Ten tips for buy-to-let: the essential advice for real estate investors
- Our buy-to-let guide explains the essence of investment property
- Regular update guide explains how you can assess investments and make a profit
- Read more about the best locations to invest in real estate, buy-to-let mortgages, rental income and what tax changes mean for landlords and investors
The mortgage interest on a purchase-to-lease can be almost at the lowest level, but investing in real estate is much more difficult than it ever was: a tax burden on buying investment properties and a raid on rental taxes have ensured.
House price increases have also come to a halt, depressing the prospect of making money from real estate inflation.
But for many Britons, the idea of investing in real estate remains attractive because they have faith in bricks and mortars and may feel that they can add value to a home in a way that they cannot do to an investment fund.
If you are tempted, read our 10 buy-to-let guide tips, which are regularly updated and have helped millions of landlords in more than a decade.
Buy-to-let is much harder than it once was, but investors are still interested in real estate
Why invest in buy-to-let?
A world with low interest rates helps to polish up the appeal of buy-to-let. Returns on savings are low and mortgages are cheap.
But interest rates are expected to rise and the 3 percent charge on the stamp service will cost a large portion of your money, while the loss of full mortgage interest deduction has eaten in the return.
Buy a house of £ 150,000 and you lose £ 5,000 in taxes on stamp duty (use our calculator for stamp duties) and your rental income is now taxed and not your profit.
As an income investment for people with enough money to launch a large down payment, it looks attractive, especially when compared to low savings rates and fluctuations in stock markets.
In the meantime, the real estate market, returning after the lows in the financial crisis, is restoring more investors to conquer real estate in the hope that its value will rise.
House price increases have priced most people out of real estate investments in London, but some areas in the UK still have to reclaim the land lost after the financial crisis collapsed and investors are increasingly looking for stronger returns.
The mortgage interest rate at a low point helps buy-to-let investors to raise deals.
But beware of low rates. One day they have to get up and you need to know that your investment can pass that test.
A tax increase has also been implemented, since buy-to-let mortgage interest deduction is being abolished and replaced by a tax reduction of 20 percent.
In addition, from April 2016, landlords must pay an additional stamp duty of 3 percent on property purchases.
But despite the tax changes, there are positives.
A higher demand from tenants, rent that should rise with inflation and the long horizon of interest rate rises, means that many investors are still tempted by buy-to-let.
If you are planning to invest, or just want to know more, we'll tell you the 10 essential things to consider for a successful buy-to-let investment below.
As with any investment, buy-to-let comes without guarantees, but for those who are more confident in bricks and mortar than stocks below, these are the 10 best tips of this money.
Is buy-to-let still in the pipeline?
My property is my pension. That was the popular saying when buy-to-let was all anger and every other person you met saw their chances as a small owner of real estate.
But life is much harder for landlords, with a series of tax grips and stricter mortgage rules that strike.
Buy £ 140,000 buy-to-let and the tax advisor takes £ 4,500 – put your £ 40,000 down payment in a pension instead of two years and he will raise it to at least £ 50,000.
Is buy-to-let still a stepping stone to increase your wealth? We discuss that in this week's podcast.
Press play to listen to the show above or listen (and subscribe if you like the podcast) to Apple Podcasts, Acast and Audioboom or visit our This is Money Podcast page.
1. Investigate the market for 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 could perform better elsewhere.
In recent years, a high savings account would beat most investments. Now the rates are lower, but investing in buy-to-let means connecting capital in a property that may fall in value.
This compares with the possibility of a 5 percent annual return from an income-based investment fund, or 3 percent on one fixed income savings account.
Bear in mind that the return on an investment in funds, shares or an investment fund through an Isa ensures that you escape income tax and that your capital growth becomes tax-free. You also have the ability to sell quickly if you want.
Ten tips for buy-to-let
This guide helps landlords make the right decision for more than a decade.
It is regularly updated with new information and is designed to help you properly assess buy-to-let.
If you have a buy-to-let question, you can send an email to firstname.lastname@example.org
The downside is that you cannot buy an unloved investment fund and start working on renovating it and adding value yourself.
Investing in buy-to-let involves investing tens of thousands of euros in a home and usually with taking out a mortgage.
If house prices rise, this means that it is possible to make large leverage gains over your mortgage debt, but when they fall, your down payment is hit and the mortgage stays the same.
Real estate investments have yielded great rewards for many people, both in terms of income and capital gains, but it is essential that you are wide-open with your eyes and recognize the potential pros and cons.
If you know someone who has previously invested in buy-to-let or rented out a property, ask them about their experiences – warts and such.
The more knowledge you have and the more research you do, the greater the chance that your investment will pay off.
2. Choose a promising area to invest in real estate
Promising does not mean the most expensive or cheapest. Promising is a place where people want to live and that can have various reasons.
Where does your city have a special appeal? If you are in a commuter belt, where do you have good transport? Where are the good schools for young families? Where do the students want to live?
You must match the type of home that you can afford and want to buy with locations that people who would like to live in those homes would choose.
