With the outlook for savers looking grim, a growing number of people are looking to invest in the residential property market, which continues to provide bumper double-digit returns for investors despite the recent introduction of new charges and taxes.
But if you are thinking about investing in property, it is essential to do things right.
Property Price Advice’s top tips:
Due diligence
When it comes to investing in bricks in mortar, you need to consider all the potential risks as well as benefits. Can you afford to have capital tied up in property over the medium to long-term?
Many people have made huge profits from investing in property, both in terms of rental income and capital gains, but it is important that you invest with your eyes wide open, acknowledging the potential advantages and disadvantages, including the fact that the value of the property may fall.
Talk to friends or colleagues who have already invested in property to learn about their experiences – good and bad.
Ensure that you conduct as much research as possible about the property and area that you are thinking of investing in to maximise the chance of making money.
Location, location, location
Whether investing in a well established or up-and-coming area, it is important to buy property in a place where people would like to live. From students to families, consider who your target tenant is and what it is that they want.
Are there good transport links locally? What are the schools like? Is crime low? Would the area appeal to students or young professionals?
These questions may sound like we are stating the obvious, but they will help determine how successful your property investment will be.
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Number crunchBefore investing in property, it is crucial that you do the maths. Consider your budget: how much will the property cost and how much rent are you likely to achieve? Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demand a deposit of at least 25%. Also, set aside a budget in case the property sits empty for a month or two. Void periods do happen. While you may expect long-term house price rises, it may be wise to invest for income and not short-term capital growth. |
Home improvements
To help maximise returns – rental return and capital growth – it may be worth buying a property that requires improvement. Rundown properties or those in need of renovation can often be snapped at a much cheaper price and done up to add value. As a rule, we suggest that you aim to ensure that the final value of a refurbished property be at least 20% above the acquisition price plus cost of work.
Negotiate
As an investor, you may have some room for negotiating a discount as you are not reliant on selling a property to buy another, and so you are not part of a chain, which reduces the risk of a sale falling through.
Return on investmentCalculate the rental return on your investment property as a percentage of its value. For example, a property delivering £5,000 worth of rent a year that costs £100,000 has a 5% yield. Remember, if you are acquiring a property with a mortgage, you will have to ensure that the rent is enough to cover the monthly payment, plus some in order to cover additional costs, such as decorating, maintenance, letting agency fees and repairs. But while you may expect long-term house price increases, you need to factor in potential falls |
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Financing your property purchase
Aside from the cost of the property, you will also have to spend in the region of £1,000 to £3,000 in fees for lawyers and mortgage lenders.
You should also set aside money for home improvements – the amount you spend will depend on the size of the property and the amount of work that is required.
You need to have a registered electrician and a Gas Safe registered engineer check that all the fixed installations and appliances are safe to use.
You will also need to pay stamp duty, including a 3% surcharge for a buy-to-let/second home.
Buy-to-let and second home Stamp Duty tax bands |
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Brackets |
Standard rate |
Buy-to-let/second home rate |
| Up to £125,000 | 0% | 3% |
| £125,001 – £250,000 | 2% | 5% |
| £250,001 – £925,000 | 5% | 8% |
| £925,001 – £1.5m | 10% | 13% |
| over £1.5m | 12% | 15% |
| Source: HMRC | ||
Securing a mortgage
Shop around to get the cheapest possible mortgage. The rate of interest, size of deposit, and arrangement fee that you pay will vary between providers – so it is well worth your time comparing deals. But note that the best rate buy-to-let mortgages tend to come with large arrangement fees.
It is wise to speak to a good independent mortgage broker when looking for a mortgage. They can not only advise on what deals are available but they can also help you consider which one is right for you and whether to fix or track. Either way, make sure you know how much the mortgage repayments will be. If it is a tracker that you opt for, allow for rates to increase.
Tax
Buy-to-let mortgage interest relief has been axed and replaced with a 20% credit. Additionally, from April 2016 landlords now have to pay an extra 3% stamp duty on property purchases.
There are different rates of purchase tax depending on how much the property is worth. In other words, the more expensive the property is, the higher the rate of tax you have to pay.
If you are renting out a property to someone, there are different ways the rental income might be considered for tax purposes – residential letting, furnished holiday lets or the Rent a Room relief scheme. With residential letting and furnished holiday lets, you can claim back expenses to reduce your tax bill. With the Rent a Room relief scheme, you get a tax-free allowance.
If when it comes to selling your property investment, if you sell at a profit you need to pay Capital Gains Tax.
Insurance
Insurers offer a wide selection of property-related policies, including landlords insurance, which differs from standard home insurance, something that all buy-to-let investors should have as renting out property is never going to be a risk-free activity.