- Factors to consider before buying a buy to let are the costs involved, your legal responsibilities, the local rental market, and selecting the right property type.
- Before making your buy-to-let investment, consider using the Buy to Let Deal Analyser tool, which helps you make informed decisions.
Owning a buy-to-let property can be a great investment but there are some factors to consider before purchasing a buy to let. These essential factors will not only help you avoid some nasty surprises but will also guarantee that you make the most out of your investment.
Is Buy to Let Actually Worth It?
First, let’s consider if buy to let is even worth it?
Buy-to-let has proven itself to be a lucrative investment strategy, allowing many property investors to reap consistent and passive rental income. Not to mention, there’s the potential for long-term capital growth.
However, it’s not all rosy. As profitable as it can be, buy-to-let investment also comes with its share of risks. These include potential vacancies, property damage, dealing with difficult tenants, and unexpected maintenance costs. Don’t worry, these don’t occur often.
The key to ensuring it’s a worthwhile investment is to do your due diligence. Carry out proper market research, understand the neighbourhood, and if necessary, hire a reputable property management company to help you navigate these potential pitfalls.
Key Factors to Consider Before Buying a Buy-to-let
1. Buy to Let Costs
You have to understand the costs involved in a buy to let investment. It’s not simply about securing the mortgage and then sitting back to watch the rent roll in. There are both initial and ongoing costs for a buy to let property. These include regular mortgage payments, maintenance costs, building and landlord insurance, possible vacancies, and other unexpected costs.
It’s always smart to have a cash reserve for those unexpected expenses. Trust me, from my past property investment experiences, unanticipated costs can really throw a spanner in your budgetary works!
2. Legal Responsibilities
Unsurprisingly, there’s a pallet of legal responsibilities that come with being a landlord. Local housing laws, safety regulations, tenant rights, tax requirements, the list goes on.
Landlord responsibilities are not something to take lightly. Ignoring them can literally land you in jail or, at the very least, with a hefty fine to pay. For more information about landlord legal responsibilities, we recommend this page on Gov.uk.
3. Market Research
Before you invest, understand the local rental market. Which properties are in demand? What type of tenants will you likely attract? Recent statistics, such as those from Zoopla, show demand for rental properties is growing in towns and cities. Tailoring your investment to meet the demands could lead to better returns.
4. Choice of Property & Strategy
There’s an impressive selection of properties out there. Don’t confine yourself to traditional ‘family homes’. Student rentals, city apartments, and HMOs all have their distinct advantages and challenges. Knowing the difference can help shape your investment decision.
For more on the different property investment strategies, I’d recommend the linked guide.
Emerging from my experiences, location plays a massive part in determining the success of your buy-to-let investment. Aspects such as demand, potential rental yield, and future growth prospects should be among the leading location selection qualifiers.
For a full step-by-step guide on how to select the best locations for property investment, I also have a guide for that.
6. Understanding Tenant Demand
Tenant demand shouldn’t be an afterthought in your investment plans. Knowing who will be renting properties like yours, their budgets, preferences, and what makes them stay or leave is crucial.
7. ROI Calculation
Your return on investment needs to be good of course. As a landlord with skin in the game, I use a buy to let deal ROI calculator to help me understand what kinds of returns I should expect.
The easiest way to do this would be by calculating the rental yield (I’ve provided a simple example of how to do that below). However, I’d recommend the ROI calculator instead as this will give you a far deeper insight into the profitability of your investment.
Rental Yield Example
Let’s say you’re eyeing a property priced at £200,000. You expect to rent it out for £1,000 per month. Your annual rent will be £12,000. To calculate the yield, you’ll divide the annual rent (£12,000) by the property price (£200,000) and multiply by 100. That gives you a yield of 6%.
8. Risk Factors
The part about property investing that we all love slightly less? The risks. They can have a significant effect on your income, so it’s only fair we give them some attention. These are some common property investment risks that you need to factor into your decision.
- Property Value Risk: Imagine buying our example property, and then BAM! A market downturn hits, driving the property value down to £170,000. What does this mean for your investment?
- Vacancy Risk: What if your property isn’t occupied? Gaps between tenancies mean gaps in rental income.
- Maintenance Cost Risk: Perhaps your tenants aren’t as careful as they could be. An unexpected bout of heavy maintenance and repair costs isn’t uncommon.
Understanding Buy to Let Mortgages
Stepping into the buy to let market involves understanding different financing options, especially the buy to let mortgage. Unlike a typical homeowner mortgage, a buy to let mortgage is a loan for purchasing a property that will be let out to tenants.
The landlord doesn’t live in the property; they earn income through the rent paid by the tenants. The amount you can borrow usually depends on the potential rental income from the property, not your personal income.
There is a slew of buy to let mortgages out there to suit different types of investors. These include interest-only mortgages, where you pay just the interest each month and repayment at the end of your mortgage term.
I cannot stress enough the need to get professional help when choosing a buy to let mortgage. A competent buy to let mortgage broker can navigate you through the personal and financial checks carried by lenders, deposit requirements, interest rates, and tedious affordability assessments.
They can guide you to mortgage products most tailored to your investment strategy and personal financial circumstances. I found there was merit in working with a mortgage expert. It helped me cut through the financial jargon and helped me make more informed decisions.
Learn more about my recommended buy to let mortgage broker.
The Buy to Let Deal Analyser
Finally, before you make your buy to let investment, I highly recommend using the Buy to Let Deal Analyser tool. This handy tool can help you make a more informed decision about your investment by providing data on potential rental income, costs involved, return on investment, and other crucial information that can make or break your buy to let adventure.
In my personal investment journey, utilising this deal analyser has been a real game-changer. Not only did it significantly simplify the process of analysing potential deals, but it also helped to preserve my sanity during those initially overwhelming stages of property investment! But remember, while tools like this can be incredibly useful, they should never replace proper due diligence and consultation with real estate and financial professionals.