These questions may seem too simplistic, but they are probably the most important aspect of a successful buy-to-let investment
In most cases, people usually invest in real estate close to where they live. On the positive side, they will probably know this market better than anywhere else and can see the type of property and the location that will do well. They also have a much better chance of keeping track of the property.
But it is also worth keeping in mind that if you are a homeowner, you are already being exposed to real estate where you live – and looking for a different type of home in a different area can be a good move.
Tax on rent and mortgage interest
New rules mean that landlords can no longer collect all their mortgage interest against income tax on rent.
In 2020 this will be completely removed and replaced by a tax reduction of 20 percent on paid mortgage interest.
The system is being introduced gradually and the tax relief is gradually being reduced, as below:
• In the tax year 2017-18, landlords could claim 75% mortgage tax reduction • In tax year 2018-19, landlords can claim 50% mortgage tax reduction • In tax year 2019-20, landlords can claim 25% mortgage tax relief
In the tax year 2020-21, landlords can no longer deduct mortgage costs from rental income and instead receive a tax reduction of 20% against mortgage interest.
Landlords must add their rental income to their regular income and pay it at the right level and then reclaim their tax reduction. This could force some landlords on a tax bracket, up to 40 percent or 45 percent tax.
For those who are pushed into the bracket between £ 100,000 and £ 123,000 a year, the effective tax rate is 60 percent due to the removal of their personal allowance at this level.
3. Do the math on buy-to-let
Before you think about looking around, sit down with a pen and paper and note the costs of houses you look at and the rent you are likely to get.
Buy-to-let lenders usually want rent to cover 125 percent of mortgage repayments – often now 150 percent – and most now require 25 percent deposits, or even greater, for rates that are significantly higher than mortgage agreements with homes.
The best rate buy-to-let mortgages also come with large settlement costs.
Once you have the mortgage interest and the rent is probably sorted, do you have to be clinical to determine if your investment works?
Don't forget to take maintenance costs into account.
What happens if the home is empty for a month or two?
These are all things to consider. Make sure you know how much the mortgage repayments will be and whether it is a tracker to raise interest rates.
The best buy-to-let mortgages
The cheapest buy-to-let mortgage rates are fixed for two years and for people with a large down payment they are as low as 1.49 percent of Leeds BS and 1.52 percent of Sainsbury & # 39; s.
However, a five-year fix may be a wiser plan for many landlords, and the best rate here is the 2.04 percent deal from Virgin Money.
However, those are low mortgage loans, and if you only have 25 percent to put down, the best two-year fix is 1.67 percent from Sainsbury & # 39; s Bank and the best five-year fix is 2.25 percent from Santander.
However, beware of high amounts, the above deals come with a maximum of £ 2,500.
When it comes to getting a buy-to-let mortgage, a good intermediary is a great help and can point out deals that you actually secure.
To compare the best deal for your circumstances, use our buy-to-let mortgage locator tool, made possible by broker London & Country
The buy-to-let mortgage that is offered to you depends on your circumstances and the criteria of the financier. Ideally, they prefer larger deposits, strong rent to cover mortgage payments and a healthy profit elsewhere.
4. Shop around and get the best buy-to-let mortgage
Don't just walk into your bank and build 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 of dollars.
It pays to talk to a good independent broker when looking for a buy-to-let mortgage. Not only can they tell you which deals are available, but they can also help you consider which one is right for you and whether you want to fix it or follow it.
However, you still have to do your own research so that you can start the conversation armed with the knowledge of what kind of mortgages you should be offered.
This is Money & # 39; s carefully chosen mortgage broker partner London & Country offers free advice, you can find more information and use our comparison tool to find the best buy and rent mortgage for you here.
5. Think of your intended tenant
Instead of imagining whether you want to live in your investment property, you have to put yourself in the shoes of your intended tenant.
Who are they and what do they want? If they are students, it should be easy to clean and comfortable, but not luxurious.
If they are young professionals, it must be modern and stylish, but not overbearing.
If it is a family, they have had enough of their possessions and need a blank canvas.
Remember that if you give tenants the option to leave their mark on a home, such as decorating or adding photos, or removing unwanted furniture, this will make you feel more at home.
These tenants will stay longer, which is good news for a landlord.
It is also possible to take out insurance against your tenant who does not pay the rent, usually the rental guarantee insurance. This costs just £ 50 and is available as a stand-alone product from a specialized provider or as part of a broader landlord insurance policy.
6. Don't be greedy, go for rental income and remember costs
We've all read the stories about buy-to-let millionaires and their huge portfolios.
But while you can Expect house prices to rise in the long term, experts say that investing in income is not capital growth in the short term.
To compare the values of different properties, use their return: that is the annual rent that is received as a percentage of the purchase price.
For example, a property with a rental value of £ 10,000 that costs £ 200,000 has a yield of 5 percent.
Rent must be the most important return for buy-to-let.
HOW DO YOU WORK OUT THE RETURNS ON YOUR PURCHASE AID
Remember, if you buy with a mortgage, the rent-to-home price will not be the return you get.
