Over recent times, tax changes have delivered a sharp blow to the buy-to-let market and yet it has simply rode out the punch and stood firm. This is a pretty clear reflection of the strength of the market, which is essentially based on the fact that the UK has a chronic shortage of housing of all varieties, coupled with a large pool of people for whom renting is clearly the most appropriate choice, such as students and mobile young adults. With a significant rise recently in the cost of renting, it may seem and attractive investment. If you are considering incorporating buy-to-let into your portfolio, here are some questions to ask.
Do I really want to be a landlord/landlady?
Even if your first thought is that you’re going to use an agency, ultimately responsibility for the property and tenants therein still rests with you. The agency will simply be acting on your behalf and, of course, they will be charging a fee for this.
Are the financial practicalities of buy-to-let investment are right for me at this point?
Even if you opt for an interest-only mortgage, you are very likely to need a deposit and that deposit could be in the region of 25% or more. That money stays in your mortgage lender’s possession until either the mortgage is paid off or the house is sold. Selling houses tends to be a relatively slow process even in the hottest of markets (at least when compared to selling other forms of investment such as shares) and if a market is slow, it can take an extended period for a property to sell and in a worst case this could even be at a loss. Your mortgage has to be repaid regardless, hence you are the one who has to absorb any loss.
Does BTL investment fit in with my overall aims/goals?
As a rule of thumb, BTL is all about generating income, the fact that you may end up with an asset is an extra bonus and it should be noted that in some situations BTL investment can still be worthwhile even if it involves using an interest-only mortgage with the result that you never actually own the house. In other situations, BTL may be an inappropriate investment, even if you can afford a repayment mortgage, meaning that you will end up with an asset. Everything depends on each individual’s particular situation.
Do the sums really add up?
If you’re still interested in buy-to-let then you need to make sure you do a very thorough job of checking your sums. In addition to the total purchase cost of the house (including transactional costs and stamp-duty surcharge), you will also need to account for all the associated costs, such as insurance, remembering that there are likely to be different rates for BTL products as compared with their residential counterparts. You will then need to see if you can feasibly recoup these costs in the form of rental income and make a profit. You may also wish to leave yourself a substantial margin of breathing space in case of future tax changes. Of course, while you can investigate BTL in general, you will only be able to go into specifics once you start looking at a particular property and you will only find out whether or not your projections about rental income were accurate when you actually start letting out the property.
There’s more to investment than property and more to property than BTL
BTL can be a very good investment for some people in some situations, but it can be useful to remember that there are other ways to invest in property, for example investing in property development. These can be more appropriate choices for some people. Likewise, there are many other investment options out there. With such a wide range of possibilities, you may find that your best starting point is to get some unbiased, professional financial advice
If you are considering a buy to let venture, I will be happy to have a chat.
The FCA does not regulate development finance and we act as introducers for it
The FCA does not regulate some forms of buy to let mortgages
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