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Buy-to-let investments guide

It’s important to try and make your money work for you. Investing your savings can reap rewards, but it can also come with risks. Here’s what you need to know about investing in a buy-to-let property.

Key with metal house keyring attached, resting inside the palm of a hand above a work bench

Putting your extra cash in a savings account can provide a safe place, but the returns are typically minimal – and in some cases, nothing at all. Investing in stocks and shares goes the other way – it can potentially generate a high yield, but it also comes with greater risk.

Investing in property is normally seen as a safe investment. There will always be a demand for somewhere to live, and the general trend of the market has reliably been upwards. But it’s important to remember that this is never a guarantee, and so this kind of investment isn’t for everyone.

You can invest in property by simply buying a home and living in it, hoping that the overall value of the property appreciates with time and that you can sell it on for more than you bought it for. Or you can buy a property and rent it out. It’s the ones you rent out that this guide is concerned with.

What is a buy-to-let mortgage?

Buy-to-let mortgages enable you to borrow large sums of money to purchase a property with the intention of renting it out. They work in similar ways to residential mortgages, though buy-to-let mortgages usually come with higher interest rates and higher deposit requirements (usually around 25%).

You would typically use part of the rental income on such a property to make mortgage repayments. And remember that the money that you receive as profit from a buy-to-let property is income, so contributes towards your income tax allowance.

What are the benefits?

Putting your savings in bricks and mortar has for a long time been one of the safer investment propositions. There’s always a need for property and the market trends upwards over time.

Similarly, there is usually a strong rental market – particularly in larger towns and cities.

As well as the overall value of the property, letting allows you to increase your income.

There is flexibility with how your property is managed. You can decide whether your tenant pays one sum every month that covers everything or whether you only charge them rent and they are responsible for the rest. You can also manage the property yourself or delegate the management to an estate agent for a percentage fee.

Is a buy-to-let investment right for you?

Do your sums first 

First, think about how much money are you willing to pay for your property. As well as needing a large deposit, a buy-to-let mortgage tends to cost slightly more than one for a residential property. You’ll also have to pay out for stamp duty (3% additional levy on buy-to-let properties), solicitors’ fees and potential renovations. Finally, the rent you receive counts towards your income and so you will need to add it to your taxable earnings. Be aware of the income tax thresholds and how the rent you receive will affect yours.

Consider the overall value of the property

It’s sensible to have a good idea of the rental income you will receive in mind when you invest in property, but bear in mind too the overall value of the property when it is sold. While you can draw an income from a rental property, at some point you will aim to be mortgage-free and your thoughts may turn to selling the property on. This should be a part of your initial calculations.

What size is your mortgage likely to be?

Many buy-to-let owners choose to pay their mortgage on an interest-only basis, which means you are only paying off the cost of the loan. Although the amount of money you borrowed will never go down, an interest-only mortgage does mean you have less to pay out each month. You’ll need to decide whether you want to pay off the mortgage balance too, because at the end of the mortgage you’ll have to repay the outstanding balance. If you ask your bank or a qualified mortgage adviser they might be able to give you a ball-park figure for the amount you will pay each month.

Add up your costs

As we’ve discussed, there are lots of costs to factor in. If you think that overall you will be making an income on your investment that you’re happy with, then a buy-to-let mortgage might be the way you want to go.

How much rent will you be paid?

You’ll need to know your likely income as well as your costs. The easiest way to find out how much rent you’ll be able to get is to look at what local estate agents are asking for. You can do your research online of course, but you might find it worthwhile contacting a local estate agent. Not only will they tell you how much rent you can ask for, but they’ll probably be able to offer other advice too. Are two-bedroom flats more in demand than one? Are any areas in town especially popular? Don’t be afraid to ask. They should be pleased to offer you assistance – after all, you may become a client of theirs.

Err on the side of caution when you estimate the rent you’ll receive

You know approximately how much rent you can ask for, but don’t assume you’ll be paid that amount all year. Some of the time your property will be vacant while you try to find new tenants. Will you be able to afford your property’s costs without rental income coming in? It might be shrewd to err on the side of caution and assume that you’ll only be receiving rent for ten months of the year.

Now add it all up

Once you’ve done all your research, factored in all the expenses and made all the necessary deductions, you can give yourself a ball-park figure of what you can expect to make in income. This should give you a firm idea of whether a buy-to-let mortgage is the way to go with your savings.

Finding your buy-to-let property

What sort of size property are you thinking of buying, and in what sort of area? Obviously you’ll be able to rent out a bigger house to more people. And if it’s somewhere people want to live you’ll be able to charge more. Find out if there’s good public transport and what the local rates are like. There are pros and cons to buying close to home. You’ll know the market well, and you’ll be able to keep a close eye on your property. But the downside is that your rented accommodation will be exposed to the same risks as your home, and it is normally safer to diversify investments to protect against the same problems affecting separate nest eggs.

There are good reasons not to bother having it furnished. Aside from saving money, tenants may stay longer if they’ve put their own furniture in and feel like they’ve made it their own.

Buying your property

Have your potential tenant in mind

When purchasing a buy-to-let property have your potential tenant in mind and consider their needs.

If you would like to rent your property to a family, consider factors important to families such as storage space, size of the garden, proximity to transport links and good schools.

The commute to work plays a big part for young professionals when choosing where they want to live. They need good nearby transport links or a home which offers parking facilities. They are very likely to take nearby shops, pubs and cafes into consideration when finding a place to live.

Go for it

Getting a buy-to-let property isn’t a frivolous undertaking. But if you’ve weighed everything up, done your research, crunched the numbers and are convinced it’s the right path for you, then it’s time to start looking at mortgages. See what’s available with Post Office by using our calculator.

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