The Building Blocks of a Sustainable Buy-To-Let Business
If you're thinking of setting up a buy-to-let business then there are plenty of pros and cons you need to be aware of in the current climate. At first glance, the stamp duty hike on second homes and the removal of mortgage interest tax relief might make you to think now is not the right time to invest in property. But, the record-low interest rates and the slowing of property price growth could be enough to make you think again.
So, if you're ready to create your property empire, these are the fundamentals you must put in place to build a sustainable buy-to-let business.
Find the right location
You need to do plenty of research to find the best areas to invest. It pays to be within easy reach of your buy-to-let property to keep an eye on it and be within easy reach when repairs need to be made. However, there are also a number of other factors to take into account.
Ideally, you want to invest in an area where there is plenty of demand for rental property, relatively high rental prices and property prices that are on the rise. Good transport links, particularly to London, almost guarantee healthy rental demand and prices. There are plenty of statistics online to help you gauge your buy-to-let prospects in a particular area.
Think about your tenants
What type of tenants do you hope to attract? The location of a property and the tenant type are inextricably linked. This also stretches to the property type and even the way you decorate. Families tend to be more likely to stay in a property for the longer term, but young professionals could potentially produce a higher yield.
So, is it stability or profitability you're aiming for? If it's profitably, houses of multiple occupancy (HMO) or student lets could be worth considering, although they come with higher maintenance costs, shorter tenancies and additional risks.
Make sure it's affordable
Buy-to-let mortgage affordability criteria has tightened. Generally, the lenders have upped the level of rental income they expect from 125 percent to 145 percent of the monthly mortgage repayments. That means if your mortgage repayments are £500 a month, you'd need a rental income of £725 a month to meet the 145 percent requirement. You also need to account for those periods when the property is vacant, so having some cash reserves to cover mortgage repayments is essential.
Non-payment by tenants is a concern for every landlord. To reduce the worry there are insurance policies you can take out to counteract the income shortfall. However, this will be an additional cost to factor into your affordability calculations.
Consider the housing association route
If it's guaranteed monthly payments you want, letting your property through a housing association could be an option. This route is hassle-free and pretty much management-free too. One potential drawback is the fact that the rent you can be charged will be limited, so although you'll never be short of tenants, your profitability may take a hit. You must also make sure your mortgage lender is happy to accept housing association tenants.
Set up a limited company
Setting up a limited company does not work for everyone, but it is one method some buy-to-let investors can use to combat the recent tax changes. If you have a large property portfolio, operating through a limited company could reduce the tax liabilities of your buy-to-let business; however, it will also add to your obligations and potentially increase your mortgage costs. This is a step you should weigh up carefully before you take the plunge.
Interest rates can and will change
The record-low interest rate at the moment has led to some unbelievable buy-to-let mortgage deals, but the interest rate will inevitably rise, it's just a question of when. For that reason, you should be always build interest rate rises into affordability calculations. For example, would rental income still easily cover your mortgage repayments if interest rates were to rise by 2 percent? What about 3 or 4 percent?
Are you ready to start your buy-to-let journey?:
t: 01276 691510