Purchasing property for the purpose of letting is common on popular television programmes such as Homes under the Hammer, and with over eight million rented properties in the UK in a market which has doubled in a decade, it’s not difficult to understand why many landlords enter the letting business with profit in mind.
However, the recent autumn statement, presented by Chancellor of the Exchequer George Osborne, has raised the prospect of a higher rate of stamp duty being levied on the purchase of properties destined for the rental sector, leading some analysts to warn of potential damage to this part of the housing market.
If, inspired by the case studies on television’s most popular property programmes, you’re considering purchasing a property for rental, it’s worth giving consideration to the key issues involved that could make a difference to the quality of your investment.
How much return might I receive?
While it is difficult to pinpoint exactly how much profit you could enjoy on a buy-to-let property, mainly due to wide variations in property and rental prices across the country and levels of demand, a return of between 5% and 10% is not uncommon.
However, it is worth bearing in mind that you may face periods when your property is unoccupied (although some letting agents operate a guaranteed occupancy scheme that will ensure your income is protected if a suitable tenant cannot be found). You should also budget for all the associated costs, including the price of maintaining the property, rental agency fees and any additional tax that is owed. In general, you should aim to achieve 125% of your mortgage payments, after deducting costs.
What do I need to know about mortgages?
If you plan to borrow with a buy-to-let mortgage, it is critical that you secure the best deal to maximise your profits. Buy-to-let mortgages usually offer less preferential terms than traditional products for owner-occupied properties due to the increased level of risk, but in a competitive market place dominated by low interest rates, you should be able to secure a deal that is affordable.
You’ll need to input a larger deposit for a buy-to-let mortgage and, the larger the deposit you can contribute, the more favourable the interest rate you are likely to be offered.
You may also only be offered an interest-only mortgage so it is vital to have a plan for how to pay off the capital. If you intend to sell the property eventually, can you be certain that you’ll be able to achieve the value of the mortgage, if property prices experience a significant fall?
Why is timing important?
Purchasing a buy-to-let property is not like obtaining a used car from your local dealer. A good investment depends on careful timing, to ensure that your chosen property is attainable at a competitive price while also being capable of achieving a profitable rental income. This is why properties in need of modernisation are particularly popular, as the savings made when purchasing often exceed the cost of repairs and maintenance. Obtaining professional advice, particularly if you are unfamiliar with property renovation, is vital.
It is also worth seeking the opinion of a letting agent before purchasing a property, to find out about likely rental income and the popularity of the area in which the property is located. The higher the demand for properties in a district, the higher the rental price, so it pays to have local knowledge from an exper