Research the market
Investing in property can be a tricky process, so we have devised top 10 tips for buying a buy to let property to help !
1. Ensuring you are familiar with the pitfalls as well as the benefits is essential. Speak to people you may know who are already experienced buy-to-letters, and read guides on the subject such as our beginners guide to property investment. If you know someone who has invested in buy-to-let or let a property before, ask them about their experiences – warts and all.
The more knowledge you have and the more research you do, the better the chance of your investment paying off.
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?
You need to match the kind of property you can afford and want to buy with locations that people who would want to live in those homes would choose.
These questions might sound overly simplistic, but they are probably the most important aspect of a successful buy-to-let investment
In most cases people tend to invest in property close to where they live. On the plus side, they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Yet it is also worth bearing in mind that if you are a homeowner then you are already exposed to property where you live – and looking for a different type of home in a different area might be a good move.
3. Get the figures right
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. The excitement of looking around houses can take over all too quickly. Put pen to paper before you view properties and write down the cost of the house and the likely rental yield. Buy to let lenders often require a deposit of between 15% and 30% and the rental income to cover 125% of the mortgage repayments. Some lenders may accept less but at the expense of a low interest rate.
It is also important to have a contingency fund for when the property is not being rented and mortgage repayments must be met, as well as repairs which ought to be fixed quickly else your tenant will vote with their feet.
4.Shop around for everything
Remember, this is an investment property – the head should always rule. Take your time to negotiate a good deal. By all means visit your high street bank for comparison but there are a wide range of finance options available for purchasing a buy to let property these days, including dedicated buy-to-let mortgage brokers to help you get the best deal. It pays to speak to a good independent broker when looking for a buy-to-let mortgage. They can not only talk you through what deals are available but they can also help you weigh up which one is right for you and whether to fix or track.
Learn to love letting agents Yes, they are a class of their own but if you befriend them they can help you with research. Jokes aside, the best agents undoubtedly have unrivalled local market knowledge so use that to your advantage.
5.. Target your tenant
Novices are often quick to see themselves living in their properties. Remember you are not the tenant and put yourself in their shoes. A student will require functional accommodation, easy transport to their campus, perhaps a range of local shops as they may not yet run a car. Young professionals may require something more stylish, perhaps in a location with access to night life and good links to road and rail. A family will need space and to be local to schools.
Remember that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home.
These tenants will stay for longer, which is great news for a landlord.
It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance policy.
6. Don’t get carried away
We have all read the stories about buy-to-let millionaires and their huge portfolios.
But while you may expect long-term house price rises, 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.
Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.
This is tax efficient, as you can offset mortgage payments against your tax bill.
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, maintenance and agents fees must be worked out and they will eat into your return.
You may want to consider whether buy-to-let still beats an investment fund or trust once these costs are taken into account.
Once mortgage, costs and tax are considered, 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 doing a property up
It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be negotiated hard on to get at a better price and then spruced up to add value.
This is one way that it is still possible to see a solid and swift return on your capital invested. If you can add some value to a home straight away then it gives you a greater margin of safety on your investment
However, remember to ensure that the price is low enough to cover refurbishment and some profit and that you allow for the inevitable over-run on costs.
A good rule to follow is the property developers’ rough calculation, whereby you want the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.
8. Set your budget and negotiate
Everyone has a budget when it comes to investing and buy-to-let is no different. Knowing what you have to play with can focus your search on an area where your budget can acquire the asset you need. Remember, you don’t have to offer the asking price. In strong markets it’s not easy but negotiation is part of acquiring the best investment you can. You are in a strong position as a buy-to-let investor being chain free. Vendors are often keen that what can be a lengthy transaction be as swift and smooth as possible. Discounts can be negotiated in order to generate a quick sale.
9. Know the pitfalls
Don’t ignore what could go wrong. How many months can you afford to pay the mortgage should the property sit empty for some months. Will you require your money out quickly? The property market has been strong for some time, if there were to be a drop in value could you ride it out? A simple rule of thumb is to factor in the property sitting empty for two months of the year to provide a buffer. If you are unable to cover the cost of a major repair not covered by insurance such as the heating system don’t 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.
If you are considering going it alone look at where you will advertise your property and where you will get documents, such as tenancy agreements from.
It really pays to look after your tenants. Do this and they will look after you.
The biggest drag on many buy-to-let landlord’s investment returns is the void period. A time when you don’t have anyone in the property. Good tenants who want to stay help avoid this – and if they move on they may even recommend your property to someone they know.
Keep up with maintenance, make sure your property is a nice place to live and try and build a good personal relationship with your tenants.
Top 10 tips for buying a buy to let property