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| Tips for buy-to-let: the essential advice for property investors | ||
1. Research the marketIf 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 from an income-based investment fund, or 3 per cent on a fixed rate savings account. Remember that the return from an investment in funds, shares or an investment trust through an Isa will see you escape tax on income and get capital growth tax free. You will also have the ability to sell up quickly if you want. The flipside is that you cannot buy an unloved investment fund and set about renovating it and adding value yourself. Investing in buy-to-let involves committing tens of thousands of pounds to a property and typically taking out a mortgage. When house prices rise, this means it is possible to make big leveraged gains above your mortgage debt, but when they fall your deposit gets hit and the mortgage stays the same. Property investing has paid off handsomely for many people, both in terms of income and capital gains but it is essential that you go into it with your eyes wide open, acknowledging the potential advantages and disadvantages. 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. 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. 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 poliicy. 4. Don't be over ambitious - go for rental yield and remember costs 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. For example, a property delivering £10,000 worth of rent that costs £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. 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. |
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| Tuesday, May 17, 2016 | ||
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