In this post, we would like to share with you some basic information on how does buy to let work. Also, you’ll find our top 10 tips to ensure buy to let success.
1. Choosing the right property at the right price
Investing in the property market is usually all about capital growth. So, choosing a property that is more likely to increase in value is the most important decision you will make. For this reason, buying at the right price is absolutely critical.
If you are patient and knowledgeable, search for an opportunity to acquire an asset below its real market value. The key for you is to do your research, work out what everything is selling for in and around the area. Then, you’ll discover that soon you’ll become very good at working out what a property is worth. You’ll know a bargain when you see it. Never consider purchasing a property in an area that you are unfamiliar with. If you do find a property that you like and are unsure of its real value, I would suggest contacting an independent surveyor and ask them to survey on the market value of the property. Always focus on making the right investment choice financially.
Ensuring that you have a steady rental income stream is also vital because this cash flow will make the property more affordable and provide a regular income from day one.
Different classes of residential property – flats, houses and land – can outperform each other over time. For example, vacant land will provide no rental income. However, it may appreciate more quickly if purchased in an area with limited supply. Some areas offer higher rental yields, but it is important that you do your homework as often these properties provide lower capital increase on the properties.
It is also important that your property suits the demographics of tenants in the area. For example, if it is near a university more bedrooms will be in greater demand than a big backyard for kids to run around. A family home that is close to schools and parks on a quiet street will be more desirable than a property on a busy road.
2. Do your sums – Cash Flow is always king!
Investing in property is a proven path to long-term wealth. However, you should consider it a medium to longer term type of investment. In this way, you’ll want to make sure that you can afford to maintain your mortgage repayments over the long-term. You should be in a position to keep your investment property until you are good and ready. If you were to encounter some financial stress, this could force you to offload the property at the wrong time or for less value.
Once you own an investment property, it can be quite inexpensive to keep it and service the loan. In fact, you earn rent and get a tax deduction on many of the expenses associated with owning the property. Remember that over time rents to tend to increase as does your own income. So, expect things to get easier over time.
Here is an example of what it might cost you to own an investment property. We recommend that you look at cost of servicing the loan on an after-tax basis. This way, you can put the cost in real terms for you.
Make yourself aware of taxes involved in property investing and add these into your calculations. Advice from your accountant is vital in this regard as these can change over time. Stamp Duty, second home tax and Capital Gains Tax need to be taken into account. Remember that interest rates can vary over time. Yet, the good news for property investors is that in times of rising interest rates you can normally expect to be able to in.
3. Find a good property manager and let them do their job
A property manager is usually a professional in their field. Their job is to keep things in order for you and your tenant. They can help you with ongoing advice and help you manage your tenants and get you to get the best possible value for your property. A good property manager will let you know when you should review rents and when you shouldn’t. Find out how to be an effective property manager.
The property manager should be able to give you advice on property law, your rights and responsibilities as a landlord – as well as those of the tenant. You should approve all incurred costs (other than certain emergency repairs), in advance. However, they’ll also take care of any maintenance issues.
The property manager will also help you find the right tenant and make sure they pay their rent on time. It is important also that you don’t interfere too much with tenants because there are laws that give them rights. So, always try to respect them. Although you should make regular independent inspections of your property to make sure that the tenant is looking after your investment, always go through your agent and give plenty of notice.
The good news is that the cost you pay to your managing agent is usually a percentage of the rent paid. Also, it is tax-deductible.
4. Understand the market and the dynamics where you are buying
Consider what other properties are available in the immediate area and speak to as many locals and real estate agents as you can. They’ll let you know if one side of a street is considered superior to the other. Make sure you do the legwork and consult professionals you can trust. Accessing independent information from a source can give you information on average rents, property values, demographics and suburb reports.
It is also a good idea to find out what changes may be happening in the area. For example, a major construction next to your property could make it harder to find a tenant at the right price.
5. Pick the right type of mortgage to suit you
There are many options when it comes to financing your investment property. So, get sound advice in this area as it can make a big difference to your financial well-being. It is surprising how many people spend too much time researching mortgages in an attempt to save a few pounds a month. Instead, they’d rather spend a bit more time on researching their local property market where much bigger gains can be had.
Interest on an investment property loan is generally tax-deductible. However, some borrowing costs are not immediately deductible and knowing the difference can count. Structuring your loan correctly is critical and this should be done with the help of a trusted financial advisor.
Whether you choose a fixed rate mortgage or a variable rate mortgage will depend on your circumstances. Anyway, consider both options carefully before you decide. Over time variable rates have proven to be cheaper, but selecting a fixed rate loan at the right time can really pay off. Remember that rate usually rises in line with property prices. So, increasing interest rates are not always bad news for property investors as they have more than likely had a win on the capital gains front.
6. Use the equity from another property
Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property. Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage.
7. Negative gearing
Negative gearing can offer property investors certain tax benefits if the cost of the investments exceeds income it produces. You can deduct your borrowing and maintenance costs of the property from your total income. If you are actually making a loss on the property, the advantage is that the loss can be used to reduce the amount of tax on your other earnings.
8. Check the age and condition of the property and facilities
Even with negative gearing, needing to replace the roof or hot water service in the first few months of ownership could make a significant difference to your profits. Actually, it can really damage your cash flow.
It is therefore advisable to engage a surveyor, a gas engineer, an electrical engineer before you purchase (and then once a year) to conduct a thorough inspection of the property to find any potential problems.
It is also wise to use a qualified tradesperson who is licensed to carry out the work and who has adequate insurance to protect you against poor workmanship.
It’s not always a bad thing to buy a property that is not in peak condition. In fact, you get the opportunity to improve the value of the property by fixing the place up. This can increase your returns for both capital growth and rental income.
9. Make the property attractive to renters
Go for neutral tones and keep the kitchen and bathroom in good condition. You’ll find that you will attract better quality tenants if you have a well-presented property. Surely, the last thing you want is a bad tenant.
Another point that is subject to debate is whether you should buy a property that you’d be happy to live in yourself. Some people believe this will mean it is appreciated more and some people don’t care. However, think about differentiating between your own home and your investment to avoid becoming overly involved. Remember it is the home of your tenant and not your own.
For me, it is important to remember the day will come when you’ll want to sell the property. If a home is appealing to not only property investors but also owner-occupiers, you’ll have a wider market for the property. This will maximise your selling price. Generally, owner-occupiers are willing to pay a little more for the right property. In fact, it becomes a more emotional rather than a logical purchase.
10. Take a long-term view and manage your risks
Remember that property is a long-term investment. You should not rely on property prices rising straight away. The longer you can afford to commit to a property the better. Furthermore, as you build up equity then you can consider purchasing a second investment property.
Finally, remain aware that unlike shares or managed funds, you can’t just sell part of your investment property if you need money. In short, be cautious, but consider that record migration levels and a rental property shortage are crucial factors favouring investing in property.
If you have any questions regarding how does buy to let work and how to ensure your success with it, do not hesitate to request your 30-minute free property consultation from Pelin Martin, Property Manager of Blue Crystal Property Management on +0208 994 7327 – firstname.lastname@example.org