Investing in Buy to Let Property
Investment in buy to let property is unique because you can use borrowed funds to make your own money work for you.
Why? Because the value of the property provides the collateral needed to borrow money. This sets property aside from investments such as stocks and shares which lenders predominantly consider too risky to lend against.
Disadvantages of investing in property
Property is illiquid compared to shares meaning that you cannot always sell quickly and realise your cash.
Having “void” periods without rental income will damage the profit that can be made from investing in buy to let properties..
Advantages of investing in property
The income from the rents received should pay your mortgage and purchase your properties for you.
Property investment is relatively risk free (there is no such thing as an entirely risk free investment).
If things go to plan there are two financial rewards – regular income and capital growth.
A key strategy in buying property as an investment is to build a margin of safety by taking sensible risks.
Three of the most important things to bear in mind are:-
Don’t overstretch yourself –don’t over borrow and keep the Loan to Value (LTV) ratio within sensible limits so that you can the mortgage can still be paid if your tenant fails to pay rent or interest rates go through the roof.
Don’t overpay for your property – avoid getting carried away when buying by letting your heart rule your head. Calculate the maximum price that you can afford to pay based on sensible cash flow calculations; research the local property market for the best deals and understand the rental demand before you purchase.
Buy the right property in the right location – making sure that there is a strong rental demand and that your property will achieve the best level of rental income – generally smaller properties have higher rental yields.
Sensible Attitude to Risk
As property has so far always appreciated in value over time your risks are relatively low when you invest in property if you take a long term view (typically a minimum of 10-years).
Even if in the short-term you suffer a loss because property prices have gone down or interest rates have gone up you will typically realise a positive return on your investment in the long run.
To minimise short term problems don’t overpay; don’t over borrow; obtain a fixed-rate mortgage and pay as high a deposit as you can afford.
Try to ensure that your rental income covers all outgoing expenses and mortgage payments by a good margin and use a trustworthy, qualified agent to screen tenant applicants very carefully.
Buy several small properties as opposed to one big one. The more tenants you have the less likely you are to fall foul of cash-flow problems if your one tenant fails you.
Property Investment Tips:
Seek advice from and use the services of truly independent, experienced and recommended professionals when you need it. Use your own surveyor, agent, accountant, solicitor, insurance and financial advisor.
Be very wary about “too good to be true schemes” peddled by slick salesmen such as expensive property investment club memberships, no money down deals, gifted deposits, cash backs and claims of discounted properties etc.
Check comparable property values in the area, occupancy rates and rental demand and where you can avoid large developments or developments where there are too many properties to-let or for sale to sustain value.
If you are buying off-plan from developers get some good advice about contracts.
Also if you buy abroad it is advisable to use advisor’s who speak the language, know the local markets and laws legislation and come with good references and an honest reputation.
Capital Growth versus Rental Income
Landlords will typically invest for a combination of capital growth and rental income. Some properties and locations may provide a higher rental yield but lower long term growth and others the opposite so you need to have a plan in mind about whether your primary requirement is income or growth. As growth is more problematic because property markets don’t always behave as predicted the lower risk is to focus on a strong rental yield that overs your overall costs and gives you a regular net profit.
Our clients are not short-term speculators wanting to sell on quickly to make a quick buck! They are serious landlords who take a professional approach and a long term view.
For more information or to speak to the team, contact us.