Buying residential property to rent out privately has been hugely popular in recent years. Indeed, there are more than 850,000 buy to let mortgages in the UK (source ifaonline.co.uk).
Advantages:
1. They are easy to understand: you purchase a property, rent it out and retain the surplus monies after expenses and taxes are paid
2. Buy to let mortgages are not very difficult to come by as long as you have a deposit of at least 30%
3. They offer good income potential, particularly good for those who may be facing retirement
4. Potential for capital appreciation: long-term property prices have easily outpaced inflation in the past century, spectacularly so in the last 10 years
5. Opportunity to 'gear up'; this is where your gains are based not just on your actual investment but on the amount you have borrowed. For example, if the property cost £100,000, deposit of £20,000, and the property value increases by 10%, your gain is £10,000, this is equal to 50% of the original outlay. Of course, there are legal fees and associated costs to take into account
6. If house prices are static or even start to fall, less people are keen on buying their own home. They are more willing to rent - which in turn keeps rental yields high
Challenges:
However, buy-to-let is not as easy as many people make out. You have to bear in mind the following issues:
1. Entry costs can be high, between 5% and 10% of a property's actual purchase, once you factor in stamp duty, solicitors' expenses, doing the place up and conforming to all legal requirements
2. You may face problem with tenants, which can be a nightmare if they fail to pay the rent or cause damage to the property. You have to factor in about 5% of annual rent for repairs and maintenance. This is tax-deductible and it is important to have landlords buildings and contents insurance to cover your costs
3. You will almost certainly have 'void' periods where the property in unoccupied which means you will pay the mortgage until you find new tenants. This is one reason why many landlords own several properties, spreading the risk across several buy-to-let homes
4. Looking after a property can be a full-time job, especially if you have demanding tenants. If you ask a letting agent to manage it on your behalf, including finding and vetting tenants, collecting rents and arranging maintenance on your behalf, it will cost between 8% and 15% of your rent each month. This too is tax-deductible
5. If you decide to sell, you will face 'exit' costs of up to 3%, including solicitors' fees and estate agents charges
6. There is the issue of box income tax plus capital gains tax to pay on any profits accruing on the sale of the property. This can be quite costly
7. Buy-to-let investments and advice are not regulated by the Financial Services Authority. What this means is that if a dodgy salesman gives you the wrong advice on an ISA, you can complain to the Financial Ombudsman Service and get redress. If a dodgy estate agent tells you a property makes an ideal buy-to-let and six month's later you haven't got a tenant, there is no redress
8. Gearing can work against you: if prices fall by more than 15% and interest rates rise, as they did in the 1990s, you may end up with a mortgage larger than the value of your property. Meanwhile, you will probably not be able to increase your rent to take account of rising interest rates
9. Finally, while bricks and mortar are a safe investment, in the sense that over the long term prices do outstrip inflation, it is not always the case in the short-term. Prices fell dramatically between 1988 and 1994 and again in the mid-1970s
Before you decide to buy a second property, make sure you do all the sums and look at every angle first.
Mortgage Saints Ltd is an Appointed Representative of Pink Home Loans. Pink Home Loans is a trading name of Advance Mortgage Funding Ltd which is authorised and regulated by the Financial Services Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.
