Investing in Buy to Let

With speculation that property prices are to rise 50% by 2025, a buy to let investment has never seemed more attractive to both part-time and professional landlords. A buy to let property can offer long-term capital growth, security for the future financially and you can make a great rental income from it. Being the owner of a property for investment does have its pros and cons, however, like any other investment as there is a lot of commitment involved when buying a property. Below, we take you through all the advantages and disadvantages of investing in buy to let, so you can decide whether or not it is the right option for you.

Should You Borrow to Fund Your Buy to Let Investment?

Thinking purchasing a property as an investment but do not have the cash to buy the property outright? Then you will be looking to borrow money to purchase your property in the hope that you will make a profit on it and this practice is called gearing. For example, realistically, the chances of being able to borrow over three quarters of a buy to let property’s value is not going to happen. So, with the gearing concept, you would say, make a deposit of 10% cash on the property and then you would take the rest of the cost as an interest-only buy to let mortgage. Of course, here we are not taking into account many other factors that you would need to if you really were buying a new property such as tax, maintenance bills, landlord insurance and mortgage fees. So, if after a year the property has risen in value by 5% and makes a profit upon selling, then you can simply pay off the rest of the remaining mortgage and then take the rest of the money as your profit. However, it is important to remember that while this is the scenario that everyone wants, it can work against you and you could see a fall in the property’s value which means you would lose part of your investment. It’s worth reading into so you can learn from professional experiences with gearing.

The Pros of Investing in Buy to Let

One of the most attractive things about buy to let has been that the property market has continually risen in value plus you can enjoy the rental income from the property as well as the long term security that a property investment can provide you with. For example, it was estimated in 2015 that in just the previous five years alone that landlords have made a profit of more than £177 billion from capital growth on properties! This does not even include any profit made from rent! Furthermore, it was reported in May 2016 that they year-on-year rise was a whopping 8.1%. Of course, as the prices of houses have risen, so too has the price of rent.

Do you know how to calculate the rental yield? If you are going to be entering the property market then this is something that you will need to take into consideration and you can find plenty of calculators online to help you with this. Essentially, if you are unfamiliar with what rental yield is, it is your rental return as a percent number of the cost of the investment house. The big thing to remember here is that while it may seem like you are going to be making a lot of money from this rental yield, you need to take into account the many extra costs that come along with being a landlord. It also does not take into account the actual mortgage payment that you need to pay back.

Cons of a Buy to Let Investment

While we would argue that the pros of a buy to let investment definitely outweigh the cons, there are still some things that you will need to consider before you enter into this type of investment. As this is still an investment, there is always a degree of risk attached. While property prices have risen over the years, there is no guarantee that the property that you buy will rise and it could end up losing money. Furthermore, you may have to deal with unruly tenants and you also need to ensure that you have a diverse portfolio. However, while these are cons of a buy to let investment, below we have given you some great tips so you can avoid these pitfalls.

Create a Diverse Portfolio

The one thing that every investor will always agree on is that you must have a diversified portfolio. This is just the general rule of investing no matter whether you are investing in property or stocks and shares. Having a balanced portfolio will keep you financially secure as you won’t be as exposed should an asset be lost or not do as well as you originally would have liked it too. An over reliance on one specific asset is never a good thing!

House Prices Falling

Another pitfall that many investors can fall into when investing in property is that the house price falls. While this can sometimes be due to factors that are simply outside of your control, sometimes just a little bit of research beforehand can pre-warn you about property investments that are going to fall. One of the biggest factors in house prices rising and falling is the area in which they are located and before you make a purchase you should always see where the new property hotspots for 2018 are located. For example, if you are looking to purchase a property investment in the North of the country then research will tell you that Manchester and Liverpool are, at the moment, enjoying a fantastic moment amongst property investors and you should also look out for other cities too such as Leeds, Sheffield and Nottingham. These are hotspots for the year ahead as more and more people will be relocating to these places that are cheaper as they can still work in London thanks to the development of HS2.

Unruly Tenants

Becoming a landlord is no walk in the park and for some it will definitely be worse than others thanks to unruly, problematic tenants. It will be up to you to deal with any property maintenance that is required and sometimes that can end up being quite a lot as tenants may not respect a property as much as if it were their own. For many, a good way to avoid unruly tenants is to use a letting agency. This can take away much of the stress that is involved with being a landlord and dealing with tenants as this can be a major problem that can leave you in a financial hole if they are not paying bills on time and are not respecting your property. You will also need to remember that your rental income is subject to income tax.

Overall, a buy to let property is a fantastic investment and can provide you with financial security for years to come so you can look forward to a lovely retirement! Start doing some more research today to find out if a buy to let investment is the right type of investment for you.