Investing in a buy-to-let property remains attractive to many. Some make a killing while others come unstuck, so here are a few important considerations before you take the plunge. With diligent research and some careful thought up front, you can make sure you’re in the winner’s camp!
Keep Up To Date with Legislation and Current Events
If there’s one thing in life that never changes, it’s that change happens all the time. When you have a buy-to-let property, you can’t afford to sit on your laurels and assume that what’s good this year will still be good next year.
For instance, in October (2015) new legislation affecting smoke and carbon monoxide alarms becomes law, with hefty penalties for landlords who don’t comply. Fines for not having up to date alarms fitted in a property will run at around £5,000. Whilst the cost of installing approved alarms won’t be huge for many, it’s something that still needs action over and above routine maintenance.
General current affairs and world events can also impact the property market, and may affect your circumstances as a landlord. Greece may seem like a long way removed, but the financial situation over there impacted the London property market, changing the popularity of certain sectors of the property market.
Interest rates, stamp duty, and inheritance tax are other changeable factors that could impact future finances and buy-to-let profitability. You also need to keep an eye on changes to income tax rules and what you’re allowed to offset against tax. For instance, from April 2016 you’ll only be able to claim for maintenance expenditure you actually make, whereas previously an automatic 10% was allowed.
Be Prepared for Long Term Investment
Buy-to-let is a long game when compared to other forms of investment. You’re looking at around 15 to 20 years, for most people, especially if you’ve bought on a mortgage with a minimal deposit. Providing you’re not looking for a fast return on your investment, though, property remains a good bet, particularly in today’s current market situation, with a higher number of people choosing to rent rather than buy.
Do Your Sums
The best way to make a smart judgement about whether buy-to-let is the right investment choice, is to work out the figures before you even begin looking round for somewhere to buy. Things to consider include:
• Current sale prices compared to likely rentals?
• Will your rent cover around 125% of mortgage repayments?
• Check on the mortgage fees you’ll incur from various lenders.
• Will you have enough money left over for maintenance?
• Can you cover void periods (when the property stands empty)?
• Insurance costs
• Tax implications (although there are some allowable expenses)
Buy-to-let mortgages are different from residential ones, and the government is cracking down on those who are renting out properties with a residential mortgage. One of the biggest impacts, which many first time landlords don’t realise, is that buy-to-let mortgages generally have higher interest rates. This is because of the higher risk of default should extended void periods result in cash flow problems.
There are several different types of mortgages available, including fixed term and interest trackers. Which is right for you will depend on your individual circumstances, but good advice from a mortgage broker before you make a decision will help you avoid potentially costly mistakes down the line.
Buy-to-let remains a good investment for the right people, but it’s not something everyone should necessarily jump into. Like any other business, it’s a little more complex than it appears on the surface. That doesn’t mean you should discount the opportunity. Being aware of all the circumstances and risks surrounding any investment makes for wiser, more profitable choices.