy-to-let millionaires and their huge property portfolios. The days of double-digit house price rises are no longer with us, so for the time being it may be better to look for monthly income as opposed to capital growth
You need to know what is your return on investment
Remeber, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return on investment you need to work out you annual net income, Total rent less total mortgage payments, this is then calculated as a % of your total initial invenstment.
For a ?100,000 property that could rent for ?500 per month:
?75k mortgage at 5% = ?3750 per annum
?500p/m rent x 12 = ?6,000 per annum
Net Income = ?2,250
Deposit + buying costs = ?25k
Annual return = 9%
Don`t forget there are other costs which can reduce your return, tax, maintenance costs, e.t.c..
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. 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. Remember you need to look upon this as a business and should not get emotionally attached to the property, there are plenty of others ont he market that you should be able to snap up.
8. Know the pitfalls
Before you make any investment you should always investigate and be aware of the negative aspects as well as the positive. Currently 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 the best of proeprties can sit empty. Do you have an emergency fund to cover any unsuspected costs, houses often need repairing and things can go wrong. Do you have enough to cover a major cost such as a new boiler?
What if you get an awkward tenant and they dont pay you or move out? The court process can take a time, can you go without rent as well as paying lawyers fees during this time?
9. 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, they should 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 do you have the neccesary expertise or knowledge and be prepared to give up weekends and evenings on viewings, advertising and repairs.
10. Choosing an Agent
This can be a very difficult decision, there are many letting agents out there some better than others, here are some important things to watch out for.
Is the agent a member of any regulatory schemes? Are they Accredited?
How long have they been in business, how successful are they? How many properties do they manage?
Do they have professionally qualified staff, ask to see certifications.
Ask to see any testimonials from other satisfied clients.
How will my property be marketed? how thourough is the agents referencing process.
What are the fees? – make sure you are aware of all fees, some agents do try to hide them.
You get what you pay for – dont always be tempted by the lowest price, will this agent spend as much attention to your property for less money?
You must be comfortable with your agent as you are entrusting them with you most valuable asset, make sure you choose carefully.
Fife Letting Service are happy to help you with any of the stages above simply contact us for help getting you on the Buy to Let market.