Choosing a property for buy-to-let
Posted 29 January 2016 by Keith Osborne
Buy-to-let is an attractive opportunity to many who want to invest in property and see a regular long-term return on that investment. However, before you plunge into the buy-to-let property market, there are a number of considerations you should take into account.
Among the topics you’ll need to think about carefully are budget, location, your income expectations, the type of property you might buy, what kind of tenants you aim to find, the costs of buying, who will manage the property and your exit strategy for your investment.
Know your budget
Before looking at any buy-to-let properties to invest in, work out your budget. The more honest and realistic you are about what you can afford, the easier and quicker choosing a buy-to-let property will be.
A good location is one where people want to live. It doesn't have to be the cheapest or most expensive area. It's an area which has the most potential for the future. The type of property you're looking for, as well as the type of tenant you want, should also influence your choice of location.
Get an indication of how much return you'll get on your investment. You can initially do this by working out the rental yield. The rental yield is the property price divided by the yearly rent. For example, the rental yield on a £250,000 property that has a weekly rent of £425 would be 4.4pc. This is £250,000 divided by £22,100 (£425 x 52 weeks). Generally, landlords should look for a minimum rental income of 125% compared with the monthly mortgage repayment. You should also take into consideration capital growth, the potential for increase in the property price or monthly income.
Type of property
The type of buy-to-let property you purchase is related to the type of tenant you're looking to target. Find a type of property which will appeal to the type of tenant you're wanting to move in. One type of property always considered a good investment for buy-to-let is new builds. There are many benefits in buying a new-build property for buy-to-let such as there being generally less repairs to carry out. These new-build properties are also attractive to a wide range of potential tenants.
Type of tenant
What sort of tenant are you looking to move in? A family, single professional or student? Deciding this will also help determine what are the best buy-to-let properties to invest in.
Stamp duty levy
Stamp duty on buy-to-let properties will soon be higher than conventional residential properties. From April 2016, private landlords will also have to pay an extra 3% stamp duty when they purchase their property. For example, for a £275,000 property the current stamp duty is £3,750. From April 2016, it will rise to £12,000. This will dramatically affect your sums when working out what you’ll charge and what rental yield you might expect.
Don't underestimate the work that's involved in being a landlord. You are responsible for repairs and the general upkeep of the property which can add considerable strains to your budget. It's again why new builds are worth looking at for buy-to-lets. You also have the option of paying an agent to look after the running of your flat for you. Way up the pros and cons of self-managing or employing a property management company.
Plan your ‘exit strategy’ for if and when you plan to sell the property. When you purchase a buy-to-let, think about when you may sell the property. Whether it's initially seen as a pension plan or a place to hand down to the next generation, think about the long-term and when to get out. The desirability of a property through its condition and location will be just as relevant then as it is now.