Thinking of building your own buy-to-let empire? There are pros and cons to any monetary investment, and when it comes to property there is a wealth of information you should indulge in to ensure you make a good investment.
With recent planned tax and stamp duty changes for buy-to-let properties it may not seem like a good time to invest. However, it’s not all doom and gloom for buy-to-let landlords; current low interest rates stand in good favour for property investors. So if you’re planning on investing in property to let and securing a good buy-to-let mortgage, Pete Mugleston of Online Mortgage Advisor takes you through the areas to investigate to ensure investors build a sustainable buy-to-let business.
Choose the right area
Which town has the best appeal? Is it an area of growth with recent investment? Does it have good transport links? You need to do as much research as possible to ensure you choose a profitable area to invest. This may sound like a simplistic tip, but it’s one of the most important ones. Investing in an area of low economic growth could leave you struggling to let your houses and in-turn could lead to you selling your property for a loss.
Think about your potential tenants
What type of tenant do you want to target? Young professionals or a family? The ways in which you decorate and market your property will have an effect on the tenant type. Families are likely to stay in the property long-term, so if stability is what you require then this could be your best route to take. If you’re looking for a higher yield, then student lets or HMO’s may be the way to go, but of course these come with shorter tenancy agreements, higher maintenance, and often-higher risk.
Look at housing association
For regular guaranteed payments, taking the housing association route can be the best option. It’s hassle-free and pretty much management-free for you. You are, of course, limited to the amount of rent you can charge, but with housing association letting, you’ll never be short of tenants. Just be sure that having council tenants is acceptable to your mortgage lender, as some restrict the tenant type to professionals and families only.
Take out an insurance policy
If non-payment from a tenant is a worry for you then it may be in your best interests to take out an insurance policy to counteract the potential short-term loss of income. Known as ‘rent guarantee insurance’, the preventative measure can cost as little as £50 from a specialist advisor.
Do your sums
You may think purchasing a buy-to-let property is the easiest way to make money on your investment, however it’s paramount that you ensure you have the extra cash to cover a vacant property for months at a time. There won’t always be queues of people wanting to rent your property, so don’t assume it’s a given that tenants will be renting it all year round.
Recent planned changes to tax rules on buy-to-let mortgages won’t prove favourable towards landlords. Under the new system, a landlord’s entire rental income from their property will be taxable, as opposed to the current system where landlords pay tax on the difference between their rental amount and the monthly mortgage interest payment. The changes are due to take effect in April 2017 spanning a period of four years.
Coupled with April’s stamp duty hike in 2016, landlords have been served a double blow. If you’re unaware of the stamp duty change, essentially, buyers of second homes now have to pay 3 percent stamp duty. This is in addition to regular stamp duty and is applied to the entire purchase price of the property. So it’s important that you do the maths and factor in the exact amount of stamp duty when calculating your returns on investment. This is especially important for those considering shorter-term developments and capital growth, as a chunk of the profits will be paid out to the taxman upfront.
Invest in repossessed property
If you’re starting out in the buy-to-let world with a relatively small budget, starting modestly could be your key to success. Repossessed properties can offer a great investment opportunity. But ensure you have the cash to make any necessary interior improvements and that your finance for the property is ready to go – you’ll need to pay 10% upfront and complete on the purchase within a month.
Low interest rates can change
It may be tempting to build a large portfolio of houses in a market with low interest rates, but rates can rise. Always ensure you have the budget to cover hikes in interest. With an unpredictable political climate post Brexit, you can never bank on interest rates remaining stable.
Set up a limited company
One measure that’s on the increase for buy-to-let landlords is to set up a limited company. If you already have a large portfolio property, it could be a good way of mitigating the cost of planned tax increases. The process of transferring your portfolio of properties over to a corporate setting can come with its complications. It could result in a large capital gains tax bill, and in the long run, higher interest rates, so make sure you know the future risks before making the change.