Does it add up to a good investment?
Before you think about looking around properties, write down the cost of houses you are looking at and the rent you are likely to get. Traditionally buy-to-let lenders wanted rent to cover 125% of the mortgage repayments, although many had relaxed this in the tail-end of the boom years. Most also looked for a 15% deposit, which protects against falling prices.
After the financial crisis, many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. They generally also require a minimum income level. The best rate buy-to-let mortgages also come with large arrangement fees, which have to be taken into account.
Once you have the mortgage rate sorted - and remember to allow yourself leeway for rate rises in years to come - be clinical in deciding if your investment will work out. What will happen if the property sits empty for a month or two? Will you manage it yourself or employ an agent? How much will the agent charge? Make sure you know how much the mortgage repayments will be and, if it is a tracker, allow for rates to rise.
Like most investments, the timing is important
Existing investors may be benefiting from lower interest rates, many will have fallen on to their lender's standard variable rate and the slashing of base rate down to 0.5% has done them a favour. This is especially true for many as a lot of buy-to-let deals do not have typical SVRs but a revert rate that tracks the bank rate.
However, new mortgage deals continue to be expensive in comparison to residential deals and it is generally acknowledged that whilst there can be many positives it is still a tough time to get into the buy-to-let market.
Property prices have fallen to more affordable levels, have hopefully levelled out and will hopefully start to rise, however you will need a big deposit and should not expect a quick return - be prepared for the long-haul!
In our opinion, if investors are willing to accept that the value of their property may vary both up and down, and can ensure their property meets the criteria of at least 75% to 85% loan-to-value and returning 125% of monthly mortgage payments, then it can be a good long-term investment.
Get the best mortgage rates
This may be obvious, but don’t just walk into your bank and building society and ask for a mortgage. There are many other options and consider using a specialist buy-to-let mortgage broker. Remember asking them for information means you are under no obligation to use them, but in our experience advice in the current market conditions can make all the difference. The lending criteria can vary between providers, with some using a fixed percentage rather than a pay rate to calculate acceptable levels.
What are the investment returns?
The "yield" is a rent-to-property price calculation. Remember however that if you are buying using a mortgage, this will not be the return you actually get.
To quickly work out your annual return on investment deduct the annual mortgage cost from the rental income and then work this sum out as a percentage of the deposit you initially put down.
£100,000 property that could rent for £500 per month:
£75k interest only mortgage at 5% = £3,750
£500 rent x 12 = £6,000
Difference = £2,250
Your capital outlay = deposit + buying costs = £30,000
Giving an annual return = 9%
This is the gross figure and may be subject to income tax, maintenance costs and other landlord expenses. Rent should be the key return for buy-to-let. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will remain the same throughout the term and often repaid on the sale of the property.
When considering entering the buy-to-let market there are many factors to consider. A significant element to establish before you do anything is to establish your business plan and whether you are looking for rental yield or capital growth. Do your research as there are advantages and downsides to both. In an ideal world an investor would aim for a balance of both although this can be difficult to achieve.
If you can get a rental return substantially over the mortgage payments, and you have built up a good emergency fund, you can start saving, put towards a deposit for further investments, pay off the mortgage or take an income from any extra cash.
Equally if you have succeeded in gaining some capital growth, re-mortgaging may allow release of capital to use as a deposit for your next property.
Remember however, people rarely buy a property outright and they come with running costs, so mortgage costs, agents fees, maintenance not just of the internal but possibly the external fabric or contribution to a factoring service along with additional costs of being a landlord must be taken into account. You must work out all your costs and allow for voids and other contingencies as they will eat into your return.
As this purchase will not be your main residence there are tax implication potentially on both annual income and any capital growth at the time of sale. Buy-to-let properties are subject to CGT at either 18% or 28%, on gains above the annual exemption when sold.
Get the right price
As a buy-to-let investor you have advantage when it comes to making an offer either through negotiation or at a closing date. If you are not reliant on selling a property to buy another, then you represent less of a risk of a sale falling through and even if offering slight less you may be seen as the preferred bidder . Remember that this is business so do your research and do not get emotionally involved, particularly at a closing date and end up over paying.
For further information see our article on Buy to let it’s a business.