If you're keen to invest in a buy-to-let property for the first time, don't jump in unless you know all the facts.
If you've always fancied yourself as a bit of a buy-to-let baron, you may have been put off by the house price crash. But there are tentative signs that the worst could be over, with Nationwide reporting that prices rose for the fourth consecutive month in August.
So perhaps now could be the right time to take the plunge. But do prospects for the buy-to-let market really look any good? After all, for the thousands of investors who have made a real killing out of letting properties, there are just as many who have had their fingers well and truly burnt.
So, how to do you know whether your first foray into the world of buy-to-let is a smart move? Let's find out...
Prospects for the buy-to-let market
It really is swings and roundabouts for the buy-to-let market.
In short, if house prices continue to recover and lending criteria doesn't relax to improve affordability, then first-time buyers will still struggle to get onto the property ladder. This is good news for the rental sector with first-timers forced into renting properties for longer periods.
According to the Council for Mortgage Lenders (CML), the UK rental sector is still relatively small compared with other parts of the industrialised world, suggesting there's room for further growth. On top of that, the persistent housing shortage problems continue to support demand from tenants.
But an increase in the number of reluctant landlords - that is, homeowners who are unable to sell at a decent price and are letting their property instead - means there may be more properties available than there are tenants, which would depress rents.
Of course, on the other hand, if house prices recover, reluctant landlords may choose to sell, resulting in a shortage of rental properties which would then push rents back up.
The fact that we're in the middle of a recession, with the threat of rising unemployment, could be bad news for rental arrears. While the CML reports that arrears improved in Q2 of the year, they remain at historically high levels.
So, the prospects for the market are hard to call. But I would say here that despite all the data, what's arguably more important is the buoyancy of your local rental market.
It's a very good idea to speak to some lettings agents in your area to find out what local tenancy demand is really like. Get to know the level of rental income you can realistically achieve based on the type of property you want to let. And check out whether you're likely to be faced with long periods when the property won't be occupied.
Buy-to-let mortgages
What we do know for sure is that buy-to-let lending has endured some very troubled times indeed. The market has been far more heavily affected by the shortage in wholesale funding than the residential lending market.
In fact, many buy-to-let lenders have withdrawn altogether.
But it's not all bad news. Borrowers are now enjoying lower interest rates and therefore, lower mortgage repayments in just the same way as the wider mortgage market. This has improved affordability for landlords.
And, as many buy-to-let mortgages are set-up on an interest-only basis, the fall in monthly repayments will be greater compared with mortgages arranged on a capital and interest basis.
However the fact remains that if you apply for a buy-to-let mortgage, you'll still need a hefty deposit of between 25% and 40%. Often fees for arranging the mortgage are charged as a percentage of the amount you borrow - 2.5% to 3% isn't uncommon, which would set you back £3,750 to £4,500 if you borrowed £150,000.
So, there's no question that if you're going to dip your toe into the buy-to-let waters, you'll need a fair bit of cash behind you first.
Some top tips for first time landlords
First of all why not start pursuing our Become a buy-to-let landlord goal. Here you'll find the motivation you need to make it a success as you complete each task.
For example, before you commit any money to this project, work out all your costs in advance. This includes your deposit and the cash you'll need to pay your mortgage fees, as well as making sure you can comfortably afford the repayments on your buy-to-let mortgage.
If you intend to appoint a letting agent to manage your property, you must compare the fees they charge and the service on offer before you make your final choice.
You'll also need to figure out how you'll cope if your tenant(s) fall behind with the rent. To protect you against arrears, it may be worth considering rent guarantee insurance. Also there may be times when the property is unoccupied - known as void periods - when you won't be getting any rental income at all. Plan ahead to work out how you'll keep up with the repayments on your buy-to-let mortgage.
There are also a number of practicalities you'll be responsible for as a landlord. Here are just some of them:
- You'll need to make sure you have all the correct gas and electricity safety checks for the property.
- Also ensure all furniture in the property complies with fire safety regulations.
- You'll need an energy performance certificate. An EPC for your property is now compulsory.
- Consider taking out landlord's emergency insurance. This will usually cover some of the costs for emergency repairs to your electrical system, heating or hot water supply, windows, roofing and so on.
- Don't forget, you'll have to complete a self-assessment tax return to declare your rental income and any capital gains you make when you eventually sell the property.
So, you can see there's a lot to think about, and I've only really scratched the surface. I would just like to leave you with one final thought: property is a long-term investment. Those who are in it for a quick buck are often the ones who don't do well. Good luck.
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