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A buy-to-let investment is a property you have purchased with the intention of letting it out to a tenant, making you a landlord.
Starting out the journey of becoming a property investor is definitely exciting but also nerve-racking. Real estate has produced many of the world’s wealthiest people, so there are plenty of reasons why it is a sound investment path.
Whether it’s your first time investing or you already have a portfolio, we can tell you all you need to know with our property investment advice.
Why invest in property?
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Many see property as an alternative that can provide their desired returns whilst being something they can understand. There are various reasons why people choose to invest in property, which includes:
- Rental income – useful for the self-employed or retired to have a predictable and reliable source of income.
- Easy to understand – property is tangible.
- Capital growth – it offers the potential when you come to sell further down the line to benefit from an increase in the property’s value.
- Renter demand – this is currently high, as soaring house prices are making it difficult to afford a property purchase.
- Insurance – you can insure against a loss of rental income, legal costs and damages.
Diversification – one of the key components of a well structured investing portfolio.
What are the cons?
Whilst there are plus points, there are some downsides you have to consider too. Here are some examples:
- Tax changes have made property a less attractive investment option. You’ll pay higher stamp duty and won’t be able to claim back as many expenses as landlords in the past.
- Property prices don’t always rise. Political uncertainty has affected the property market in the UK.
- Property can be very illiquid, meaning it can be difficult to get your money back straight away. Because of this, property investments need to be long term rather than just short-term projects.
- It can be hard work. Especially if you’re investing directly, you may not want to take on renovations or repairs yourself, but getting a third party to do it can be costly.
Problem tenants can cause emotional and financial strain.
How much will you need to invest in property?
If you’re looking at how to begin property investment, you’ll need to know how much you’ll be spending. So, when planning to purchase your first buy-to-let investment property, there are three main considerations you’ll need to keep in mind:
- There is an extra 3% stamp duty to pay on top of the standard rates.
- You will need to save for a larger deposit, about 20-25% of the original purchase price. But a small number of lenders will accept 15%.
- You need a safety net of cash to cover maintenance costs and mortgage payments when your property is empty – six months or more worth of rent is recommended.
Differences between a buy-to-let and homeowner mortgage
- Generally, you must earn a minimum of £25,000 a year outside your buy-to-let investment.
- You will be charged a higher rate of interest if you are an inexperienced landlord.
- Buy-to-let lenders use what is called an ‘interest-coverage ratio’ to check if you can afford the loan. Your monthly rent must be between 125% and 145% of the mortgage payment to be accepted.
- Buy-to-let loans are usually interest only, which means you’ll have cheaper mortgage costs, but the mortgage balance won’t come down.
Property investment advice before you get started
Avoid high-interest rates
The cheapest mortgage interest rates on the market are reserved for those with at least a 40% deposit. Experience counts as well since beginner property investors and those who have yet to purchase their own home will be subject to higher rates.
Get a letting agent’s opinion
To gauge if the property you want to buy is a viable investment, ask your local letting agent for their opinion on what rent you can charge. If the price is too high, your property might end up remaining empty.
Pay off any personal debt
It’s smart to use cash reserves to pay off any costly personal debts first, or the amount you’re paying in interest, as it will reduce the value of your investment returns. Being in debt may even impact your credit score, which could lead to higher mortgage interest rates or your mortgage application being rejected.
Have a long term vision
As we’ve already mentioned above in our property investment advice, buying a buy-to-let property is a long term investment, not a way to make quick money. Over time, the property should increase in value, but if you attempt to sell too early, you might catch property prices declining and miss out.
It’s important to focus on generating a healthy monthly rental income instead.
Avoid properties that need lots of work
There will always be a reason why a property is priced cheap. It might leave you out of pocket – there could be structural issues with the building, cracks that need repairing or pipes that need replacing.
All in all, even if you think you have paid a good amount for your property, your investment return will diminish if you have to spend thousands of pounds getting it ready to rent out.
You might be earning a good rental income, but if your costs are too high, your profit margin will inevitably shrink. To work out your margin, consider the following monthly costs:
- Unexpected costs
- Repair bills
- Letting agent fees
- Service charge and ground rent if the property is leasehold
- Mortgage interest payments
Don’t be overconfident
If you’re a beginner looking for property investment advice, keep it simple by purchasing a property with mass-market appeal and requiring minimal work to get it ready for your tenants.
Experienced letting agents in Leicester
With an unrivalled experience in the Leicester lettings sector, you can be assured of the best expertise to help you achieve your property investment goals.
Contact us today for a FREE rental valuation on 0116 243 7938.