Mortgage blog: Why buy-to-let may now be a long-term game
For years, many people have chosen to invest in property using buy-to-let mortgages. The promise of capital gains and rental income is a convincing reason to invest but what happens when house prices start to cool?
As the rate of property price growth slows, landlords are being warned that they should view buy-to-let as a long term investment. Experts are also advising that they should carefully work out the financial implications of an investment before buying.
Why property should be a 10-20 year term investment
With property prices cooling, it’s harder to make a quick profit on a rental property. This means that landlords may have to think in 10-20 year terms before investing in a property.
“It’s even more important now to do your homework,” says Richard Lambert, chief executive of the National Landlords Association. “There was an assumption in the past that you put your money in here and it came out there. More people are now looking for a rental return.”
According to the Financial Times, landlords should now be looking at holding a property for 10 to 20 years. The newspaper says that “because of stamp duty, capital gains tax and other costs, it is expensive to enter and exit property investments, so a brief holding makes little sense”.
If you’re not likely to make a quick profit on selling a property then the most important focus becomes on whether you will be able to find a tenant who will pay the rent you need to make the investment viable.
Keith Osborne, editor of Whathouse.com, says: “Successful buy-to-lets tend to be in convenient locations close transport links and other amenities. They are also generally properties in good condition as tenants like well looked after homes and because repairs can eat into rental profits.”
When considering a buy-to-let investment it can also pay to fully consider the potential costs. These will include maintenance and repairs, your buy-to-let mortgage payments, letting agents’ fees, insurance and tax on any profits that you make. In addition, you also need to carefully consider how you’d afford to meet your monthly costs if you didn’t have a tenant for a period.
Regional differences can help you to make money
If you’re looking at a long-term investment that will provide a healthy rental return then it can pay to head to the geographical locations where rental yields are higher.
The FT reports that rents in London grew at the slowest pace of any region in the past year, compared to rising rents in the East of England and the East Midlands. According to LSL’s index London offers a 4.2% yield compared to 7.2% in the North West, 7% in the East Midlands and 6.3% in the West Midlands.
Osborne adds: “Properties with higher rents can also help a landlord to maximise their buy-to-let mortgage borrowing. As the mortgage amount is often determined by the rent it follows that higher rents can help landlords to get the largest possible loan.”
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