Despite the adversity the buy-to-let market has recently experienced due to changes in tax legislation on investment properties and landlord’s rental income, property as an investment remains a popular avenue. Many individuals still prefer the concrete evidence of their investment as opposed to the uncertainty of the stock market, and low interest rates that result in cost-efficient mortgages and low yield savings accounts sweeten the deal.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
This won’t always be the case as a base rate interest rate hike is imminent, and hefty stamp duty and tax changes that will undoubtedly affect your bottom line are also poised to take effect. It’s best to strike while the iron is hot if you’re interested in pursuing buy-to-let as part of your financial strategy.
We’ve put together a series of tips to keep in mind if you’re thinking of giving the buy-to-let market a go.
Our first five tips are all about preparing to enter the world of buy-to-let.
(1) Do your research
Your first step should be to conduct research about the buy-to-let market. Doing so will illuminate all the risks and rewards associated with property investment.
A great way to get started is to meet with a financial adviser who will be able to review your portfolio and advise on other investment options if you’re unsure about the potential downfalls of being a landlord.
It’s a huge upfront monetary commitment – one that doesn’t always provide a return, but can and does for many investors.
(2) Location, location, location
Since you’re putting a lot of money on the line, you want to ensure the property you purchase is in a desirable area.
This can mean many things – close to good transport links or motorways for young professionals or near good primary and secondary schools for families and universities for young students – but overall, it should be a location where people want to live.
Proximity to where you live is also a factor if you want to manage your property hands on. Investing where you live is also beneficial as you already know the right places to look for property.
(3) Do the maths
One of the most important factors in deciding whether or not buy-to-let is right for you is if it works financially. You’ll need to take into consideration the prices of homes you are looking to buy and the rental income you could feasibly make.
Lenders that specialise in buy-to-let mortgages usually require a deposit of at least 25% and that the rent you charge covers 125-150% of your mortgage. You’ll also need to consider additional fees charged by your mortgage company, maintenance costs, possible vacant periods, and incidental expenses.
(4) Consider a fixer upper
If you fancy yourself as an interior designer, you may want to include properties that need major renovations in your search. You’re more likely to negotiate a better deal on these types of properties because of all the work needed, and you’ll be glad for the equity you’ve gained if it ever comes time to sell.
To understand if a property is a viable option, use the property developer’s rough calculation – the goal is for the new valuation after renovations to be at least equivalent to the purchase price plus the cost of work and an additional 20% on top of that.
(5) Be realistic
Your initial research into buy-to-let will hopefully shed some light on what you can expect in the business.
Now you’ll need to prepare for all eventualities because the market and industry are unpredictable.
Consider the answers to these questions:
- What happens if house prices fall and your rental income is affected?
- How will the BoE rate rise impact you?
- What if something happens that prevents you from remortgaging in the future?
- How will you handle not having rental income if your property isn’t occupied?
- How much should you have in an emergency fund?
Be prepared for a never ending parade of changes to tax on your earnings from investment properties too.
If you are considering a buy-to-let property as part of your investment portfolio, it’s advisable to speak to a financial expert to make sure it is the right decision for you. Contact the team at Dental & Medical Financial Services to discuss your ambitions.
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