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Buy-to-let Considerations

Buy-To-Let investments have become really popular in Britain in recent years. As interest rates on savings have fallen, and as pension funds have been raided and endowments have dwindled, Brits have turned to property to make money. However, the rising price of property and increasing interest rates have made the market much tougher for investors.

The love affair with property has carried on regardless of warnings from experts that this no longer a route to easy money. The Council of Mortgage Lenders reports that in 2006 there were 330,000 buy-to-let mortgages taken out worth £38.4bn.

In June of this year Halifax plc reported that the average British home cost £194,500, and the base bank rate was up at 5.75%, giving landlords a harder time than in 2004 when home averaged at £154,000 and the bank rate was down at 4.5%.

Nevertheless, the buy-to-let market is still viewed as a route to riches. It may turn out to be eventually but anyone new to the market should follow a strict and careful path. Buy-to-let is a business and as with any business the figures must work.

The first question is: do the figures work? Traditionally, a buy-to-let investor would put down a deposit of 15% minimum and ensure that rental income would achieve 125% of the mortgage repayments. It has become tougher and the providers have eased their qualifications, shifting buy-to-let from a soundly based business to something more akin to a landlord’s gamble on rising house prices delivering capital growth as rental income has shrunk in comparison with mortgage outgoings. The trouble is that those qualifications provided safety-net restrictions, giving cover to landlords for tenancy gaps, repair bills and increasing mortgages. Without those restrictions landlords leave themselves dangerously exposed.

Would-be landlords should buy for the market, not for themselves. You should make sure that your property is going to be appeal to a wide rental market, and don’t be lured by expensive fixtures and fittings that will put the property out of the range of many tenants. Renovations are also more expensive on luxury properties.

You need to examine the rental market in the area where you’re considering buying a property. Remember again, that you’re not buying a property to live in yourself, you’re buying it to rent out, so, yes, it might need to be near a station, an airport, a university or a business park. It is worth putting in some time and effort to understand which areas rent well.

You also need to look at where your potential tenants are coming from. Are there more of them than available property or is there too much property for the number of tenants. Try to make sure your property fits the renting population.

You also need to consider all the other costs involved in owning a buy-to-let property. Items need maintaining, and you will probably need to attend to them more quickly that you would in your own home. You might live with a broken cupboard handle – your tenant is unlikely to. Maintenance will include white goods, other electrical goods, furniture and fixtures. You need to keep a reserve fund for such potential emergencies.

There is also the cost of a lettings agent to consider. You might be able to manage all rentals yourself, but it is probably better to use a lettings agent – at a charge of around 10% of the rental amount.

Tom Smith
7th August 2007

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