The buy to let market has been in the media a lot recently, and more and more people are considering this form of investment. However, like any investment, it needs to be approached with caution, and appropriate advice should always be sought.
If you are interested in buy to let, or indeed are already a buy to let investor, you might find it useful to consider these points:
When considering a buy to let property, some key issues are the location, nature and style of the property you hope to lease out. At this point I would emphasise that your own personal taste and preferences in relation to location and property styles should be taken out of the equation. You need to establish your financial aims and goals. Various sectors of the rental market provide different results – some sectors will provide minimal or nil capital growth, but will offer a reasonable return or yield, whilst other sectors may potentially in the long term provide capital growth, although the yield may be disappointing. You will have to take into account whether your move into the buy to let market is a short, medium or long-term scenario, and whether your aim is to achieve an ongoing monthly source of income or a long-term investment for future gain.
Your decision on property also has to include the level of investment, and as such the potential number of properties in your portfolio. Do you buy one property at £330,000 or three properties at £110,000? The actual purchase/investment cost, running cost, possible returns, legislative and regulatory requirements and the risks are potentially different. These factors need to be investigated and understood.
As with any business, how the business is to be funded and returns dealt with must be established. Decisions have to be made as to the extent of personal outlays and borrowings that will be required. In many cases specialist advice is needed in order to obtain loan funding for a buy to let property. The majority of lenders will view this as a business scenario restricting the terms and life of the loan. It should be noted that if you are proposing to lease your current home there will be a requirement to inform your lender, who may not support the proposal on your current mortgage package.
In working on your financial plan you must also remember to take tax into account, as this will potentially fall into various categories depending on a mixture of situations relating to the property and your personal circumstances – this is an area where seeking appropriate advice is particularly necessary.
In addition professional input should definitely be considered if there is more than one investor, particularly if the investment percentage amounts differ.
A factor that many fail to take into account is that while in an ideal world the property remains leased for the full term of any loan, the reality is in the ever-changing market there may be void periods in between lease agreements where there is no rental return. Some consider a spread of properties safer to minimise the impact of one property being vacant. It is essential that this be factored into the decision process. There are products in the market which can allow you to effectively insure against void periods.
The nature of the property, the capital outlay and the location will to an extent dictate the nature of the tenants, although careful consideration will also be required to establish the type of tenant you would prefer to occupy your property, and by default the risk of damage. You should also remember that (if it is your former home) tenants may not treat the property in the same way as you did. You must remember that this is a business decision and keep emotion out of the equation.
As with any business, there are multiple rules, regulations and statutory requirements that must be met. You need to decide whether you will engage the services of a letting agent (who will, of course, charge for their time), or alternatively whether you will allow a budgeted cost for your personal time, to ensure that you comply with all the regulations in conjunction with the ongoing maintenance problems that relate to a rental property.
It is a requirement, for example, that you register as a landlord with the local authority where the property is located. Failure to do this could mean a hefty fine.
Protecting Your Assets
As you work on your plan you need to keep in mind that the world is not fair and not everything goes according to plan. It is advisable to protect yourself, your family, and your assets.
This may in some cases be as simple as writing or reviewing your will, but setting up companies and trusts might also be considered. Again, advice should be sought as to the best solution for your circumstances.
Again it should be emphasised – this is a business. Remember that it does not matter who you are leasing to – whether they are a family member, friend or stranger, you need to have a formal lease signed from the outset. This helps prevent future problems. If the property is mortgaged, your lender will insist on a formal lease.
Business Planning and Budgeting
If you fail to plan and to run your buy to let business as such, then you can very easily run into serious difficulties. It is strongly recommended that anyone considering a buy to let investment seek appropriate advice from the outset, in order to be aware of all the potential costs, outlays, pitfalls and risks at play, and to prepare an appropriate business plan and budget to take these into account. With proper preparation and planning the risks can be minimised, and buy to let property can be a very successful investment.