Why choosing a buy-to-let property requires an entirely different approach.
Whether you’ve already got experience in the buy-to-let game, or you’re just starting out as an investor, you’ve probably already purchased a property for yourself, but buying a property for a buy-to-let investment requires an entirely different approach.
From calculating how much you’ll make from your property to ensuring you target the property to the right tenants, there are important steps to take when finding a successful property investment.
First thing to work out – the budget.
Investing in a buy-to-let property usually means putting down a pretty large deposit, and unless you have the finances to buy it outright, it also means taking out a mortgage, so it is important to work out exactly how much you can afford to spend and setting a strict budget.
It’s important to remember that buy-to-let mortgages are typically more expensive than standard mortgages, this is due to them requiring a deposit of at least 25% of the property’s value, which is 15% more than the 10% for standard mortgages, interest rates are also often higher.
It’s also important to factor in the rent you can expect to get from tenants. Lenders will typically want this to cover between 125% and 145% of your mortgage payments, meaning that if your monthly mortgage payment is £500, you should be charging between £625 and £725 in rent.
It’s also vital to set aside some money for maintenance as well as for periods where the property may be empty between tenants as you wont be receiving any rent during these periods.
What makes a sound investment?
The answer can be different depending on why you’re investing in property. If you’re focussed on long-term capital growth or working on improving a property to sell in the future, then it’s important to look for a property in an area with strong growth potential. If you’re investing to receive a steady income whilst owning the property, it’s important to choose a property with the potential for a healthy rental yield.
What’s a rental yield and how is it calculated?
The rental yield is the measure of ‘return’ or how much you earn from a property investment.
Rental yields are calculated as a percentage of the property’s value. Generally, yields of 5% or more are attractive to landlords, but whether this is achievable depends on where you buy and the rental costs in that area.
For example, a rental income of £10,000 per year on a property costing £200,000 gives you a 5% yield. A rental income of £20,000 a year on the same property gives you a 10% yield, and so on.
The average UK yield is 5.2%, but properties within London may yield less because of the higher property prices.
What sort of tenants should I appeal to?
The answer is key to finding the right property to invest in, so it is important to consider whether you want to rent to families, students or young professionals, as these people will be seeking very different properties.
It is important to think about what your target tenants will be looking for from a property, for example, a modern, well-maintained property close to public transport is more likely to appeal to young professionals, whereas a family will be seeking a larger home, closer to parks.
Remember that whoever you rent to, there are documents you must provide, including a tenancy contract. The most common type is an assured shorthold tenancy (AST), lasting for a period of between six to 12 months. You also need to place the tenants’ deposit in a deposit protection scheme, or you risk being fined.
Where do I start my search?
Think carefully about what areas you’d consider buying in, then make a list of these areas to begin your search.
You may want to start close to home, since you’ll know the area and can check on the property. But if you’re going to pay a lettings agent to manage the property, you may also want to look further afield.
What sort of property should I buy?
The right investment property may be entirely different to a home you would buy for yourself, which is why it’s important to make decisions with your head and not your heart. For example, you may love older properties, but these can come with hefty maintenance bills.
Ultimately, if you’re seeking to let as quickly as possible, you want a property with broad appeal. So, it’s important to consider the following:
Should you buy a house or flat? This will affect the type of tenant you’ll get. For example, young professionals may want an easily maintained flat, but a growing family is much more likely to go for a bigger house.
New or old build? You may find there are fewer issues with a new build and that they are less costly to maintain. However, older buildings often have more character, and may be cheaper to buy, particularly if they need some work.
A garden? Gardens, in general, have broad appeal – provided tenants want to maintain them. For some, it could be an unnecessary hassle.
And how do I buy?
You can, of course, go down the traditional route and buy through a local estate agent, or find a private seller.
The major difference will be securing a mortgage. Lenders have different criteria and processes for arranging buy-to-let mortgages compared with standard mortgages. Some landlords choose to use a mortgage broker to help them secure the best deals.
Alternatively, you may be able to bag a bargain at an auction. This is a popular option among experienced investors in particular.
Buying at auction may also avoid the lengthy process of purchasing a property through the conventional process, when you may be stuck in a chain. But make sure you do your research and understand the pros and cons before going down the auction route, as major repairs can be costly.