Buy to let introduction
If ever there was a way to make money easily or a way to lose it
easily, then letting property is the way. Letting property is of
course not new, it has been going on for thousands of years. But
now, due to the improved availability of
buy to let loan finance, buying
property to let is open to most people. Additionally the performance
of other more conventional types of investment has been somewhat
volatile and alternatives are being sought.
However, care has to be taken that a flood of new landlords will not
outstrip the demand from tenants. There are many considerations when
investing in Buy to Let and we at Let Property Strategies hope to be
able to help.
The Main Issues
It is vital that you should be clear at outset of your objectives. The three most common reasons for investing in a property to let are:
- To produce capital growth
- To produce an income stream
- To combine income with growth
To produce capital growth or to combine income with growth
In our opinion, any property purchase which has, as part of the rationale, a speculative or high element of capital growth requires very special skills and knowledge. These are the skills of a property developer or a speculator rather than those of a landlord.
If the income stream produced out of a property represents a poor return on capital it may have to be supported by growth in value of the property, in order to produce an acceptable return. This is not unreasonable and in certain parts of the country this is a very important part of the decision to buy.
Local knowledge is absolutely vital if capital growth is your objective. There are many questions that you need to have a clear view on –
- Am I buying at value for money?
- Is it over or under-priced?
- What is the immediate area like?
- What are the risks to negative equity if prices reduce?
How long you intend to hold the property is an important issue too. Is it for a quick turn or are you prepared for a long hold through times of price fluctuation (including negative equity). Remember that if the buy to let rental cover does not produce a good return you will still be liable for any mortgage commitments on the property.
Gearing your capital can help the situation considerably. For example, if you buy outright with no loans, then a 5% increase in capital value gives you naturally enough a 5% return on your capital. However, if you can get away with a 15% deposit only and borrow 85%, and if the rent covers the cost of borrowing, then a 5% increase in the value of the property represents a 33% increase in your investment. (5% / 15% is 33%).
To produce an income stream
If it is done correctly, Buy-to-Let will produce a regular stream of income, which should not fluctuate greatly and should produce an excellent return on capital. It need not present a great risk to achieve this and certainly not one any greater, in fact usually much less, than alternative investments in stock markets and unit trusts.
Let Property Strategies are Property Consultants and Mortgage Brokers. All views expressed are those of Let Property Strategies and the information is believed to be correct at the time of issue. The examples shown within this site are for illustrative purposes only, exclude repayment of capital and allowance for void periods and should not be construed as any form of recommendation. Interest rates may vary and taxation, which has not been included in any example, will depend on individual circumstances. The value of investment property and rent levels can go down as well as up. Investors are advised to seek appropriate legal advice before entering in to any contractual agreement. February 2009
Your home may be repossessed if you do not keep up repayments on your mortgage. Written details on request. Loans subject to status
