Buy-to-let mortgage rates may be at near rock bottom levels but investing in property is much tougher than it once was – a stamp duty tax crackdown on buying property investments and an income tax raid on rent has seen to that.
House price rises have also stalled, denting the prospect of making money from property inflation.
But for many Britons the idea of investing in property still appeals, as they trust bricks and mortar and may feel that they can add value to a home in a way they can’t to an investment fund.
If you are tempted, make sure you read our 10 tips for buy-to-let guide, which is regularly updated and has helped millions of landlords over more than a decade.
Why invest in buy-to-let?
A world of low interest rates helps polish the attraction of buy-to-let. Returns on savings are low and mortgages are cheap.
But interest rates are forecast to rise and the 3 per cent stamp duty surcharge eats a large amount of your money, while the loss of full mortgage interest tax relief has eaten into returns.
Buy a £150,000 home and you will lose £5,000 in tax on stamp duty (use our stamp duty calculator) and your rental revenue will now be taxed not your profit.
As an income investment for those with enough money to raise a big deposit buy-to-let looks attractive, especially compared to low savings rates and stock market swings.
Meanwhile, the property market bouncing back after its financial crisis lows has encouraged more investors to snap up property in the hope of its value rising.
House price rises have priced most people out of London property investment, but some areas of the UK are still to regain the ground lost after the financial crisis slump and investors are increasingly looking there for stronger returns.
1. Research the market on buy-to-let
If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits.
Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere.
In recent years a high-rate savings account would beat most investments. Now rates are lower, but investing in buy-to-let means tying up capital in a property that may fall in value.
2. Choose a promising area to invest in property
Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons.
Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
You need to match the kind of property you can afford and want to buy with locations that people who would want to live in those homes would choose.
These questions might sound overly simplistic, but they are probably the most important aspect of a successful buy-to-let investment
3. Do the maths on buy-to-let
Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.
Buy-to-let lenders typically want rent to cover 125 per cent of the mortgage repayments – often now 150 per cent – and most now demand 25 per cent deposits, or even larger, for rates considerably above residential mortgage deals.
The best rate buy-to-let mortgages also come with large arrangement fees.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment work out?
Don’t forget to factor in maintenance costs.
4. Shop around and get the best buy-to-let mortgage
Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.
It pays to speak to a good independent broker when looking for a buy-to-let mortgage. They can 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.
5. Think about your target tenant
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.
Who are they and what do they want?If they are students, it needs to be easy to clean and comfortable but not luxurious.
If they are young professionals it should be modern and stylish but not overbearing.
If it is a family they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home.