What is a buy-to-let Investment?
Buy-to-let is purchasing a property with the intention of letting it out. As with most investments, it is a case of putting your capital in to something with the idea of getting a return or a steady income. Basically, you are after a rental return, capital growth or a combination of the two. There are a number of ways a buy-to-let investment varies to your standard investment in stocks or shares:
- You can’t just sell a property and get your money out instantly. It takes time to sell and also time to go through the legal work.
- There are a number of legal responsibilities as a landlord.
- There are a number of new tax implications being phased in over the next few years. This doesn’t make property a bad investment, but you need to be aware of what they are.
- You can leverage your initial investment by getting a mortgage. This is also known as gearing.
Aims of buy-to-let investing?
Rental return: This is quite often the primary goal of most investors with the rent covering the mortgage as well as all other costs and still providing a profit.
Capital growth: If you are clever with where you invest then you can achieve the rental return as well as get the capital growth. This quite often comes down to location!
Risks of buy-to-let investing
As with most investments, your asset can go up as well as down.
Along with the property value going up, but also potentially down, the rent can also do the same. For the most part, rents do tend to go up although you need to be aware that this isn’t always the case.
At the end of the tenancy, it can potentially take time to find another tenant and there could be a void period.
You will have responsibilities as a landlord and therefore should something go wrong with the property, it is your responsibility to fix it.
Costs of buy-to-let investing
Stamp duty: this is usually the largest cost involved with buying a property and since April 2016, will cost you an extra 3% to purchase a property if it isn’t your primary residence.
Conveyancing and surveyor fees: These vary depending on the size and location of the property but can quite easily add up to several thousand pounds. The survey you should get will depend on the type of property, although it is worth getting some advice which one is best for you.
Mortgage fees: To get the best mortgage product on the market, you will quite often need to pay an arrangement fee for the mortgage to be set up.
Property maintenance: from time to time, things do break so you will need some funds put away for when this happens.
Insurance: You will have building and landlord. Again, these vary in cost depending on the size and location of the property
Service charge: if you own a freehold house, then it is quite possible that you won’t have one of these although if you own a flat then you will. The service charge will vary from flat to flat although covers the upkeep of the building as well as various other things.
Lettings agent fees: These can be up to 15% of the annual rent if the property is being managed. You can quite often find a cheaper agent, so it is worth looking around.
How to choose the right buy-to-let property
There are two key things to take in to consideration when choosing a buy-to-let property:
Your target market: Who is likely to rent your property? Is it going to be a family and therefore schools are important? Or is it young professionals where proximity to transport and amenities are important?
Supply and demand: What kind of property are the target market looking to rent in the area you’ve chosen and how quickly is it likely to rent? Also, how many of them are currently on the rental market. Also, if you wanted to sell the property quickly, could you, if you needed to. It is imperative you do all of your research beforehand.
Buy-let-let and tax
Before investing in a buy-to-let property, you will need to consider how tax will affect you. Some of the above costs can be used to reduce your tax bill, softening the blow on your returns. There are new tax laws coming in from April 2017 that will affect most landlords – it is worth getting some expert advice to know what your responsibilities are.
How to calculate your returns
This very much depends on what your need is from the investment and whether you are primarily after an income or capital growth.
The main way to calculate your return is by working out the yield. This is done by dividing the net income by the property value.