The concept of buying a property and renting it out to generate an income is not a new idea – landlords in university cities have been doing it for years. This style of investment has not been without its fair share of complications over the years and yet more potential issues on the horizon today. This is not to say Buy to Let is not a good idea – it can be incredibly profitable when it works, but get it wrong and it can be an incredibly expensive and time consuming lesson.
How Buy to Let has changed
What signified the entrance of Buy to Let into the investment world as a fully-fledged investment vehicle was the introduction of mortgages specifically designed for Buy to Let in the mid-’90s which were heavily marketed by the banks to entice the public with what sounds like a very simple investment concept that the home-owning public could understand and easily relate to.
The substantial influx of mortgages designed with the property investor in mind was arguably a fundamental driver of house prices in the UK for several years. Coupled with a strong economy at the time and a number of tax benefits for investors, it led to a boom in the property market.
Low interest rates, interest-only mortgages and high loan to value ratios have all been marketing tools used by the banks to stimulate lending to the sector. Whilst all have enabled people to enter the Buy to Let market more easily than ever, it has sadly created a few problems that today’s investors can (and should) avoid – unless of course, you are buying in cash.
Points to consider before investing in Buy to Let Property:
Whilst some of these points will sound obvious – many have been caught short by not taking them into account!
- Decide if you want to be a “hands-on” landlord. Will you manage the property yourself? Or, will you use an agency? Using an agency will incur costs – ensure you include them in your calculations before you buy
- Demand – Is there real rental demand for the type of property in the area you are buying? Finding what appears to be a cheap 3-bed semi is all very well, but if demand is primarily for 1-bed flats and studios it might be difficult to find tenants
- Regulations – Rental property requirements with respect to safety are constantly being updated. Evaluate any property prior to purchase to establish how much time and money might be needed to bring it up to and keep it in line with regulations
- Mortgages – There are plenty out there, some will be more suitable than others. However, remember to consider these few points: If interest rates start to rise – will the rent still be able to cover it? If it doesn’t– are you prepared to make up the shortfall? In the case of interest only mortgages – It might be 25 years before the principal is due to be repaid, but have you thought about how you will do that when the time comes?
- Taxes and Ownership – Property not classed as your primary residence is subject to different taxes and rates (some beneficial to the owner in the form of mortgage relief and others being additional taxes). Some taxes can be reduced by placing ownership with a relative for example and in some cases, it can be effective to own the properties using a company shell. Needless to say, structuring the ownership of the property itself and how the rental income is accounted for can get incredibly complex and subject to change as the UK is beginning to see
- Tenants – Whilst using an agency to manage the property and find tenants is a sensible option to avoid most issues that can arise, regulation of landlords themselves is a hot topic in the UK at the moment for a variety of reasons – ranging from the upkeep of the property itself to proposed new legislation making landlords responsible for renting to immigrants. An example of the extent of governmental concerns over landlord regulation can be seen here.
Buy to Let investing is often portrayed by the press as an “easy” investment – years ago that might have been the case, more recently though as regulations, taxes and lending policies change – be sure to understand and prepare yourself.