The current financial climate has probably got you thinking about your income streams. Maybe you’ve been like me and really enjoyed being at home more with the children so are wondering about how to invest to create a passive income?
Being a landlord and taking on a buy-to-let is not quite as easy as it used to be. There’s a lot of legislation and regulations involved and recent tax changes have made it trickier to make a profit on renting a property. It’s understandable if unsure whether to enter the market at the moment, and questioning whether it’s worth your time and money.
That’s not to say that it can’t be a success, however. With house prices on the rise, many people can’t afford to buy. Renting is becoming the norm, so the market is definitely out there. When potentially becoming a landlord, it’s simply important to view the whole picture and not enter into it thinking that it’s going to be an easy money maker. So, what things should you consider before you make this sort of investment?
Location, location, location
Certain rental properties will do better in some places than others, so it’s important to be clever about where you invest. Some of the locations with the highest buy-to-let yields (annual rental income minus mortgage costs divided by the cost of the property) are places with high student populations, such as Nottingham, Leeds, Liverpool and my home town Hull. Students will always need somewhere to live and will almost never be purchasing property.
If you’re looking at investing in a city property, perhaps a flat for a young professional would be the place route to go down. For more rural areas, you might want to consider a family home above anything else. Always consider your location and your audience.
Also, rented property tends to do quite well in expensive areas such as London, as many people strive to live there but can’t afford the house prices. You tend to get a bit more for your money when you rent, so that’s the route people go down to live in an affluent and desirable area. If you can afford to put your money here, it’s well worth doing! CIA has a great local property stats tool you can use to check out the average houses prices in any area on your radar.
As with any investment, buy-to-lets don’t come without their risks. Firstly, the amount of rent you can charge varies according to a number of factors, including wider market trends outside of your control. Rents are never guaranteed, so be realistic and prepared.
Similarly, what if you can’t find tenants? If you’ve taken your location and the type of property into consideration as mentioned above, you shouldn’t have too much of an issue here but again, nothing is guaranteed. If you can’t find tenants and can’t charge the rent you expected to, you might not be able to cover your mortgage repayments.
And of course, if you find tenants there’s no guarantee that they are going to be good tenants. If you conduct all of your screening and background checks thoroughly then you’ll put yourself in good stead but you’ll always be putting your property at risk of damage, illegal activity or possibly tenants with financial issues.
As with buying any house, house prices can fall and if they do, the value of your property is likely to fall as well. If you find yourself in a position where you have to sell the property, the sale price might not cover the whole mortgage and you’ll have to make up the difference. On the flipside though, if the housing market does well then you might be able to sell your property for a profit, which is a huge plus.
Find the best mortgage
It’s not the most exciting part of the process, so it might be one that you want to get done and dusted pronto. But don’t just walk into your bank or building society and ask for a mortgage. It pays to speak to a good independent broker who can give you invaluable advice when looking for a buy-to-let mortgage. They will not only talk you through what deals are available but they can also help you weigh up which one is right for you, and whether to fix or track.
What kind of a landlord will you be?
We’ve all heard horror stories about landlords, but we’ve heard of people renting in the same property for decades. Landlords come in all different shapes and sizes and you need to decide where you want to fit in.
Firstly, do you want to have complete control or do you want to enlist the help of a letting agent? Agents will charge you a management fee but will deal with any problems and have a good network of tradesmen to call in when things go wrong.
With that in mind, you’ll make more money by going it alone and avoiding those letting agent fees, but you’ll have to dedicate more time to your responsibilities. It’ll be you that does viewings, advertising for new tenants and sorting out any repairs and maintenance. If you like the idea of being in control and making this project your own, then avoiding letting agents might be best. You will be the point of call for your tenants and be responsible for looking after them – and it definitely pays to look after them. Be respectful, personable and understanding and they will in turn look after you and your investment.