Lets consider a couple of important issues first.
According to the latest Bank of England figures, the huge hike in buy-to-let landlords in the UK has led to a massive mortgage debt of £200bn to fund their property investments. This staggering figure has grown from around £10bn in 2000 and buy-to-let lending now represents around 15% of all mortgage loans.
Naturally, the Bank of England is worried about unsuspecting new landlords who could be hit hardest when interest rates start to rise. Many buy-to-let mortgages are interest only and are not fixed rates. When interest rates rise and if investor’s en-mass were forced to sell their properties, it might affect prices, causing a fall in prices and potentially lead to a similar situation to the 2007-2008 credit crunch, when many mortgages were forced into negative equity. I doubt though that many would be forced to sell and indeed there are under 2.7 million buy- to–lets in the market place so even if they all went bump although causing a stir it is doubtful that it would cause a total melt down the size of which we saw in 2008.
There are about 25 million homes in the UK, of which seven out of 10 are owner-occupied. The number of home owners has risen by more than one million since 1997 alone. In 1918, eight out of 10 homes were rented privately, compared with one in 10 now. Un-fortunately, we can’t predict the future, but what is certain is that while demand grows for affordable housing across the UK, buy-to-let will continue booming.
Although it is likely that interest rates will rise in the next 12 months, investors can protect themselves from financial difficulty, if they make sound and well planned buy-to-let choices. The problem is that many investors purchase buy-to-let property without carrying out their due diligence on their area of operation and the local market and considering all the financials. If investors fail to make a considered purchase, they are at a much higher risk if any financial pressures hit them.
So what are the common mistakes that investors make when they invest in buy-to-let?
Location, Location, Location
It’s a big mistake to buy a property in area you don’t know. Investors need to research the local area and understand market conditions. Rent yields vary from demographic to demographic and although general demand across the market is high it important to buy in an area with strong rental demand. Think about the potential of the town you are considering for buy-to-let, is the town in a commuter belt? Is there a demand? What the competition is like? Are there good transport links? Are there good schools and shops for young families? Is there a student demand? In most cases investors tend to invest in property close to where they live. This is a great advantage as they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Contingency Fund
Many investors do not factor in a contingency fund. If you do not have a contingency fund in place to cover unforeseen circumstances, then you could fall into financial difficulty. As a general guideline, 30-35% of one year’s gross annual rental income should be put aside to cover rent arrears, void periods, maintenance, repairs and refurbishment, white and brown goods replacement and the on-going rental costs such as gas safety certificates and letting agent fees. Any contingency funds not used can be dealt with as a small premium on your year end, as long as you make the same provision next year.
Cash Flow
It’s vital to do the maths before investing or you could be seriously out of pocket. You need to buy an asset, not a liability and it needs to put money in your pocket every month. Before you think about looking around properties, sit down with a pen and paper and write down the cost of the properties you are looking at and the predicted returns. Buy-to-let lenders typically only offer a maximum LTV (loan to value) of 70% and will seek a minimum of 125% rental cover, this is rent plus 25% allowing the margin of cover. Ensure you know how much the mortgage repayments will be and if it is a tracker, allow for the rates to fluctuate in your calculations. Once you understand the mortgage rate and potential rent achievable, then you must do the numbers carefully and work out how your investment will perform. Ensure you factor in maintenance costs and work out how you will cope if you have void periods between occupancy? These are all things to consider. Make sure you know how much the mortgage repayments will be.
Don’t’ Be Emotional
It can be easy to follow your emotions when purchasing a property, be excited by the possibilities, especially early in your investing career. The golden rule is don’t buy a house because you love it and would like to live there yourself. You need to “love the deal” and not the property. You can sometimes trade a little on price and rental income if you know the area well and feel you will achieve great capital appreciation, but you are a little more dependent on market fluctuation.
Have a Great Team to Rely On.
Property is a team sport; investors need the support of a good mortgage broker, solicitor, accountant, builder and letting agent. You will find that a good letting agent may be able to assist you in your property search and indeed make introductions to their own power team to help you. Develop a relationship and work with them they can prove invaluable.
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