Talk of “the housing market” often focuses on buying property and in particular the challenges facing first time buyers. There are, however, a number of people for whom renting is an appropriate lifestyle choice. The most obvious example of this is younger people, who are still forming relationships and establishing themselves professionally. Renters, of course, need landlords, which opens up opportunities for investing in rental property. There are various ways to go about this, so those interested in this area might be well served by getting some financial advice from a qualified financial adviser before deciding which option is right for them. Those who are seriously considering buying a property to let out should think about all the implications before they start.
Financing a buy to let property
Unless you can afford to buy a rental property outright, you will need to look for a specific buy-to-let mortgage. While these are officially exempt from the affordability criteria which have been applied since April 2014, potential investors need to be aware that their application is still likely to be looked at very carefully. Buyers also need to understand that the deals on offer in the buy-to-let mortgage market can be very different from those available to people buying a home to live in. Interest rates and fees, for example, can be substantially higher and lenders may insist on bigger deposits. There may also be a preference for younger borrowers, i.e. people who will have paid off their mortgage by the time they retire or at least very shortly afterwards.
A buy to let mortgage can last longer than a tenancy agreement
One of the reasons lenders look carefully at buy-to-let mortgage applications is that mortgage repayments have to be made every month, regardless of whether or not there are tenants in the property at the time. Potential buy-to-let investors will therefore need to have funds set aside to cope with vacant periods (or problems with tenants not paying or paying late). These funds have to be viewed separately from general savings.
Be clear about the difference between rental income and rising house prices
Renting out a property will bring you an income, but you will only be able to turn rising house prices into hard cash if you sell it. It is, however, risky to assume that you can pay off a mortgage by selling the property towards the end of the term. If the market value of your investment property falls, for any reason, then you will be left to deal with the shortfall. This is a particular risk for those with interest-only mortgages, which are currently far more common in the buy-to-let market than in the residential one. Potential property investors should also be aware that profit on the sale of buy-to-let properties is liable to be subject to Capital Gains Tax.
Remember to budget for running costs
Potential landlords will need to decide whether or not they are going to work through an agency or be “hands on”. Agencies charge fees but can save time and hassle. In either case, buy-to-let properties need much the same care and maintenance as any other home and one way or another these costs will come back to the owner of the property.
Be realistic about your market
It may be an old cliché but location matters a lot in the property market. There are therefore two key questions to ask when looking for buy to let properties. These are “What is the going rate for rentals and sales in the area?” and “Who are my potential tenants?”
Student towns have obvious appeal to buy-to-let investors, as do places where there are lots of young adults, particularly young professionals. There are, however, other markets, for example in some areas family homes could be a very good investment.
As you can see, there’s actually quite a lot to becoming a buy-to-let property investor. The golden rule, however, is always to ensure that you can realistically expect a rental income which is at least high enough to cover all the costs involved.