What is ‘buy to let’ and is it right for you?
On paper, buying a property with the intention of letting it out at a monthly rent which exceeds your mortgage repayments sounds like a pretty straightforward way to make an easy profit, right? The answer is a little more complex than you might expect! Here we examine the pros and cons, best strategies and common pitfalls of this increasingly popular way to invest in property.
Do you qualify?
In order to qualify for a buy to let mortgage, you’ll need to be able to tick a few boxes. While the rules differ from country to country, you generally need to provide some kind of proof that your expected monthly rental income will be higher than the mortgage repayments – usually around 125%. Many (but not all) lenders will also require you to own your own residential property first before granting you an additional mortgage; and because they’re seen as more risky than traditional home loans, they’re likely to charge you more interest too. Shopping around to find the best deals and working with direct lenders and property experts in the area you’re interested in is your best bet in finding the most attractive deal. That might even mean looking overseas.
Of course, if you have saved up sufficient capital for a healthy down payment, are lucky enough to have come into an inheritance or other windfall and are able to buy cash, the picture might look very different! For most of those wanting to get their foot in the door, however, this isn’t always an option. Whatever your financial circumstances, spending a few years saving aggressively before you take on additional debt is always a good idea, as buy to let properties come with costs that aren’t always immediately apparent – more on that later.
The good news
In most parts of the world, rentals are going up. This means that scooping up a great property in an up-and-coming area can provide a steady stream of income despite the associated costs. And because property prices in the area are going up, you’re growing your overall investment at a very attractive rate, while also gaining a major asset. Over time, you should be able to purchase additional properties and grow your portfolio, using some of your profits to expand your empire.
Before you change your social media profiles to reflect your new title as a property mogul, there are some less obvious costs and potential pitfalls to consider. Aside from having to maintain and insure the property, pay income taxes on this new source of revenue, and the relevant transfers and estate agent fees, there’s the very real possibility that you could end up with troublesome tenants. What happens if the person who’s been renting from you for the past two years suddenly loses their job and can’t afford to pay their rent for several months? What if rental prices in the area suddenly drop? It’s important to remember that a buy to rent property is not a get rich quick investment, and you need to get expert advice, crunch all the numbers, crunch them again, and allow for a margin of error on your expected profits. Failure to do so could mean you end up with a property that loses money each month instead of the opposite.
Starting with a small unit like a flat in a popular area which is already in good condition is the best option to get your feet wet and discover if buying to let is right for you. All investments come with a certain amount of risk, but you don’t want to get burned right from the get-go. If all goes well, you’re ready to move onto more challenging projects – but you won’t face bankruptcy if it doesn’t.
Moving onto something like student housing, such as working hands-on with contractors to convert a small home into separate units for multiple rental incomes, could be your next move. Some people discover they love getting involved with the process, dealing with a wide range of artisans and contractors from carpenters to plumbers and architects, managing equipment and forklift rentals, and watching their property transform before their eyes. It might even be the start of a whole new career! On the flipside, you might discover you prefer a less hands-on approach, and would rather have a letting agent manage your properties for you. By starting small, you have the room to experiment and discover the type of landlord you were destined to be.
Finding suitable properties
Another enjoyable and rewarding aspect of buying to let is shopping around for properties with potential! Sometimes that potential is obvious – like large properties within walking distance of a college, apartments close to amenities and public transport, or pretty houses in vacation hotspots. Sometimes you might need to think a little more outside the box – such as in neighborhoods with extremely attractive property prices, but few amenities and low average incomes.
Wherever you look, doing as much research as possible and always running the numbers carefully while keeping an open mind for opportunity can be massively rewarding – both personally and financially.