To calculate your annual return on investment, deduct your annual mortgage costs from your annual rent and then work this sum up as a percentage of the down payment you have made.
For an accommodation of £ 100,000 that can rent for £ 500 a month, you need a deposit of £ 25k and about £ 2,000 in purchase costs.
£ 75k mortgage at an interest rate of 5% = £ 312.50
£ 500 rental income x 12 = £ 6,000
Difference = £ 2,250
Deposit + purchase costs = £ 27k
Annual return = 8.3%
Remember that taxes, maintenance costs and other expenses of the lessor will include that return.
Most buy-to-let mortgages are done on an interest-only basis, so the loan amount will not be repaid over time.
However, while you could settle your entire mortgage costs with tax that is currently being eaten and by 2020 you will receive a tax reduction of up to 20 percent on your mortgage payments.
If you can get a significant return on your mortgage payments, you can start saving or investing extra money as soon as you have built up a good emergency fund.
However, remember that people rarely buy a house and they come with running costs, so mortgage costs, maintenance and brokerage fees must be calculated and they will eat your return.
You may want to consider whether buy-to-let is still an investment fund or a trust if these costs are taken into account.
Once the mortgage, costs and taxes have been considered, you want the rent to accrue over time and may then be able to use it as a down payment for further investment, or to finish the mortgage at the end of its term to unload.
This means that you benefit from the income from rent, have paid the mortgage and have the full capital value of the home.
7. Look further or acquire a property
Most buy-to-let investors look for properties in the vicinity of their place of residence. But your city may not be the best investment.
The advantage of a property in the area is that you can keep an eye on it, but if you do have an agent, they should do it for you.
Cast your nets wider and look at cities with good commuter connections, which are popular with families or have a large university.
It is also worth looking at properties that need improvement as a way to increase the value of your investment. Tired houses or buildings that need to be renovated can be negotiated to get a better price and then cleaned up to add value.
In this way it is still possible to see a solid and fast return on your invested capital. If you can immediately add some value to a home, this gives you a greater safety margin for your investment
However, do not forget to ensure that the price is low enough to cover the renovation and some profit and that you take into account the inevitable cost overruns.
A good rule to follow is the rough calculation of the project developers, where you want the final value of a renovated home to be at least the purchase price plus the cost of the work plus 20 percent.
8. Down to price if you invest in real estate
As a buy-to-let investor, you have the same advantage as a first-time buyer when it comes to negotiating a discount.
If you are not dependent on the sale of one property to buy another, you are not part of a chain and you represent less of a risk of a sale falling through.
This can be an important asset when negotiating a discount. Make low bids and don't be persuaded to pay too much.
It pays to know your market when negotiating. For example, if the market is softer and houses take longer to sell, you can negotiate better. It is also useful to find out why someone is selling and how long the property belongs to the owner.
An existing landlord who has owned a property for a long time – and cashes in their capital gains – may be more willing to accept a lower bid for a quick sale than a family that needs the best possible price to pay for a move .
9. Know the pitfalls of buy-to-let
Before you make an investment, you must always examine both the negative and the positive aspects.
House prices are rising now, but growth has slowed and they could fall again. If house prices fall, can you continue with your investment?
Meanwhile, rates are currently low and that encourages people to invest comfortably with rent that covers the mortgage, but what will you do if interest rates rise?
Also consider the standard variable interest rate to which you can move after a fixed interest period. What happens if you cannot perform a remortgage?
Even in popular areas, homes can be empty. A rule of thumb to which many buy-to-let investors apply is to keep the property empty for two months of the year – this provides a significant buffer.
Houses often need to be repaired and things can go wrong. If you do not have enough on the couch to cover a major repair to your home, such as a new boiler, you should not invest yet.
It is also essential to read the buy-to-let tax. An additional levy surcharge of 3 percent is now being charged and soon all mortgage interest can no longer be settled with rental income before the income tax is calculated. A tax reduction of 20 percent is introduced instead. Read more about taxes on buy-to-let here.
10. Consider how hands-on a landlord you want to be
Buying a home is only the first step. Do you want to rent it out yourself or do you get an agent to do that.
Agents will charge you management costs, but will solve any problems and have a good network of plumbers, electricians and other employees if something goes wrong.
You can earn more money by renting the house yourself, but be prepared to cancel the weekend and the evening for viewings, advertisements and repairs.
If you choose an agent, you don't have to go for a High Street presence, many independent agents offer excellent and personal service.
Select a shortlist of agents large and small and ask them what they can offer you.
If you are considering doing it on your own, see where you are going to advertise your home and where you will receive documents such as rental agreements.
It is worth taking care of your tenants. Do this and they will take care of you.
The biggest impediment to the investment return of many buy-to-let landlords is the invalid period. A time when you have nobody in the building. Good tenants who want to continue helping prevent this – and if they continue, they can even recommend your property to someone they know.
Stay on top of maintenance, make sure your home is a nice place to live and try to build a good personal relationship with your tenants.
This manual was first written in February 2006 and is regularly updated