Before making your buy-to-let investment, there are many things that you should first consider. There are many different aspects of an investment, and whether you are a novice or an experienced investor, it is extremely important that you consider them all. To help you make the right investment for you, we have created a list of the top tips to consider before taking the plunge.
What Do You Want to Achieve?
When considering making a buy-to-let investment, it is important to determine what you are hoping to achieve, setting clear goals to help you along the way. As part of this, you should look to focus on either capital growth or rental returns, as choosing one or the other can be the key to making the most profit. This decision is based on your personal circumstances, relating to your property, your budget and any other sources of income.
A simple way to look at it would be to consider that a higher valued property may achieve lower rental yields, and so a medium to long-term investment may see you achieve good profits through capital growth, whereas undervalued properties will often produce higher rental yields for you. This also involves determining how involved with the project you want to be. You should weigh up the potential pros and cons about being hands-on, and consider the resources you have and the time you are able to give to the project, as this will help you to decide your overall involvement.
As part of this, you need to find the right buy-to-let mortgage for you. This can be done by considering exactly what you want to achieve, looking at your options and choosing the right mortgage tailored to you. By looking at the different terms and financial implications, you will be able to determine exactly what you want from the investment and how you are able to achieve that through your mortgage. You should take the time to look into your different options, making calculations and in-depth considerations to each area of a mortgage.
Research, Research, Research!
Almost certainly the most important aspect of any investment is to research exactly what you are getting yourself into, researching different financial aspects of investments, realistic investments and also your exit strategy if possible. Not only does this minimise any risks, but it also helps you to predict what profits you may be able to make following your investment.
This includes looking into and ensuring your ability to afford such an investment, as well as the average rents, potential rental yields, expenses and ultimately your potential profit levels.
When considering the property you are going to invest in, it is important to research the best performing property types, the location of your property, your ideal tenant and which combination of these would generate the most amount of profit.
Determining how you will exit your property investment may help you to achieve the most amount of profit, optimising your investment rather than looking to get out of a bad situation further down the line.
Be Fully Aware of Taxes
If you are considering the purchase of buy-to-let property for sale, you should make yourself aware of the different taxes that you may be subject to as a result of your investment, especially as they can really eat into your profits if you don’t fully understand and prepare for them.
Capital Gains Tax
Although the initial £11,100 of profit is free from capital gains tax, the rest of your profit will be charged at 18% or 28%, depending on which tax bracket you are in. Any capital gains tax that you are required to pay should be paid within 18 months; however, this is to reduce to just 1 month after the completion of a sale as of 2019.
For buy-to-let properties, landlords are required to pay a 3% charge on their property price, for all properties over £40,000, excluding student properties, where the charge only applies to properties over £150,000.
Tax on Rental Returns
Any rental income that you generate will be subject to tax charges, based on your individual tax band. Mortgage interest relief is set to see a reduction gradually from April 2017 to April 2020 where the tax relief will be capped at 20%, a significant reduction when compared to recent rates.
Find the Perfect Location
Choosing the right location for your property investment is paramount to the success of your investment project, and can have a direct impact on the profit that you are able to generate. You need to consider the type of area you wish to invest in, such as a city centre property or one in the suburbs and whether you wish for your property to be close to you or further away. These factors should be considered with profit levels in mind, as well as the ease in which you will be able to manage the property. A city centre property further afield from you may cause you more problems and be less profitable than one on the outskirts of the city that is closer to home and easier to manage.
When looking for the perfect location to buy your property in, you should create a list of what you may like the area to have. For example, good commuting links, local amenities, high-quality schools and quiet neighbourhoods may appeal to a lot more people, and so could potentially draw more profit from your investment. You should also consider your tenants at this point too, as buying a property that would be ideal for them based on their interests and needs would mean less chance of void periods.
Be Sure of your Responsibilities as a Landlord
When making a buy-to-let investment, there are a number of responsibilities that you immediately incur, including:
- Making your property a safe place for tenants to live
- Ensuring your property has heating and running water
- Carry out all relevant checks within the property, such as gas and electric safety checks
- Fire-proofing the property and making sure it meets all safety regulation
- Repair issues to the structure and exterior of the property
You will need to ensure that your tenant’s deposit is safe and secure, as well as ensuring that their right to live within your property is protected by an Assured Shorthold Tenancy. This gives them the right to live in your property for the agreed amount of time, highlighting terms surrounding their rent, responsibilities for maintenance and repairs, when they may be served with a notice of eviction and any other relevant information about their agreement.
Their deposit should be placed into a deposit protection scheme, and failure to do so will lead to fines for you or your letting agent. There are two different deposit protection schemes backed by the Government:
Custodial Deposit Protection Schemes
The deposit is paid into the scheme that you choose, earning interest whilst free to use.
Insurance Deposit Protection Schemes
Available through MyDeposits, Deposit Protection Scheme and Tenancy Deposit Scheme, the landlord or agent will keep possession of the deposit and pay interest to the insurer.
Recognise the Potential Problems
As is a well-known fact, all investments come with potential risks and problems that you may face. You need to be aware of the potential problems and what you are getting yourself in for, so that you can prepare and have answers should there be any problems down the line.
- Increases in interest rates could cause mortgage payments to rise, meaning that your investment may become less profitable or even affordable
- Risking too much capital could mean even higher costs and the failure of your investment
- Choosing the wrong property or the wrong location may lead to no interest and therefore no income
- Extensive repairs or maintenance could eat into your profits and make the investment unprofitable
What to do during Void Periods
- Look to take advantage of council tax exemption
- Make repairs and update furniture
- Pay closer attention to utility bills and reduce electricity, water and gas bills where possible
- Make an effort to hold memorable viewings
- Clean your home and make it a pleasant environment
Understand your Target Tenants
Understanding your potential tenants may be the key to finding the right investment opportunity, and then also making the most of it. By knowing your target tenants, you are able to look for certain things that your property should have, whilst considering the ideal location for them depending on their potential needs and interests. As well as this, you can then begin to think about what your property may need based on the tenants, allowing you to plan even further ahead.
Considering your target tenants during your property search also allows you to look at the other side of the coin, meaning that you can prepare for the potential issues that certain tenant types may bring. For example, student tenants may cause damage to the property and mean that you need to make repairs to the property. Students will also only need your property during term time, and so you would be able to consider the summer void periods.
Plan your Exit Strategy
Exit strategies can often be very confusing and a lot of investors tend to avoid creating one. However, an exit strategy could possibly be the way that you optimise your profits and get the most out of your investment. There may be a number of reasons to exit your investment, such as retirement or freeing up some capital, but regardless of the reasons, it can be very beneficial to have that plan in place. Options for your exit strategy can include:
- Retaining your property portfolio forever
- Selling your entire property portfolio
- Restructuring your property portfolio