Buy To Let Overview
Since the property boom of a few years ago, the popularity of buying property to let has become hugely popular. Against a backdrop of a falling stock market reducing the value of pension funds and other investments, people have been increasingly turning to property to make money and provide for their future.
Historically, property has always increased in value in the long term, and this is the crucial point. Buy-to-let should not be viewed as a get-rich-quick and must be seen as a long-term investment. A property should be kept for at least 10 years to make sure it is successful at making money.
The concept of buy-to-let was introduced by the Association of Residential Letting Agents (ARLA) 10 years ago, which, according to its definition, does not include property speculation, such as buying newbuild property off-plan, or buying a holiday home.
It was designed to stimulate the growth of the private rental sector and now makes an important contribution to the UK’s housing, raising the choice and standards of rented accommodation and providing homes for a range of people, including students and council tenants.
With the growing need for rental property in the UK caused by factors such as the influx of immigrants, the increasing student population and the higher number of single-person households, including divorcees and potential first-time buyers unable to get on the ladder, there is likely to be a healthy supply of tenants for buy-to-let properties.
In the past, lenders considered buying property to make money as a commercial venture and consequently charged much higher interest rates on mortgages for this purpose. However, over the last 10 years buy-to-let mortgages have been developed, which allow individuals to invest in property at much more reasonable interest rates.
As the popularity of buy-to-let has grown and the Bank of England base rate has fallen, the interest rates of buy-to-let mortgages have come to be much more in line with those of residential mortgages. The types of products available have also grown and it is now possible to get buy-to-let mortgages with flexible features and on a self-certification basis.
The gross returns landlords can expect from a buy-to-let property range from 7% to 10% but there are a number of costs that will need to taken into account. These include ground rent and service charges for leasehold properties, repairs and maintenance, letting agents’ fees, insurance and council tax.
On top of this income will be the capital appreciation of the property when it is sold, which is likely to increase at a higher rate than inflation. However, estate agents’ fees of around 2% will be charged on the sale price, reducing the final profit, and a home information pack...well let us wait and see on this!!
There are also costs associated with the initial purchase of the property as well as the mortgage payments, which are usually on an interest-only basis for buy-to-let, including a mortgage valuation and survey, legal fees and stamp duty. Because of this, most buy-to-let investments have negative cashflow for the first few years – another reason why it should be entered into long term.
To make buy-to-let work it’s important to first investigate the market and think carefully about the location of the property, the kind of tenants who might live there, what kind of property would suit them and what average rents are in the area. Lenders will usually require that the rent covers the mortgage interest payments by at least 125%, and if you make sure this will be the case you will almost certainly cover your costs.
With careful planning and research and a long-term view, buy-to-let can be a profitable and relatively low-risk form of investment.
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