It might feel like sitting around planning is just delaying you from getting out to look at properties and start making money. Or to put it another, more painful way: In fact, the best plan would be so simple that it fits on the back of an index card — meaning that you can commit it to memory and use it to drive every decision you make. In order to get to that simplicity though, you might need to do some seriously brain-straining thinking first. Note that I said it was the easiest part, but still not easy — because it involves honesty about what you can commit, and self-knowledge to determine where your strengths lie.
You might be surprised by how much thought is involved in answering these questions properly. If your goal is to create a certain monthly income within three years, the Property 1 is likely to be a better choice. Growth is unlikely to happen to any great extent over that time, so you need to optimise for cash in the bank right now. On the other hand, if you have a decade before you want to have achieved your goal, Property 2 is probably the better bet.
The way I like to think about strategy is the way you compensate for a lack of cash. Think of it like this: But most people will want more — which is where more of an advanced strategy comes in, allowing you to get better results, faster. Simply appreciating the need for one of these strategies from the start is a really big deal. It is a huge commitment, and though you could make a big profit on your property, it needs to be thought of as a business, not an investment.
Buying a rental property is not cheap — you need a substantial pot of cash behind you. Buy-to-let loans are very similar to ordinary mortgages, but there are extra calculations banks will make before deciding whether to lend to you.
A deposit is crucial: Landlords tend to take interest-only loans, where just the mortgage interest is paid off and none of the capital. This is because an interest-only loan is cheaper, and landlords typically sell their house after 25 years. Mortgage arrangement fees on buy-to-let loans can be hefty.
On top of this, banks will need to know how much rent you are likely to get. You can get a feel for this by browsing advertisements on property websites such as Zoopla, Prime Location and Your Move and talking to local letting agents. It may sound excessive, but it can help to protect you in case there is a sudden rise in interest rates. On top of mortgage fees, there are the costs of stamp duty, valuations, surveys and legal work.
Figures show the typical so-called rental void is 20 days a year on average, according to the Association of Residential Letting Agencies. Plus, every time you change tenants there may be redecorating costs, as well as unexpected bills when things go break or go wrong. For example, while an average yield of 5. Ten tips for buy-to-let: How to make investing in property work. Finding the right property, and understanding the local market is critical. What type of person do you want to rent your property to: The latter usually want gardens and good schools, while young professionals need decent transport links and are likely to prefer a flat.
Be wary about buying run-down properties you plan to do up. Not only will this drain your spare cash, but the property will stand empty while you carry out repairs. Increasing numbers of homeowners are becoming first-time landlords by renting out their existing property instead of selling it when they move home.
Some lenders will allow you to keep your old mortgage initially — though they may charge a fee or increase your rate. Or, if your bank allows, you could take your current mortgage deal to your new property — particularly if you have a competitive rate. Do not just rent out your property without informing the bank. Not only will you be in breach of your mortgage conditions, you may invalidate your buildings insurance.
Landlords also need specialist insurance — this costs more than ordinary building and contents cover for your own home. Have no illusions — being a landlord can be hard work. A lettings agent can do some or all of the dirty work for you. There are typically two options when hiring a lettings agent: The former is cheaper.
However, should any other problems arise, it will be down to you to sort them out. In addition to finding tenants, the agent will handle repairs and maintenance, chase unpaid rent and carry out inspections of the property. Before you pick a lettings agent, do a bit of mystery shopping.
Call up and pretend to be a prospective tenant. The treatment you receive will give you an idea of how well they will market your property. There may also be an additional fee to set up a tenancy agreement. By law, deposits must be placed in a government-backed tenancy deposit protection scheme within 30 days. Check your agent is regulated by a body such as the Association of Residential Letting Agents and has a redress scheme.
If you manage the property yourself, you will need to pay a solicitor to draw up a tenancy contract for you. 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. 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. We have all read the stories about buy-to-let millionaires and their huge portfolios. Rent should be the key return for buy-to-let. Remember, 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 subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.
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.
However, whereas once you could offset your entire mortgage cost against tax that is now being eaten into and by you will get a maximum 20 per cent tax credit on your mortgage payments.
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.
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 familes or have a sizeable university.
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.
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 major asset when negotiating a discount. Make low offers and do not get talked into overpaying. It pays to know your market when negotiating. For example, if the market is softer and homes are taking longer to sell you will be better able to negotiate.
It is also useful to find out why someone is selling and how long they have owned the property. An existing landlord who has owned a property for a long time - and is cashing in their capital gains -may be more willing to accept a lower offer for a quick sale than a family that needs the best possible price in order to afford a move.
Before you make any investment you should always investigate the negative aspects as well as the positive. House prices are on the up right now but growth has slowed and they could fall again. If property prices dip will you be able to continue holding your investment? Meanwhile, rates are low at the moment and that is encouraging people to invest with rent comfortable covering the mortgage, but what will you do when rates rise?
Consider too the standard variable rate you may move to after a fixed rate period. 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. It now incurs an extra 3 per cent stamp duty surcharge and soon all mortgage interest will no longer be able to be set against rental income before income tax is calculated.
Instead a 20 per cent tax credit will be phased in. Read about tax on buy-to-let here. 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.
Buy-to-let is a business, so be professional. There are typically two options when hiring a lettings agent: let only, and full management. The former is cheaper.
A business plan is always helpful to manage the risks and rewards of your buy to let investment. Download our business plan template for your buy to let property.
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