10 Tips for Buy-to-let Investments

Wed 13 Jan 2016

There are many things you should consider before purchasing a property as a buy-to-let investment. From thinking about who your target tenant might be to working out the return on your investment.

10 tips for buy-to-let investments to help you on your way...

1. Research the market 

Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. 

Before beginning your property search work out your finances;note down the cost of the houses you are looking at and the rent you are likely to get. 

Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. 

Don’t forget to factor in maintenance costs, consider the possibility of the property sitting empty and make sure you know how much the mortgage repayments will be and if it is a tracker allow for rate rises.

2. Choose the right area 

The right area does not mean most expensive or cheapest. Arguably the most important aspect of a successful buy-to-let investment is buying a property in an area where people would like to live and this can be for a variety of reasons; ask yourself 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? 

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.

3. Consider looking further afield

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.

4. Shop around and get the best mortgage

Do not just walk into your bank and building society and ask for a mortgage. It pays to speak to a good independent broker when looking for a buy-to-let mortgage. They will not only talk you through what deals are available but they can also help you weigh up which one is right for you and whether to fix or track.

John German Estate Agents work closely with APT Financial Management, who are on hand to look at the right mortgage for you. 

5. 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: The property needs to be easy to clean and comfortable but not luxurious.

Young professionals: It should be modern and stylish but not overbearing. 

A family: They will have plenty of their own belongings and will 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 you as a landlord.

6. Don't be over ambitious - go for rental yield and remember costs

You may have read all 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. 

7. Work out the return on your investment

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.

For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.

£75k mortgage at 5% interest rate = £312.50

£500 rental income x 12 = £6,000

Difference = £2,250

Deposit + buying costs = £27k

Annual return = 8.3%

Don't forget tax, maintenance costs and other landlord expenses will eat into that return.

8. Interest-only 

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. 

9. Factor in additional costs

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.

10. Join our mailing list

Register your details with us and we’ll keep you up to date on any potential buy-to-let properties we have for sale.

"John German would definitely be our first choice if we decide to move house in the future. All the buyers had been vetted properly so we avoided time wasters which was much appreciated as there's nothing worse than no shows."
Mr A Smith - Happy Clients

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