These days first time buyers in the property market face the challenge of mortgage approval, due to the rising prices on the property market making it more and more difficult to save up for a deposit. This has led to an increase in rental incomes over the last few years, as many have found themselves unable to climb onto the property ladder and trapped in the rental area. For this reason, letting a property can be a good income investment. However anybody considering this option needs to know all of the risks involved with buy to let mortgages.
- Could your money do better somewhere else, in another investment?
- If property prices rise, you may make a gain above your mortgage, but what will happen if prices drop, will you be able to continue holding your investment?
- What if the house is unoccupied for a long period of time? Will you still be able to cover your mortgage payments?
- Factor in the costs of preparing the property to be let, decorating, furnishings etc…
- Take into account insurance, any letting agent’s fees and general running costs
- If the house needs a major repair, e.g. roof, boiler etc.. will you be able to pay for it?
Buy to let mortgages are always more expensive than residential mortgages as they pose a bigger threat to the lenders. Generally speaking, lenders want to cover 125% of the mortgage interest repayments on a loan and may expect 25% or more as a deposit.
The majority of buy to let mortgages are interest only, which can usually offset the mortgage interest against your tax bill. Being interest only, once the term is up, you will either have to sell the property or find another way to repay the loan.
Although it may sound obvious, it is vital that you shop around to find the best loan and don’t accept the first offer. As a first time investor, you are not part of any chain and therefore in a position to negotiate a better deal.
Buying a property in need of renovation is another way to improve your investment, you can offer a low price (making sure it is low enough to cover refurbishment) then see a better return once the property is newly renovated and let at a higher rate.
Thorough Research Pays Off
One of the most important considerations when buying to let, is the location of your property. Many landlords want to buy a property near to where they live for convenience purposes, but this may not necessarily be the ideal catchment area for rentals. You may want to consider looking further afield. When looking to rent a property, tenants usually want to be in a popular, safe area with good transport links on a commuter’s belt.
Finding Your Ideal Tenants
Who are you targeting? Different sectors of the population have differing priorities and you do not want the property to be unoccupied. As a buyer you should view possible properties through the eyes of your targeted tenants when house hunting. Your own personal tastes, likes and dislikes are not relevant as you are not house hunting for yourself.
Will you be using a letting agency? You will have to pay a maintenance fee, but on the other hand if anything goes wrong, they will have a good network of plumbers, electricians etc.. and the problem will be dealt with on your behalf. If you are not using a letting agency, then be sure to thoroughly vet any prospective tenants, as once a problematic tenant is in the property, he/she can be very extremely difficult to remove.
What kind of tenants are you hoping to attract?
If you are planning to let to students, the property needs to have good transport links and be located near to the university/college, as well as shops and restaurants. Students typically don’t expect luxurious furnishings, but the property must be neat, comfortable and clean.
Good transport links and popular areas with local conveniences are once again important. Furnishings should be stylish but not over bearing, no brightly coloured cushions, rugs or trinkets etc.. Furnishings should also be kept minimal, as many young professionals often like to buy or bring pieces of their own furniture.
Being in an area near good schools is an important factor for families when choosing a rental property, transport links, close to local amenities and being on a commuter’s belt will also make a difference. A family usually brings its own furniture, and will therefore usually find a blank canvas more attractive. Another extremely important consideration is a garden. Space is more often than not, the key deciding factor for a family with young children.
Looking After Your Tenants
Taking care of your tenants is a good investment as they are more likely to stay with you long term if they feel as though their landlord is reasonable and wants to keep the property well maintained. Most landlords visit their properties every 6 months for an inspection. Maintaining a good relationship with your tenants is good for business, they are more likely to recommend you if and when they move on.
It’s important to remember that by letting a tenant make their own mark on a property, they are likely to feel more at home and therefore more likely to look after the property and stay long term.
Get in touch with Gary Harper today for more advice T: 01743 364377 M: 07887 920121.