Buying to let – where do I start?
by Housesimple on 9th August 2015
Imagine making money each month for doing nothing. If you own a second property and rent it out successfully then that’s exactly what could happen, but there are dangers and many decisions to consider. Here are a few that should be at the front of your mind…
Can you do it?
If you already have a mortgage, then getting another is possible but probably difficult. You’ll need to convince a bank that you can pay two mortgages at once at all times, because there’s no guarantee the second home will always have tenants. Investment properties also traditionally need a higher deposit, probably at least 25% of the property value. It should also be noted that most buy-to-let mortgages are interest only, as the interest is deductible from the rental income when tax is paid.
Therefore, expect your finances to be scrutinised. Those mortgage fees, estate agent fees, maintenance and all those things that you thought you’d left behind with your own home are all back. The best bet, if possible, is to pay off your own mortgage first before moving onto another.
Know the area where you’re buying
Buying a property 200 miles away in an area you don’t know, purely because you’ve heard it’s fashionable, is potentially a recipe for disaster. It’s awkward from a logistical viewpoint, but also because of a probable lack of knowledge. A lack of knowledge into the travel infrastructure of the area, attractions, crime rates, property values and, above all, what is likely to be targeted by renters, could be an issue.
Instead, look for properties a few miles from where you live, in an area that you know. Look at the proximity to schools and universities, shopping areas and so on, and then consider the home itself. A home that you’re lining up for students near a university doesn’t need many ornaments or extravagances. A home with a family in mind might require a bigger garden and more bedrooms.
Finding the right property
Unless you’ve got a burning impatience then finding the right property can be done at leisure, since you’re not part of a chain. You can haggle for a good price, and you’re probably more likely to be looked at as a good customer by sellers.
You can also be judicious in looking for homes that will appreciate in price, because you’re presumably aiming to make money from the bricks and mortar themselves, and not just those tenants you’ll be getting in.
Is it worth it?
Let’s say you’ve waved goodbye to the mortgage on your own home and have enough of a deposit for a second home (usually at least 25%) and therefore an income. You’ve calculated everything nicely and you aim to make maybe £200 a month profit. And then the Bank of England puts up the interest rate. You’re suddenly making nothing but still paying for the repairs and upkeep….so you want to put up rent, and your tenants have only just moved in…
This is a totally plausible scenario, bearing in mind that the interest rate has been at a record low for six years. There are other scenarios – bad tenants or a collapse in the housing market, for example – which could also cost. It might be more prudent and less risky to invest in a savings account.
Here’s another scenario; you’ve done your research and make a couple of hundred pounds profit a month and manage to always time it rightly so that rent rises cover interest rate changes. Within a few years you’ve paid off mortgage number two and you’re making £600 a month profit. You soon have another deposit and start again...happy days.
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