You've decided to buy your first investment property so what should you look out for and what makes a good buy? These are the questions this article will answer for you...
Choosing Where to Invest:
This will be largely dictated by your budget and also if you want to live close by to your investment or not. Budget and how you intend to finance the purchase, will dictate if you can afford to buy in certain locations. As for being close by, it's really not necessary when you can utilise a local agent to take care of matters for you.
So where should you start looking once you know how far your budget will stretch?
Buy to let investing is typically a long term investment strategy, you buy it, you tenant it and hold the property for a good number of years (hopefully in that time the property goes up in value) and one day you can sell that asset and you have a nice lump sum of money.
With capital growth in mind... you will want to look at areas of the UK, where you can buy a good quality property, in a decent area, that will hopefully give you a good amount of capital growth!
Now historically, property always increases in price (long term) - but some areas have better growth than others. You can check out these areas using a website called: Property Data - this website will allow you to do a postcode search and it gives you all the historic data and rental values and a whole host of other data points too.
Looking back at how an area has performed in the past five years will give you some level of confidence about the future. (capital growth should never be banked on as a certainty)
So what makes a property, a good buy to let deal? Well it's wise to remember it's not about the property, it's about the numbers. It doesn't matter if there is a high spec kitchen with all the mod cons, what matters is... what is the net cash-flow each month!
To work this out effectively you have to know how much your property will rent out for. This gives you your gross rental income. Next we want to know what the costs will be each month...
Agent Management Fees (usually around 8 to 10% of the rent per month)
Repairs & Maintenance (account for 5% of the rent each month)
Voids (again account for another 5% of the rent each month)
Landlord Insurance (typically £20 to £40 per month depending on policy)
Income Tax (you will be liable to pay tax on rental income)
If you are self managing (not recommended) this would save you some money, but having a professional agent manage the tenants is always wise, as lettings and management is heavily legislated and ever changing.
It's always prudent to account for the rainy day, so when the washing machine needs replacing, you have a pot of money set aside. The same with voids, it's great when you have a tenant who wants to put down roots and stay for years, but tenants do tend to move and this could leave you with a void period where you have zero income. That rainy day will come so make sure you have a pot of money set aside for this to cover you.
Landlord Insurance is a must, so you will need bricks and mortar cover as a minimum and if you are providing a furnished property, then you may want to consider contents insurance too.
Income Tax on rental income is payable and what you need to be aware of is this could push you into a higher band. You should speak with a property tax specialist to work out what your tax implications are based on your own personal circumstances.
The Net Income:
After you have accounted for all your running costs each month, you are left with the NET CASHFLOW each month. It's common for joe public to think all landlords are filthy rich and make lots of money... but the actual cashflow each month can be quite small.
Buy to let as an investment strategy is where you take a long term view on your investment. You would hope based on all your research that your BTL will increase in value and give you the option to sell and release a lump sum of capital OR..... you have the option to release equity by refinancing and possibly investing in another property to grow your portfolio.
Top Tips for BTL Investment
Always research the area you intend to invest in thoroughly.
Always seek financial advice and tax advice
Buy modern or in good condition - good quality housing attracts tenants more easily.
Be cautious when choosing an agent - speak to other local landlords and get recommendations!
Buying on a new build complex, could equal more competition
You will make more money when buying - so look for bargains and negotiate hard!
If you enjoyed this article, be sure to check out our other articles and our property based podcast called: The Property Side Hustle Pod