Buy to Let - Things to consider
Buy-to-let is an investment in property for the purpose of renting it out, usually bought with the aid of a mortgage.
The 1988 Housing Act gave landlords more control over their properties and as a result there has been a steady growth in the privately rented property market.
The availability of buy-to-let loans has also boosted the market for investing in rental properties.
When you invest in a buy-to-let property, with it come certain responsibilities, as you are in effect running a small business with important legal liabilities such as the safety of your tenants.
As stated above, as a landlord you have legal responsibilities, as such you require adequate insurance cover for your property. We can help you with this, just follow the relavant links below for expert advice or an online quote.
Here are a few tips for you to follow if you want to buy-to-let property:
1. Research is the key.
- If you are just getting into buy-to-let, what do you know about it?
- Do you know the pros and cons of the buy-to-let market?
- Make sure buy-to-let investment is what you want.
- Compare buy-to-let with other forms of investment and see which is best for you.
- 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 on a fixed rate savings account.
- Talk to someone who is already in the buy-to-let market, ask them for advice after all they've been in your situation.
- Alternatively look for advice on a landlords forum website, they're packed with lots of good and relevant information, for new or prospective landlords.
2. Choose your area carefully
- The most expensive or cheapest areas are not the only criteria to be considered.
- The area people choose to live is based on a variety of reasons.
- Check out the area for commuter compatibility such as: bus routes, trams, trains and road links.
- Is the area suitable for families, does it have good schools, nearby shops and outdoor spaces like parks?
- Are there universities or colleges nearby to attract students?
- Is the area close to a hospital or a city centre where you might attract young professionals, graduates or nurses?
3. Calculate the odds
- Before go you hunting for your investment property, sit down with a pen and paper and work out the price you can afford for the house(s) you want and the revenue in rent they are likely generate.
- Buy-to-let lenders usually look for rent to cover 130%-150% of the mortgage repayments.
- Most also looked for a 15%-20% deposit, which protects against falling prices.
- A letting agency will charge 10% plus VAT of the rent to find a tenant and 15% plus to manage the property.
- The best rate buy-to-let mortgages also come with large arrangement fees.
- Will it all work out with your investment?
- If the property sits empty for a month or two what will you do?
- Make sure you know how much the mortgage repayments will be.
4. Shop around
- Do not just walk into your 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 millions in profit.
- If you are looking for advice consider using a specialist buy-to-let mortgage broker.
- Remember asking them for information means you are under no obligation to use them.
5. Think about your prospective tenant(s)
- It's not a matter of whether or not you would want to live in your Buy-to-let property, think of the needs and requirements of your prospective tenant(s).
- Who are they and what are their requirements?
- A family will require little in the way of furniture as they'll probably have plenty of their own belongings and need space to put them.
- Students' needs are simple; it has to be comfortable, easy to clean and not too small.
- Young professionals like it modern, stylish and clean cut.
- It is also possible to take out an insurance policy against your tenant(s) failing to pay the rent, usually known as rent guarantee insurance, it can be purchased as part of a buy-to-let insurance policy or as a stand alone product.
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If you would like to speak to us about an insurance quote please email us and we'll get back to you as soon as possible click here and we'll be in touch asap.
- Remember your tenant(s) require insurance cover for their personal possessions, they can get the cover they need by visiting our tenant's contents insurance page.
6. Be Cautious
- We have all heard the stories of buy-to-let millionaires with their huge portfolios.
- But the days of huge house price rises are gone, so experts advise the investment for income rather than short-term capital growth.
- The key return for buy-to-let should be rent.
- Mortgages for buy-to-let are mostly done on an interest-only basis, so the principal amount borrowed will not be paid off over time.
- If the rental return is substantially greater than the mortgage payments,you have a chance of saving or investing any extra cash generated, after you have built up a suficient emergency fund.
- After the mortgage, costs and tax are taken care of, you will want the rental income to build up over time, so that you will, potentially, be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term.
- Which means you will have benefited from the rental income, paid off the mortgage and hold the property's full capital value.
7. Consider looking further afield
- Most buy-to-let landlords look for properties near to their own homes.
- Your own area or town may not be the best area to invest in buy-to-let property.
- There are advantage to being close to your buy-to-let property, being able to keep an eye on it for instance and easy access for maintenance, but if you employ an agent in a different town they should do that for you.
- Look further afield and consider towns that are popular with families, with good commuting links or have a university nearby.
8. Get the best price
- As an investment property purchaser you have an advantage similar to a first-time buyer when it comes to negotiating the price of a property
- You do not have to sell another property to buy the next, so you are not part of a chain and it's less likely the sale will fall through.
- This gives you an edge at the negotiating table, when looking for a discount.
9. Know the pitfalls
- Look at all the pros an cons of buy-to-let property investment, before you make any investments you need to thoroughly investigate both the downside and the upside aspects of buy-to-let market.
- House prices are in a depressed state at present, if this situation continues can you continue with your investment?
- Properties can sit empty, and be a drain on resources, even in popular areas.
- 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.
- Maintenance of the property is often needed, as things can go wrong.
- If you do not have sufficient capital reserves in the bank to cover any important repairs to your property, such as replacing a boiler, do not invest yet.
10. Consider how hands-on you want to be
- Purchasing your buy-to-let property is only the first rung, on the landlords' ladder.
- Will you employ an agent to manage the property or will you rent it out yourself?
- 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.
- Your profits may be higher by renting the property out yourself but be prepared to invest considerable time to allow for viewings, advertising and repairs.
- Be choosy if you are going to use an agent big doesn't always mean best, many independent agents offer an excellent and personal service
- Make a shortlist of agents, big and small, then compare the services that each can provide before you choose.
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