Buy to Let
Buying a property to let can be a good investment, or it can be a financial disaster. Making the wrong move can leave landlords with financial difficulties with mortgage payments if there is no rent coming in from the property. But, making the right investment can mean a bit of extra income and a stable asset.
Do your homework
Investing in property to let is not an instant road to riches scheme. Before you dive in, be prepared to…
- have a deposit on the property tied up for an indefinite period. This is usually about 15-20% of the property value.
- get the place up to a standard where you can be confident it will attract tenants.
- pay for maintenance.
- weather any fluctuations in the market.
Tips for success
- Location, location, location. This is one of the most important factors a tenant will look for. Desirable properties are conveniently located for public transport, local amenities, restaurants and bars and have parking facilities nearby. If you are buying to let in the student market, proximity to the university is also a major selling point.
- Consult Stepping Stones to find out which areas and what kinds of property are in demand. We should also be able to advise you about rent
- Charging too high a rent will put off prospective tenants – research the market conditions thoroughly. Remember that rent is not the mortgage, and if the lettings market is sluggish, you may not succeed is covering your entire monthly mortgage amount.
- A well maintained and attractive property will be much more in demand than a run down property.
- If you decide to let the property furnished, it is worthwhile taking some time to find out what features make a property desirable to tenants. Again, Stepping Stones will be able to advise you on this.
- If you have the money, time and inclination, you may consider investing in a property that needs some work. You’ll be able to customise it to the needs of your tenants.
- If you do not have the time or interest to buy a property that needs a lot of work, a newer property may be more suitable. However, it is worth remembering that even new properties will need maintenance and this will increase as the property ages.
- When you are buying the property, try to remember that it is not you who is going to be living there. Look at it with an objective eye. Think about the property from a tenant’s point of view.
Letting agencies
Using Stepping Stones is a great way of entering the letting market. There are a number of benefits of using us:
- Proven experience in the field
- National exposure for your property
- Reduce your administrative burden. We will usually handle vetting tenants (checking references), inventory, drawing up handling tenancy agreements and handling the financial transactions such as deposits/bond money and collecting rent.
- Agents usually charge between 15-20% of the rental income as their fee. We charge less!
Buy to Let mortgages
There are increasing numbers of lenders who have loans and mortgages tailored specifically for the buy to let market. These mortgages (also referred to as Residential Investment Loans) …
- will lend up to 15-80% of the purchase price of the property
- are usually about 0.5 % higher than a normal, standard variable rate mortgage
- are available in Long, Short, Fixed and Capped options
Before committing to an investment loan like this, it is advisable to review your current and long-term situation and make sure that you know exactly what you are getting yourself into. You should ask yourself:
- Will I be able to cover my mortgage repayments and insure the property if I have no money coming in from rent?
- Can I afford to lose money/take a loss if the housing market slumps?
- Will taking out a mortgage on this property affect my chances of getting a mortgage if I decide to move house at a later date?
Buying a home may be the largest single investment you will make in your lifetime. Below are some hints and tips that can help you understand the process a bit better.
How much can you afford?
The price of your new house or flat is just the beginning of the costs involved in purchasing a new property. If you take out a mortgage, then you must add interest into the equation, which can be a significant sum. On top of that, you have the following fees that need to be paid:
| *Costs | Approximate costs for £100,000 property |
| Solicitor’s fees | £900 |
| Searches | £25-150 |
| Land Registry | £80 |
| Solicitor’s disbursements | £35 |
| Lending source’s solicitor’s fees | £300 |
| Mortgage Indemnity Guarantee | £1,400 |
| Lender’s valuations | £160 |
| Survey fee | £300 |
| Buildings insurance | £200 |
| Carpeting? | |
| Decorating expenses? | |
| Furnishing? |
*source: www.yourmortgage.co.uk
Mortgages
Mortgages come in all shapes and sizes these days. And lenders are giving birth to new types every year. Generally, mortgage lenders will lend you about three times your annual gross salary. If you are buying with a partner, then they may lend you an extra amount equivalent to one times his or her annual gross salary.
The common rule of thumb is to spend no more than one-third of your monthly take-home pay on mortgage repayments. This is a big commitment when you consider that most mortgage terms last about 25 years. You may wish to seek advice from an independent financial advisor or from your estate agent about the best mortgage package to suit you.
Repayment vs. Interest Only
You have two choices in how you repay your capital – you can either pay it back a little at a time (repayment mortgage), or pay it all back at the end of the contract term (Endowment, ISA, and pension mortgages).
- Repayment mortgage – each month, you pay off part of the capital as well as part of the interest due on the loan. At the end of the term, the mortgage is clear. This is the least risky type of loan.
- Interest only – you make monthly payments to pay off the interest on the loan; at the same time you make payments into an investment fund that will pay off the capital cost of the loan at the end of the loan’s term. So, you don’t pay off the capital during the term of the mortgage.
Calculating your rental return.
When buying rental property it is important to know how to calculate the returns your investment will make. Below we will discuss and demonstrate some of the most common calculations and figures you’ll need to know. You should always do a quick appraisal of any investment before you go ahead to make sure its worth your while.
When calculating rental yield values you can also examine the effect that borrowing has on your potential returns, such as between buying a property in cash and using a buy to let mortgage to fund the purchase.
How much you decide to borrow also depends on your attitude towards risk as we all know that interest rates can go up as well as down. It’s really a matter of personal preference and how you see the local economy and cost of borrowing for the future that should influence your investment decisions.
A simple rental yield calculation
Lets say that you purchase a property for £100,000 and you receive rental income of £500 per month from your tenant.
The yield calculation would be as follows:
£500 x 12 = £6000 per annum rental income.
(6,000 ÷ 100,000) x 100 = 6% Yield
So simply put, Yield is the return on your investment expressed as a percentage of what you put in! (i.e. If you invest £100,000 and you receive £6000 in profit/income per year, so £6000 is 6% of £100,000.)
The above example has been put very simply without factoring in any property maintenance costs/insurance and doesn’t include any mortgage payments.
Let’s look at calculating yield with a mortgage & associated costs
Let’s say you purchase a property for £100,000 but this time you use a buy-to-let mortgage and have to pay for the property insurance and some maintenance costs.
The following are the figures we use to calculate the yield value;
Purchase costs: £1000 (including solicitors fees and insurances etc…)
Deposit at 15%: £15000
Mortgage costs are calculated as follows:
A £100,000 property (purchase price) with a 85% LTV (loan to value) interest only mortgage at an interest rate of 5.5%.
£100,000 – £15,000 = £85,000 mortgage
Monthly repayments are: £85,000 x 5.5% = £4,675 per annum. £4,675/12 = £389 per month.
The gross profit would be;
£500 rent – £389 Mortgage = £111 gross profit per month
£111 x 12 = £1332 per annum.
Now we have these figures we can now calculate the yield value as follows;
Amount invested so far is: £16,000 (deposit + costs)
Annual gross profit is: £1332
(£1,332 ÷ £16,000) x 100 = 8.3% Yield Value on cash amount invested
Looking at these figures you could have bought 6 properties secured on a buy to let mortgages with a £100,000 investment and receive £7,992 in gross rental profits compared to £6000 using the cash to purchase one rental property.
Because you can now buy 6 properties you will own a larger amount of assets (£600,000) so you will also get greater capital gains if the house price was to rise in the future.
