Thousands of property owners have profited from investing in buy to let properties over the years. But the process of selecting and owning a buy to let property is more involved than simply picking out a house that you like. Here are some of the factors to consider when choosing to buy property of this type.
See Through Tenants’ Eyes
Remember that you are selecting a property based on the needs of your tenants, not on your own personal tastes and aspirations. Above all, your choice should reflect the requirements of the local market. The points to consider cover the property itself, the location, and the market profile of the typical tenant in the area:
- What property types for let are in short supply?
- Is there demand for flats or houses, how many bedrooms?
- How many bathrooms should there be, per bedroom?
- Is there a lot of woodwork requiring high maintenance?
- Are patios or gardens in demand?
- How much rent do they add?
- Are local tenants commuters? Travel by bus, train or car?
- Is the property on a reliable bus route or close to a station?
- Does it have a garage or access to easy parking?
- Are tenants mostly young professionals wanting restaurants and entertainment?
- Are they older, looking for the quiet life, are they families with children?
Take your time to carefully research these areas, lest you rush into an ill-informed venture. Remember that a buy to let property represents a medium-to-long term investment, so you are in the deal for the long haul.
You might also consider consulting a professional letting agent from ARLA, the Association of Residential Letting Agents, who can help you to evaluate the letting potential of your prospective properties. If a buy-to-let property is bought with the above points in mind, successful letting will be the norm and void period between tenancies will be shorter.
Buy To Let Mortgages
There are two important differences between Buy-to-Let mortgages and standard mortgages available for those buying their own homes:
- Buy to- let mortgages take rents achievable into account when calculating income
- Lenders often expect investor landlords to show significant gearing when building up a property portfolio
There is a wide choice of buy to let mortgages designed to fit a variety of circumstances. Some are tailored to the purchase of a single property, others to the creation of a portfolio of up to five properties. With sufficient equity in the property, second mortgages are also available. Loans of £15,000 to £1 million are available to each investor for periods from five to forty-five years and for up to 80% of valuation.
Buy to let mortgage loan servicing methods are also very flexible. They can include repayment of capital plus interest, interest only payments, pension and endowment or PEP linked, or a mixture of all. There are even mortgages that allow for overpayment, and then use the overage funds to allow the borrower to underpay or take a payment holiday, which can be quite useful for void periods. Buy to let mortgage rates are usually slightly higher than those of other investment mortgages. However, the arrangement fees on buy-to-let deals can be quite high, sometimes ten percent or more, so this must be included in the overall cost calculation.
Rental Coverage
A buy to let mortgage lender will require that the sum of the rental income you receive be sufficient to cover your monthly mortgage repayments. Often lenders require a margin of safety on top, in order to cover any rental voids. For example, if your lender requires 120% rental income, this means that the sum total rent from the property must cover your monthly mortgage repayments plus an extra 20%. You can use a buy to let mortgage calculator to help you work out the income requirements you will need to meet.
Other Costs Involved
On top of letting agents’ commission and management fees, there are other costs involved. The first is insurance, which includes the building and its contents, legal expenses, and rent cover. Then there are the expenses of maintaining the property, which might run into thousands of pounds if the property is in poor condition. If you are hiring a commercial property management firm, and be sure to add their fees to the total operational costs.
There are also ground rents and service charges if the property is held leasehold. You will also have to incur any legal costs associated with drawing up a rental contract. Also, some deals include variable buy to let mortgage rates, so your monthly payments might go up if interest rates increase.
Tenancy Deposits
Many landlords decide to hold a deposit from the tenant, usually equivalent to one or two months’ rent. Landlords taking deposits are required to join a tenancy deposit scheme to safeguard the money and ensure that the tenant is returned a fair amount when the tenancy ends. There are two types of protection schemes: custodial and insurance-based. All schemes include a dispute resolution service at no charge.
Use Due Diligence
Unlike owner-occupier loans, buy to let mortgages are not regulated by the Financial Services Authority. Lenders do not have to follow the same regulations when they sell, market, and advertise buy to let mortgage deals. Be aware that you are responsible for your own financial security, and take the time to read all contracts carefully and ask question if you are unsure of anything.