In recent years, many investors have turned to property as a way of providing both income and capital growth.
Between 1999 and 2019, the average cost of a home in England rose by more than £188,000, from just over £91,000 at the end of 1999 to around £279,997 at the end of 2019 - an increase of more than 200%.
If you're thinking about purchasing a Buy to Let investment, there are a range of factors you should consider before you take the plunge. Here are five of the most important.
1. Make sure you understand the risks as well as the benefits
As above, a £188,000 rise in the value of the average property in England over 20 years is a clear reason to consider property as an investment. But how much do you really know about the property market? Are you aware of the risks as well as the benefits?
While savings rates are low, property might be attractive. However, investing in Buy to Let means tying up your capital in a property that may fall in value, and that is relatively illiquid (in that it can be difficult to sell quickly). Investing in Buy to Let typically involves committing tens of thousands of pounds to a property and, often, taking out a mortgage.
While property investing has paid off for many people, both in terms of income and capital gains, it's important that you go into it with your eyes wide open, acknowledging the potential advantages and disadvantages.
The more knowledge you have and the more research you do, the better the chance of your investment paying off.
2. Make sure the numbers work for you
Before you even start to look around for potential properties, it’s important to work out whether the numbers work for you. For example, consider the cost of houses and the rent you’re likely to receive for them.
Buy to Let mortgage lenders typically need the rent to cover between 125% and 145% of the mortgage repayments. You may also have to put down a 25% deposit or more, and interest rates are generally higher than they are for residential properties. Also, the best mortgage deals often come with large arrangement fees.
Once you have an idea of the mortgage rate and the likely rent, you can work out whether this investment is feasible. Don’t forget also to factor in:
- The costs of repairs and maintenance
- Void periods – what happens if your property is empty between tenants?
- Are there other fees to pay such as buildings insurance, or ground rent/service charges on leasehold properties or flats? What about fees to a letting agent?
Finally, remember also that returns from funds, shares or an investment trust through an ISA are tax free, whereas there are many property taxes to consider. This brings us to...
3. The tax you will pay
In recent years, tax changes have made it more expensive for landlords to invest in property.
Firstly, there is now an additional 3% Stamp Duty surcharge (4% in Scotland) when you buy an additional property. On a £200,000 purchase, this is an additional £6,000 charge (£8,000 in Scotland).
Additionally, the government has been phasing out tax relief on mortgage interest since April 2017, with the proportion you’re allowed to deduct slowly being reduced each tax year. From the 2020/21 tax year onwards, landlords can only subtract a flat credit of 20% of their mortgage expenses from their rental income when filing their tax return.
Also, you could previously claim some Capital Gains Tax (CGT) relief if you had rented out a property that had been your main home at some point, even if you hadn’t lived in it for a long time.
Now, landlords will usually need to be living in the property in shared occupancy with the tenant at the time of the sale to claim this relief. If you don’t, you may also have a CGT bill to pay based on the profit you have made on the property when you sell it.
4. Do your research
Rushing into a decision when buying an investment property can be a costly mistake. So, having looked at the numbers, it’s important that you then do your research in terms of where and what to buy.
They may seem like simple questions, but you need to ask:
- Where to people want to live?
- Which locations have good transport links?
- Where are the good schools for young families?
- Where do the students want to live?
You need to match the kind of property you can afford and want to buy with locations that people who want to live in those homes would choose.
Often, people tend to invest in property close to where they live. The advantage is that you might know this market better than anywhere else, and you can spot the type of property and location that will do well. It may also be more convenient when it comes to managing the property.
However, if you are already a homeowner, you are already exposed to the property market where you live. Most experts advise diversifying investments, and that means looking for a different type of home in a different area may help you to avoid putting all your eggs in one basket.
5. Seek professional advice
When it comes to Buy to Let investment, there are lots of issues to consider. Many of these will concern the financial aspect of the investment, from the mortgage to the taxes you’ll pay.
This is why it can pay to speak to a professional early in the process. They can help you to:
- Establish exactly what mortgage you can afford
- Work out how much a mortgage will cost, and whether you’ll be able to borrow based on the estimated rental income of the property
- Understand what costs are involved
- Understand the tax implications of your purchase.
As Buy to Let mortgage specialists, we can provide you with answers to all these questions and more. Request a callback or call us on 03300 583 859 to find out more.
Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy to Let (pure) and commercial mortgages are not regulated by the FCA.