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5 Questions to Ask When Investing in Buy-to-Let

Thinking about investing in a buy-to-let property? Here are a few things for you to consider

Buying-to-let gives you the opportunity to generate a steady income from a property, as your tenants pay rental fees on a regular basis.

In comparison to buying-to-sell, it comes with added responsibilities, such as maintaining the property and finding a tenant in the first place.

In fact, 65% of landlords now play an active role in the maintenance of their property, according to a study by Simple Landlords Insurance1. So, whereas the regular income can be a major draw, a buy-to-let property can be a very hands on investment.

There is plenty to consider before making your first move into this area of property investment.

So, we have created our very own Buy-to-Let Investment Guide to help you get started.

Step 1: What is the current state of the market?

Is now a good time to be investing in property? Things to look out for are housing prices, rental prices and demand for housing.

If houses are more affordable, then it’s probably a good time to invest in regards to gaining value from the investment price. At the same time, if houses are less affordable, it is likely a good time for the rental market – meaning you may find it easier to find a tenant (and potentially charge higher rental prices).

Rental prices will be determined by a number of different factors (property size, location, facilities etc.). But if you feel you can make enough money per month, to justify your initial investment, then it’s a good sign.

For example, if you were to invest in a property in Camden, London – you could pay £750,000 for a two bedroom.3

Average rent in Camden sits around £2,300 per month.4

Therefore, the return on your £750,000 investment would be 3.68% per annum which holds up well against other investment options. In addition, you might be able to sell beforehand or can justify a higher rent.

Residential property is also an appreciating asset in the medium to long term, (properties in London generally increase in value over a 10-year period) meaning that buy to let investors do not only benefit from rental income but also increased sales value of the property when they choose to sell, therefore even in the current uncertain economic times a buy to let remains a resilient investment option.

Step 2: Which area should I invest in?

You may have already decided that you’re looking to invest in the London area. Either you live in London, or have other properties in and around the capital, it is important to consider all different options available before investing. The property market does vary throughout the UK. Investing in Manchester is a lot different to investing in London. For example, the average rental price for property in Greater London is over £1,500 per month. 2

While in the North West, you could expect to charge about £670 per month. 2

Some areas are increasing rental prices faster than others (for example, the West Midlands average increased by 5.1% in 2016 – the highest across the United Kingdom 2). Of course, the initial investment price differs per region, too. So, keeping a budget in mind for your investment is a sensible place to start narrowing down locations.

Once you have a region in your sights, you can start to weigh up the expected return per property, based on rental prices for comparable properties in the area.

It’s also wise to consider how much the property will cost you, beyond the initial investment, as time goes on. From capital gains tax to carbon monoxide alarms, there is a lot of added responsibility when it comes to being a landlord. All of these issues ought to be factored into your decision on a property, before investing.

Here’s a quick checklist of things to consider:

  • Landlord license (do you need one?)
  • Landlord insurance
  • Letting agent fees
  • Capital gains tax
  • Energy certificates
  • Utility bills (are they included/excluded from rental fees?)
  • Maintenance & repairs
  • Smoke & carbon monoxide alarms

Finally, the tenants are different, too. Choosing an area and a property based on money alone is a pitfall to avoid.

For example, a student property in Liverpool may seem like a straightforward investment opportunity based on the growing university culture in the city and relatively cheap property prices compared to London.

However, when you factor in the cost of maintaining a student property in comparison to that of a single professional, the opportunity becomes less appealing.

As a guide, follow this order of questioning when considering a buy-to-let property:

  • What is my budget?
  • Which regions in the UK match this budget?
  • Which of those regions have a high demand for rental properties?
  • What is the average rental price in this region?
  • What is the trend for buying and renting prices in this region?
  • What other costs do I need to factor into my ROI calculation for properties in this region?
  • What tenants can I expect to deal with for these properties?

Once you have a shortlist, you can explore the finer details of the investment to make the most informed decision possible.

Step 3: What are the details of the investment?

As mentioned above, knowing the key details of your investment – like how much money you want to put in, and how much you want to get out – is essential. Investing is always a risk – it’s important to never invest more than you can afford to lose – and accept that you may not get any of your money back. But by doing your research before-hand, you can give yourself a better chance at success.

Things to consider are:

  • How much money do you want to invest?
  • Do you need to take out a mortgage to complete the purchase?
  • How much do you want to make each month (i.e. rental fee)?
  • How long will it be before you’ve made back your initial investment (assuming the property is always occupied with a tenant)?

With all of this information, you’ll be able to make an informed decision.

Step 4: Who is going to manage the property?

Once you’ve gone through the process of purchasing a property, you need to start renting it out in order to generate that revenue.

The cheaper option here would be to manage everything yourself. That means finding a tenant, performing the necessary background checks, and collecting payment each month.

The easier option would be to hire a letting agency to do all of this for you. There will be additional charges (roughly 10-15% of your rent – excluding extra costs like commission if a tenant renews).

But if you don’t have the time, desire or experience to do any of the above – it’s probably the best way.

Just make sure you go back to your ROI calculation to factor in this additional cost.

Example letting agent scenario

Rent paid by the tenant to you (per month): £600.00

Fee paid by you to the letting agent for managing the property (per month): £90.00

Step 5: Is buy-to-let really the best option?

It’s clear to see that a buy-to-let investment means you’re going to be heavily involved with the process. Although the long-term gains are there (a steady income stream is very appealing, especially once you start building a portfolio of multiple properties). But there is a lot to commit to on this journey, which is why it’s not for everybody.

The alternative is to buy-to-sell. A straightforward option that suits more opportunistic investors.

If you’d rather read our comparison guide, we’ve got all the pros and cons of each investment type in there.

Always seek independent advice. This blog has not been approved as a financial promotion by Cogress Limited. We are not responsible for the content of external websites. Potential investors must rely on their own due diligence prior to investing.

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Daniel Levene2018-11-16T22:49:59+00:00