Posted on 9.11.17 by Joseph Maloney
It would be fair to say the buy-to-let market is currently in a state of flux. Over the past year, the so-called ‘war on landlords’ has seen entry costs increase and rent return reduce for buy-to-let investors…
Higher rate stamp duty, introduced last year, has seen many pay thousands extra in tax when purchasing a second property, this combined with a significant tax relief crackdown has driven many private landlords out of the market and narrowed the profit margins of others.
The effect of the stamp duty, in particular, has been significant, the government (according to HMRC statistics) has raked in £2.6bn in residential Stamp Duty in the third quarter of 2017, a 23% increase from the same period last year. In the current financial year, the amount of transactions effected by the tax is up by 6%, with rising house prices largely to blame for the increase in transactions falling into the Stamp Duty net.
However, the fact remains that rental income has steadily been increasing over recent years and is forecast to continue into the foreseeable future, combined with the fact that mortgage rates are still historically low, buy-to-let properties are still piquing the interest of investors. The government crackdown on private landlords doesn’t mean buy-to-let can no longer be a worthwhile investment, it just means there is less margin for error. Considering all the risks and assessing all the costs has never been more important.
Consider the costs
Before you start looking at potential buy-to-let properties, it’s important to map out all the costs and measure them up to potential returns.
Buy-to-let mortgages can be significantly more expensive than your typical residential loan. A minimum of a 25% deposit will be required upfront and the rates will also be higher. This is primarily because of the increased risk to the lender, for example, if the landlord is unable to secure a tenant or the tenant is unable to pay rent it could potentially lead to the borrower falling short on mortgage repayments. Buy to let mortgages also often come with large arrangements fees.
When looking for your perfect buy-to-let opportunity, work out the yield of the property, this is a simple calculation that shows how much annual return you are likely to get from your investment. Property yield is annual rent received as a percentage of the purchase price.
For example: If rent will bring in £20,000 a year and the property costs £200,000 the percentage yield is 10%.
Don’t restrict yourself
Many first-time buy-to-let buyers are keen to buy close to home as there is the added benefit of knowing the area and being able to keep an eye on the property. But if the object is to make money, the right location may have to take precedent over convenience.
Due to the aforementioned lesser margin for error, it may be wise to look further afield for the right investment if your local and surrounding areas are not the best place to buy.
Understand the risks
The property market fluctuates, house prices are rising for now but growth has slowed and they could fall again in the future. If property prices take a downward turn will you be able to continue holding your investment? Mortgage rates are at a historic low, which is a great incentive to invest, but what will you do when rates rise?
If you’re unable to find a tenant, will you be able to make the mortgage payments and for how long? You will need to plan ahead for this scenario whilst also factoring in any potential major repairs that may be needed.
Choose your approach
You will also need to decide how involved you will want to be in regards to managing the property. You can put your property in the hands of an agency but they will, of course, charge a fee. If you choose to go it alone you will be responsible for advertising the property, arranging and attending viewings and sorting out any repairs.
Speak to a professional
Gorvins’ experienced team of buy to let solicitors will provide guidance and advice to make the entire process clear, stress-free and efficient as possible. The buy to let team will support you on every legal aspect of your investment, from understanding the legislation in England and Wales to setting up and maintaining tenancy agreements.
We have expert knowledge of the property market and have a wide range of experience in dealing with diverse transactions so you can ensure everything will be taken care of.