It would be easy to start by saying how easy it is to become a landlord and earn income from UK investment property and how you can simply sit back and watch the profit tumble in like a cascading waterfall. The reality is that there are a number of key issues that you will have to be involved in to ensure your investment property portfolio works to its optimum. With tenants to source and vet, an investment property to maintain, buy to let mortgages to arrange, letting agents to manage and accounts to monitor, it does take a certain level of commitment. So if you are still keen to have a slice of the much talked about property game then you will want to read on to find out how to get started?
Firstly, you need to establish if this is the right time for you to become a landlord and how much it is going to cost you. Can you afford to tie up money in a property? If the worst comes to the worst, can you afford to lose that money?
The simplest way to work out the repayments on a buy to let mortgage is to use an on-line buy to let mortgage calculator. These can help you work out the best buy to let mortgage product for the type of UK investment property you are considering and your individual circumstances. You will need to know the likely rent that can be achieved for the property as this will determine the maximum loan amount available against the purchase price or refinancing value of the buy to let property. Lenders normally suggest that the rental income each month represents at least 130 per cent of the monthly mortgage payment. Although there are some buy to let products calculated on ratios of as little as 115%. By working on these calculations, gives the investor a margin to cover the letting agent’s fees and other associated costs.
This is a long-term investment and you need to take the same approach to investing money into a house or flat as you would to buying into the stock market. Historically the value of properties have doubled every 10-15 years but that doesnt mean to say that there wont be peaks and troughs in between. These are times that you have to be prepared and most importantly can afford to ride through.
Increasing your returns by using buy to let finance to your advantage
For example, lets say you have 100,000 cash to invest into Investment Property. Is it best to buy a property outright or use this money as deposits on multiple buy to let properties?
Mr Jones decides to use his 100,000 to purchase a brand new property outright for cash. He lets the property for 600 per month giving a return of 7,200 per annum. Due to inflation, the rent will increase accordingly and eventually, after fluctuations in the property market, the house doubles in value.
Mr Smith decides to use 100,000 as deposits (15% for each investment property) to buy 500,000 worth of properties similar to the one Mr Jones bought. This results in Mr Smith receiving five times as much rental income, i.e. 3,000 per month or 36,000 per annum. The other 400,000 is borrowed on buy to let mortgages and Mr Smith pays interest on this at a rate of approximately 5%. These monthly interest only repayments would work out to be 20,000 per annum. Therefore, net of interest they receive 16,000 per annum. Mr Smith is already better off than Mr Jones.. but what happens in years to come? Well it is probably safe to say that Mr Joness rental income will rise with inflation as per Mr Smith. However, Mr Smiths buy to let mortgage costs remain the same. Therefore, the gap between Mr Jones and Mr Smiths rental income will continue to widen as time goes on. And finally after 10-15 years when property could have doubled again. Mr Jones would have made a capital gain of 100,000 and have 200,000 worth of investment property. Whereas, Mr Smith would have made 500,000, which is five times as much capital gain!!
The most successful landlords will use some of the best buy to let mortages to fund their buy to lets and with buy to let mortgage products becoming more sophisticated and competitive the right buy to let financing can ensure you maintain your investment property portfolios in such a way that you are always working to the most optimum cashflow situation.
Best Buy to Let Mortgages
Finding the best buy to let mortgage is crucial to your success as a property investor. Unlike other forms of investment, a lot of the money you put into a buy to let property is likely to be borrowed. Over the last few years, the buy to let mortgage market has boomed, and borrowing money to invest in this way has become easier than ever. There are a number of different buy to let mortgage products available from fixed rates, discounted variable rates, discounted rates and so on. Different products may be suitable for different investment properties. And dont be tempted to just go for the cheapest buy to let mortgage as there may be penalties that make it less attractive in the long term.
Always find out the best buy to let mortgage deals available at the time. Some investors may decide to retain their entire portfolio with one lender, but its important to realize that different buy to let products between different lenders can provide you with maximum flexibility and cashlow depending on how you structure your funding.
However it is very important that you get the correct guidance with your buy to let finance. You will often find that buy to let mortgage brokers have access to numerous different products and lenders and some can even offer exclusive products that wouldnt necessarily be available to you if you approached the buy to let lender directly.
Questions that are worth considering when finding the best buy to let mortgage:
1. Do they have access to lots of different products in the market place?
2. Do they have the ability to create a long term property development strategy for you?
3. Are they able to secure Exclusive Products?
4. Are they able to arrange mortgages within 10 working days?
Most buy to let lenders will offer a maximum loan of 85% requiring you to fund at least a 15% deposit towards your UK investment property. The buy to let mortgage industry is very competitive with new products being launched on a very regular basis.
Some buy to let mortgage brokers may charge a brokerage fee up to 2% to arrange the buy to let finance for you but dont let this put you off because if they do have the ability to secure exclusive products for you, it could be very beneficial to your cashflow as a landlord. Plus, if they are able to reach formal mortgage offer stage in a very short space of time, this could result in you being able to secure the investment property at very competitive prices if you have the ability to tell the vendor that you can have the deal completed within a matter of a few weeks.
How much you can borrow for the buy to let property will usually be worked out differently to how much you can borrow to buy your main home. Different lenders and different products carry different criteria for working out the maximum loans available. Some will lend on how much you earn, others on the rental income you achieve from the investment property. And sometimes a combination of the two.
How much rent will you make?
Before you agree on the purchase price of a buy to let property, it is important to find out from local letting agents, what the likely rent could be. They should be able to let you know which types of property are in highest demand and which areas are the most sought after for tenants. If you need to find out whether your potential buy to let is looking like a good investment, ask your broker/lender to work out the yield (ie the money you are investing and the rental income you will receive) on the property against what your repayments are likely to be. I you are investing in an up and coming area, it could still be a viable investment despite the figures not looking too healthy today. If you believe that the area will be having a lot of other investment or new businesses moving in, then there is the possibility that the surrounding property market will have a positive knock on effect. When the valuation is carried out on the property, the surveyor who visits the property will also be expected to give an assessment of the expected rent as well as the value of the property.
A local letting agent is the best person to approach for this kind of information – especially if you hint that you might let them be the propertys management agent.