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Guide for first-time landlords. Part 2 - Finding and buying the right property

POSTED: 26th May 2015
IN: Landlord helpful guides
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For many, buy-to-let can make an attractive investment.

In the 18 years since buy-to-let mortgages were introduced, landlords have received a 16.3 per cent return on their investment, with every £1,000 invested in a property turning into £13,048 since 1996. 

However, while the property industry may seem like the perfect place to invest money, potential landlords must ensure they do their research before making such a significant investment.

In this four part guide, we’ll be publishing a series of posts to help new investors get to grips with the world of buy-to-let. In this post - the second in the series - we’ll put the financial side of buy-to-let under the microscope. We’ll evaluate how potential new landlords can hit the ground running by researching, finding and buying the right property.

Financing your investment

Unless you have the money to buy the property in cash, securing the right mortgage deal is one of the most crucial steps in successful property investment. With so many mortgage options on the market, it can be difficult to decide which one to choose, however, it’s vital that landlords opt for a buy-to-let mortgage, rather than a typical residential mortgage arrangement.

 

What is a buy-to-let mortgage?

On the whole, buy-to-let mortgages work similarly to a standard residential mortgage. That is to say, an investor is able to borrow money that is secured against the value of the property they are buying. However, there are a few fundamental differences between the two:

  1. Interest rates on buy-to-let mortgages tend to be higher
  2. The minimum deposit required also tends to be higher (typically 25 per cent depending on your chosen lender)
  3. The lending criteria is generally more strict for buy-to-let than for residential; i.e. most banks and building societies insist on a minimum age (often 25), plus a minimum income, usually around £25,000. 

Because the lending criteria for buy-to-let mortgages is generally stricter, a good credit record and strong financial standpoint is ideal. As a result, prospective borrowers that already own a house or flat may find it a little easier to secure a mortgage than a first time buyer. However, conducting research to find out which lenders are comfortable with providing mortgages to new investors would help to ensure time isn’t wasted on applying for mortgages with unsuitable lenders.

Even though you’ll have tenants to cover the cost of mortgage repayments and bills each month, when choosing a mortgage, seek advice, research the BTL mortgage market, and opt for one that is affordable for you.  Remember to take ‘void periods’ into account. These are (usually) short periods where there are no tenants in the property providing rental income, and you may need to cover mortgage repayments yourself.

How much can I borrow on a buy-to-let mortgage?

The amount of money you can borrow for your buy-to-let property is linked to how much rental income you expect to make from it. As a general rule, you need the rental income to be at least 25 per cent higher than your mortgage repayment for a lender to consider your application, so it’s essential to have planned and calculated your potential yield before you start the property search.

At this point, you’ll need to consider:

  • What area you want to invest in
  • Who you’re likely to attract within the area (will you be letting to students or young families, for example)
  • What other, similar properties are being let for within the locality (you can generally get a good feel for this from sites like Rightmove and Zoopla)
  • What the demand is like for properties in that area (i.e. are you likely to be able to fill void periods easily)?


Once you’ve got a good idea of property prices and a realistic idea of rental income, and are satisfied that you have a solid business proposition, you can start to research the numerous buy-to-let mortgage deals available.

Should I go for an interest-only deal?

Interest-only buy-to-let mortgages are currently the most popular among buy-to-let investors. Repayments of these deals are generally lower, and the investor is able to access a larger proportion of the rental income, which is good for short-term cash flow. If you wish to undertake this type of mortgage, always be mindful that at the end of the mortgage term, you’ll need to repay the capital in full.

Leave your emotions at the door

As a buy-to-let investor, you have the benefit of requiring zero emotional connection to the property you select.

As you won’t be living in the property, then providing it meets the criteria of being a financially sound investment, you’re relatively free to go ahead and make an offer. Many homebuyers are slowed down in the property selection process by the personal considerations they need to take into account: Do I want to live in this house? Will it meet my needs for the next five years? Etc.

Consider whether you want to refurbish the property

Paying less for a property usually results in better investment prospects, providing of course, that it’s in a good area and is structurally sound. Often, buyers will find that properties on the market requiring a little TLC, such as a new bathroom or a kitchen, are valued considerably lower than those that are in pristine condition.

Depending on how much time and money you’re willing to spend (as well as how comfortable or experienced you are with property refurbishment), these properties can often make better financial investments. Very often, cosmetic improvements to bring a property up to date aren’t particularly expensive or time consuming.

Getting a return on your investment

A buy-to-let property should always be treated as a serious business venture. In order to make a return on your investment you need to consider the property’s rental yield and how much profit you’d be likely to make when you eventually come to sell the property.

Think of the rental yield as a monthly income, and the property sale as a much more long term investment. To calculate the rental yield you need to divide your net rental income into the value of the property. Don’t forget to include all the costs associated with buying it such as stamp duty and solicitor fees.

For example, if your net rental income comes to £10,000, and the property costs £200,000 in total, the rental yield is £10,000, divided by £200,000 which equals 0.05 or five per cent.

What is considered to be a ‘good’ rental yield?

The average rental yield for the UK is currently around 5.9 per cent (as of September 2014). However, depending on the area and type of property you’re choosing to invest in, there are fluctuations.

Studies show that in recent years, property investors have started to move away from London, traditionally one of the most attractive prospects for buy-to-let investments. Instead, savvy investors are identifying regions where yields are almost three times as high as in the capital, including Southampton, Manchester, Nottingham and Blackpool.

Over to you

Property investors who devote time to properly researching the market before they make an investment could be setting themselves up for a bright financial future. While there are no guarantees in the world of buy-to-let, for those willing to put in the hard work, bricks and mortar could prove to be a worthwhile financial pursuit.

This post is instalment two of a four-part series for landlords making a first buy-to-let investment. In the other three parts, we take a closer look at:

Part one: An Introduction 

In part one of this series, we started by asking: Is buy-to-let right for you?

Part three: Getting Ready for Tenants 

In part three, we’ll look at how you can get your property ready for tenants, including managing paperwork and getting to grips with legal responsibilities.

Part four: The Realities of Buy-to-Let 

Part four, the final instalment in our buy-to-let series will look at how you can find and manage your tenants. You’ll learn how to manage your property and ensure that everything runs as smoothly as possible.

To find out more about the various buy-to-let mortgages that are available at Aldermore Bank, don’t hesitate to get in touch.

Sources

http://www.bbc.co.uk/news/business-31501707

http://www.theguardian.com/business/2014/apr/26/returns-for-buy-to-let-landlords-dwarf-other-investments

http:/www.martinco.com/property-franchise/buy-to-let-returns-at-16-3/

http://www.lawsociety.org.uk/support-services/advice/practice-notes/mortgage-fraud/

http://www.rightmove.co.uk/resources/property-guides/letting-guide/rental-income-and-capital-growth.html

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