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5 Tips for Buy-to-Let

5 Tips for Buy-to-Let

Published by: Tom Soane

Thinking about investing in a buy-to-let property? Here’s Pink Street’s top five tips on how to do so…
 

1. Choose a promising area to invest in property

Promising does not mean most expensive or cheapest. Promising means a place where people would like to live, and this can be for a variety of reasons.
Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
You need to match the kind of property you can afford and want to buy with locations that people who would want to live in those homes would choose.
These questions might sound overly simplistic, but they are probably the most important aspect of a successful buy-to-let investment
In most cases people tend to invest in property close to where they live. On the plus side, they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Yet it is also worth bearing in mind that if you are a homeowner then you are already exposed to property where you live - and looking for a different type of home in a different area might be a good move. 

2. Do the maths on buy-to-let

Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.
Buy-to-let lenders typically want rent to cover 125 per cent of the mortgage repayments - often now 150 per cent - and most now demand 25 per cent deposits, or even larger, for rates considerably above residential mortgage deals.
The best rate buy-to-let mortgages also come with large arrangement fees.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment work out?
Don't forget to factor in maintenance costs.
What will happen if the property sits empty for a month or two?
These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.

3. Shop around and get the best buy-to-let mortgage

Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.
It pays to speak to a good independent broker when looking for a buy-to-let mortgage. They can not only talk you through what deals are available, but they can also help you weigh up which one is right for you and whether to fix or track.
You should still do your own research though, so that you can go into the conversation armed with the knowledge of what sort of mortgages you should be offered.

4. Think about your target tenant

Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.
Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious.
If they are young professionals, it should be modern and stylish but not overbearing.
If it is a family, they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home.
These tenants will stay for longer, which is great news for a landlord.
It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance.

5. Don't be greedy, go for rental yield and remember costs

We have all read the stories about buy-to-let millionaires and their huge portfolios.
But while you may expect long-term house price rises, experts say invest for income not short-term capital growth.
To compare different property's values, use their yield: that is annual rent received as a percentage of the purchase price.
For example, a property delivering £10,000 worth of rent that costs £200,000 has a 5% yield.
Rent should be the key return for buy-to-let.


How to work out the return on your buy-to-let investment

Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return on investment subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.
For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.
£75k mortgage at 5% interest rate = £312.50
£500 rental income x 12 = £6,000
Difference = £2,250
Deposit + buying costs = £27k
Annual return = 8.3%

Don't forget tax, maintenance costs and other landlord expenses will eat into that return.
Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.
This is tax efficient, as you can offset mortgage payments against your tax bill.

However, whereas once you could offset your entire mortgage cost against tax that is now being eaten into and by 2020 you will get a maximum 20 per cent tax credit on your mortgage payments.

If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.

Remember though, people rarely buy a home outright and they come with running costs, so mortgage costs, maintenance and agent’s fees must be worked out and they will eat into your return
.
Once mortgage, costs and tax are considered, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term.

This means you will have benefited from the income from rent, paid off the mortgage and hold the property's full capital value.