10 recession-busting buy-to-let tips

Christina Jordan outlines ten terrific tips to protect and perfect your property investment strategy

It's not been plain sailing for buy-to-let borrowers over the past couple of years, with drastically reduced mortgage options, dramatically increased lending restrictions and a worrying rise in tenant arrears to cope with.

Low interest rates may have given many landlords on a variable rate something to smile about, but the looming threat of rate rises is ever present, and a sharp rise in mortgage repayments could plunge many buy-to-let borrowers into mortgage arrears.

However there are actions you can take to maximise the performance of your buy-to-let investment now, and protect yourself from the inevitability of increased mortgage rates.

1) Use a letting agent

Unless you are extremely experienced in the buy-to-let market a letting agent can make your life much easier and increase the chances of a successful investment. They will find good quality tenants, take care of credit checks and references, and cover your back legally, ensuring you have a watertight contract in place as well as helping you wade through the red tape.

If you want them to fully manage the property, they will undertake all communication with the tenants, and deal with maintenance and repairs - so you don't get the call in the middle of the night when a pipe has burst. For 10%-15% of the rent they do the hard work for you.

2) Overpay your mortgage

Many landlords have seen their monthly repayments plummet as a result of falling interest rates, but it's what you do with the money you have saved that could make the difference between success and failure.

If you have excess rental income overpaying your mortgage not only reduces your overall debt, it can also bring down your loan-to-value ratio. This opens up far more remortgage options, as the more equity you have the better deal you can get. Indeed you will struggle to remortgage at all without 25% equity.

3) Upgrade your property

Investing in your property may not seem like a good use of any surplus rental income with possible rate rises around the corner, but improving your property can reap rewards.

A lick of paint or a new bathroom could make your property far more attractive to tenants, reducing the chance of them leaving and minimising nasty void periods between lets. Plus you may be able to attract a higher calibre of tenant, who keeps the place clean and pays their rent on time.

4) Fix your mortgage rate

It might seem crazy to consider moving from a low variable rate to a more expensive fixed deal (which start at just under 5.5%), but some landlords are fixing all or part of their portfolio in order to protect themselves from future rate increases.

If you can afford a fixed rate deal but your rental income would not cover higher mortgage repayments it could pay to lock in now. Not everyone will agree with this, as you could stick on a low variable rate and save any excess rental income. However, many portfolio landlords are managing their interest rate risk by keeping some mortgages variable and fixing others.

Seems sensible to me.

5) Communicate with tenants

Are your tenants fully aware that their rent should be their priority debt? Have you made sure they have set up a standing order to pay it, even if they are friends or family?

It's essential that you make it clear the rent must come first. But also let them know you are approachable and encourage them to talk to you early if they are worried about meeting their obligations.

6) Have an exit strategy

Know what you want from your investment.

Are you planning to sell up and invest any profit into a business venture, or do you expect your buy-to-let investment to act as your pension? It's amazing how many landlords do not have a firm plan of action.

If you intend to sell your property do you fully understand your Capital Gains Tax liability? Or if you plan to live off the rental income is your mortgage on a repayment basis? If not, do you know how you will repay the debt at the end of your term?

7) Consider landlords' insurance cover

It's not for everyone and you might prefer to manage your own risk but rental void cover and rental guarantee insurance can be useful tools for landlords, protecting against empty properties or tenants that can't pay. And with almost half of landlords claiming to have suffered some form of rental arrears during the recession, protecting yourself could be a very clever move.

8) Discuss payment problems early

Unless you are stuck on a high fixed rate, you are probably enjoying relatively low mortgage repayments. But if you are struggling, or fear you may have payment problems in the future, the first thing you should do is talk to your lender. They are committed to helping buy-to-let borrowers get back on track with their repayments, and some may offer a temporary reduction or a payment holiday if appropriate.

Lenders have pledged that repossession will only be used as a last resort, so contact them early in order to get help.

9) Sell up if you need to

It might not seem like a great tip for successful property investment but knowing when to sell up is vital.

It you are having problems meeting your mortgage repayments now, it could be compounded when interest rates rise. If you have equity in your property, selling up and taking any profit could prove your best option. Landlords with portfolios should assess which properties are performing for you, and which are not.

Realising some profit by selling up could allow you to expand your portfolio or reduce your debt.

10) Use a mortgage broker

The majority of active buy-to-let mortgage lenders are only accessible through a broker, so it's a no-brainer that you need one. They also offer invaluable advice and can help you restructure your financial arrangements, reducing your costs or releasing funds to expand your portfolio.

Many of the best funding solutions for landlords are currently from commercial lenders and you really need a specialist to help you navigate this complex lending arena. Put simply, you will get a better, cheaper buy-to-let mortgage if you go through a specialist buy-to-let broker.

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