Part Two Money’s Top Ten Buy To Let Tips
6. Don't be over ambitious - go for rental yield and remember costs
How To Work Out The Return On Your 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.
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.
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, agents fees must be worked out and they will
eat into your return.
Once mortgage, costs and tax are taken into account, 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.
7. Consider looking further afield or doing a property up
Most buy-to-let investors look for properties near where they live. But
your town may not be the best investment.
Cast your net wider and look at towns with good commuting links, that
are popular with familes or have a sizeable university.
It is also worth looking at properties that need improvement as a way of
boosting the value of your investment. Tired properties or those in need of
renovation can be negotiated hard on to get at a better price and then spruced
up to add value.
8. Haggle over price
As a buy-to-let investor you have the same advantage as a first-time
buyer when it comes to negotiating a discount.
Make low offers and do not get talked into overpaying.
9. Know the pitfalls
Before you make any investment you should always investigate the
negative aspects as well as the positive. House prices are falling and if this
continues, will you be able to continue holding your investment? What will happen
if you can't re-mortgage?
Even in popular areas properties can sit empty. One rule of thumb many
buy-to-let investors apply is to factor in the property sitting empty for two
months of the year - this gives a substantial buffer. Homes often need repairing
and things can go wrong. If you do not have enough in the bank to cover a major
repair to your property, such as a new boiler, do not invest yet.
10. Consider how hands-on you want to be
Buying a property is only the first step. Will you rent it out yourself
or get an agent to do so. Agents will charge you a management fee, but will
deal with any problems and have a good network of plumbers, electricians and
other workers if things go wrong.
You can make more money by renting the property out yourself but be
prepared to give up weekends and evenings on viewings, advertising and
repairs.
If you choose an agent you do not have to go for a High Street presence,
many independent agents offer an excellent and personal service.
Select a shortlist of agents big and small and ask them what they can
offer you.
- Essential Guide: Tenants rights and deposit
protection
