Buy to let investment is a big commitment and you’ll have to keep a lot of different things in mind.
Tricky business but our tips will help you avoid the common pitfalls and ensure you’re getting the most out of your investment.
Choosing your investment
Your financial situation
You’ll need to start with a good understanding of your personal finances to see what investment opportunities are right for you.
These are the most important things that you should focus on:
Your savings: look at how much you’ve got in the bank. You should also look at any other assets and investments. Have you put money in an ISA? You can withdraw these savings to put together a bigger deposit. You’re likely to build these investments up again quickly once your property starts producing a rental income.
Your salary: It’s also a good idea to work out how much you can save each year. This is important to make sure you can pay interest on mortgage if your property is empty.
Your credit report: This is sometimes called your credit score. You can now check it your credit report online and for free.
Short term or long term let?
You should decide if you want to invest in a short term or a long term let before you choose a property.
Long term lets are best if you’re looking for a steady income stream every month. But the rental yields are lower so this income stream might not be very big.
If you’re comfortable with irregularity, a short term let will provide you with a higher rental income.
Hands on or hands off?
Think about how much time you can spare and how involved you want to be. Managing your property can be a demanding but rewarding job.
A hands-on approach can save you management and agency fees if you work part time or flexible hours or you’re confident that you can manage your property.
If you’re new to property investment or you have a demanding job, it’s best to appoint a management agency.
There are more and more management packages available. You should know exactly what services your agency will provide – ask your agency what scenarios they won’t sort out for you.
Some services will do the work for you but keep you updated so you always know what’s going on with your investment.
Getting a mortgage
Buy-to-let mortgages are different to residential mortgages and there are a lot of things to keep in mind. Read our full guide on buy to let mortgages.
Appoint a mortgage advisor
It’s always best to consult an independent mortgage advisor to make sure you’re getting the best deal.
They charge fees but they will remove a lot of the research you have to do. They might also be able to find you better mortgage products that aren’t publicly advertised.
Your bank might provide you with a mortgage advisor, but they’ll only be able to offer you products from their own bank. An independent advisor can give you impartial advice and the most competitive interest rates.
Increase your deposit…
A bigger deposit will let you access lower interest rates, because the bank is lending you less.
Most banks won’t lend you more than 75% of the total value of the property, so you’ll have to provide the remaining 25% as a deposit. But if you can cover more of the total property price yourself, you can unlock interest rates as low as 1.5%.
Most of your rental income will probably be spent on interest payments for your mortgage, so a lower interest rate can significantly increase your profit margins.
…But not too much
Don’t put every last penny you’ve got towards your deposit. You’ll have a number of other costs when you buy a property, such as Stamp Duty, mortgage fees and renovations. These costs can’t be covered by your mortgage or deposit and need to be paid by you independently.
You’ll also want to keep some cash as personal savings, because it might take a while for you to start profiting from your rental income.
Finding a property
Always keep your ideal tenants in mind when you’re buying a buy-to-let property. Ultimately, they’re the people you’ll need to attract.
If your ideal tenants are a family, you’ll want to ensure there are nearby schools and parks. If you’re hoping to let to young professionals, you should look for a modern property in a central location.
Pay attention to location
Your property’s location will affect your rental income and your capital growth. Try to think about location from the perspective of your target tenant. Are there good transport links for their needs? Does the neighbourhood suit their lifestyle?
For short term lets it’s best to choose somewhere close to the town’s commercial centre or most popular attractions, because visitors won’t have time to get used to a complicated commute.
Widen your search area
Consider properties outside your local area – they might provide you with a much higher rental income. Areas with more demand from tenants than buyers, like student towns and city centres, will provide much higher rental yields compared to the property price.
Popular tourist destinations, like seaside towns, will provide very high rents for short term lets.
Calculate the rental yield
You’ll need an estimate of how much you’ll earn in rent when you apply for a mortgage and to calculate your investment returns.
Your seller or estate agent might be able to tell you estimated rental yields, but you should always double check using letting websites. How much do similar properties in the neighbourhood ask for in rent?
Look for problems
You need to actively look for any problems the property might have when you go to a viewing because the seller will only focus on the positives.
It’s best to find these issues early on so you don’t waste time on a property that’s not suitable.
Derelict and Project Properties
Transforming a run-down or derelict property can be an opportunity for huge capital growth and a boost to your rental income – tenants will usually pay more for a property that’s more modern or in a better condition.
But project properties take a lot of hassle, work and expense. Construction work can be very costly and some damage might not be reparable. You’ll probably also not be able to get tenants in until the work is complete.
If you don’t have much time to spare, you should look for a property that’s ready to let out without many repairs or refurbishments.
If you do look for a project property, it’s very important to choose a good location – the neighbouring homes should be in good condition and the area should be in high demand for tenants and buyers.
Talk to the tenants
Try to talk to the current tenants before you buy the property. Tenants can tell you more about the condition of the property and what it’s like to live there – if the house gets cold in winter or whether the local transport links are reliable.
This can help you think from the perspective of a tenant and answer questions your prospective tenants might have when you’re trying to let it out.
Ask about costs
You should always ask the seller about the monthly running costs. How much does the owner or tenant pay for electricity, gas and water? How much is the council tax?
You’ll need to cover these costs yourself if you’re providing a short-term let and tell the tenants if they’re renting the property long-term.