When you consider the poor return you will see on savings or the high risk attached to investing your money in the stock market, using your savings as a large deposit on a buy-to-let property seems like a good idea doesn’t it? Well we’re not about to rain on your parade but what you do need to know is that you should proceed with caution. We give you some tips on buying-to-let below.
So Do Buy-to-Let Investments Perform?
According to a recent study cited by the telegraph, buy-to-let investments have outperformed all other major investment opportunities over the past 18 years. When you take out a buy-to-let mortgage you benefit from something known as leverage, where you receive a greater return on your investment than if you were to pay cash – this is because you are receiving the same rental income despite investing a smaller amount of cash up front because the balance is financed through the mortgage – this also offers you greater buying power. However, this could change in the near future when the property market changes.
Understand the Terms and Conditions of the Buy-to-Let Mortgage
While buy-to-let mortgages are on offer through major banks and building societies – in fact 14% of all mortgages in the UK are buy-to-let mortgages – you need to put rather a hefty deposit down in order to avoid paying exorbitant fees. For the lowest fees of under 3%, you would need to put down a 40% deposit, which will then negatively affect your leverage and lower the return on your cash investment, so you need to research, research, research to find out exactly what fees you will pay up front as well as part of the mortgage repayments.
Know What Type of Property Offers the Best Return
While you might think that a large property will offer a better return than a one bedroom apartment, you may need to think again. According to a report published by Thisismoney.co.uk, the type of property that offered the best yield was a one bedroom apartment in Wales, outperforming larger properties in London. And don’t forget the old adage: location, location, location – invest in an area that is up-and-coming.
What are the Risks?
When you are selecting the type of property you will buy, you also need to consider what ‘type’ of tenant you are targeting. While a one bedroom flat may offer the best return, it might not offer the best security because depending on the area, your tenants may have cash flow problems and default on their rent from time-to-time. Fortunately, it is quite simple to offset this risk, by taking out rent guarantee insurance. There are also other risks attached to property: failing house prices, stagnant rental prices and dry months where you may not be able to get tenants into your property. Ensure you have enough of a financial safety net aside for such circumstances and don’t push all your cash into a deposit.
Remember that you have an Advantage
Do you remember being a first time buyer? The very prospect seemed daunting but all you had to do was buy a new property, not wait for another property to be sold first. Well as a buy-to-let buyer you have exactly the same advantage as a first time buyer – you don’t need to sell first, which means you have a strong bargaining chip – use it wisely to get the best price possible.
If you do your homework and your sums carefully, buy-to-let might be a good investment for you. Just ensure you are fully clued up on all the potential risks and rewards.