Bricks and Mortar: Why invest in buy-to-let?

Many people have more faith in bricks and mortar than they do in stocks and shares.

Bricks and Mortar: Why invest in buy-to-let?

People will always need a place to live and with the housing shortage it is hardly surprising that once again the popularity of investing in buy-to-let is on the increase. Demand for rental property continues to outstrip supply in most regions of the country.

If done right, there is money to be made in buy-to-let but it is not a get rich quick scheme.

Returns on buy-to-let can be attractive – both by way of capital appreciation and income from rent but there are no guarantees that you will make money and like any other investment you could lose money.

And unlike a passive investment in stocks and shares it also means that you will have to take on the responsibilities and hard work of being a landlord.

Capital appreciation

It is highly likely that the value of your buy-to-let property will rise over 10 to 15 years nevertheless, this is not certain and it is important that your investment generates a return before taking this into account.

Yields

Most market indices track buy-to-let yields in gross terms (annual rental income divided by property value).

There is a general consensus among these various indices that gross yields are currently averaging between 6-6.5%.

But if we drill down into the sector, actual yields can vary widely depending on the type of property with Houses in Multiple Occupation (HMOs) currently returning gross yields in excess of 10%.

But that’s not the whole story. Getting a healthy gross yield is a useful indicator for comparing property types but you need to know the net yield after allowing for the costs of running your property including letting/managing agent fees, insurance, maintenance and void periods. I will be looking at these in detail later on in the series.

Return on investment

Taking out a buy-to-let mortgage can have a big impact on the return on investment as shown below.

Return on buy-to-let investment

Return on buy-to-let investment

As the basic number crunching shows, buy-to-let is definitely an investment worth considering but there are many other factors to take into account. In my next blog, I’ll look at how to decide where to invest.

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About Author

David Whittaker

David Whittaker is managing director of specialist buy-to-let broker Mortgages for Business