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Ten tips for buy-to-let

Bricks and mortar: Buy-to-let is a popular option for those who would rather grow their wealth through property than shares or cash

For many buy-to-let looks an attractive income investment in a time of low rates and stock market volatility. Read This is Money's top ten buy-to-let tips - the essential guide to successful property investing.

Buy-to-let may no longer be the hot property of the boom years, but it has seen a resurgence in recent times.

As an income investment for those with enough money to raise a big deposit buy-to-let looks attractive, especially compared to low savings rates and stock market volatility.

But beware, many investors who bought in the boom struggled as mortgage rates rose before the base rate was slashed to 0.5 per cent - and one day interest rates must rise again.

Lower house prices, rising rents and improving mortgage deals are tempting investors once more.

If you are planning on investing, or just want to know more, we tell you the ten essential things to consider for a successful buy-to-let investment.

Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares here are This is Money's top ten tips.

Are you a landlord? Why do you invest and what do you want from buy-to-let? Take part in Financial Mail's survey.1. Research the market

If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits. Catch up with the latest news in our buy-to-let channel.

Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. In recent years a high-rate savings account would beat most investments. Now rates are lower, but investing in buy-to-let means tying up capital in a property that may fall in value.

This compares to the possibility of a 5% annual return from an income-based investment fund or 3 per cent on a  fixed rate savings account.

Remember that the return from an investment in funds, shares or an investment trust through an Isa will see you paying just 10 per cent tax on income and getting capital growth tax free. You will also have the ability to sell up quickly if you want.

If you know someone who has entered the buy-to-let market, ask them about their experiences.

 Message boards: Talk to other buy-to-let investors

Rental returns: A breakdown by location from Countrywide

THE SECRET TO BUY-TO-LET RICHES? A ONE-BED FLAT IN WALES

A one-bedroom flat in Wales may not be the most glamourous of property investments but it could deliver the best returns according to a new in-depth buy-to-let report.

Buy-to-let landlords see the best yields in Wales, the North and the Midlands and on one and-two bedroom homes, a survey of more than 50,000 rental properties has revealed.

Those letting in Wales are achieving an average 6.7 per cent yield (rent measured as a percentage of property price), beating the North and Midlands, which are both on 6.5 per cent.

The figures were delivered by a detailed report into buy-to-let income returns from the UK’s largest lettings agency Countrywide. It showed that average monthly rent in England, Scotland and Wales has risen for six consecutive months to hit £842 in April. 

But rent rises are running below the increase in the cost of living, with an annual increase of just 0.8 per cent standing against Consumer Prices Index inflation of 2.8 per cent.

Read the full buy-to-let yields report here 2. Choose a promising area

Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons.

Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?

Asking yourself these questions might sound over simplistic, but they are probably the most important aspect of a successful buy-to-let investment

Zoopla: Check the rental market and homes to buy 3. Do the maths

Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.

Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. You can see an example of best buy-to-let rates here.

Once you have the mortgage rate and likely rent sorted be clinical in deciding will your investment work out?

What will happen if the property sits empty for a month or two? These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.

 This is Money's mortgage calculator Can you still get into buy-to-let?

Many long-term existing buy-to-let investors are sitting comfortably on low mortgage rates, having seen standard variable rates fall as base rate was slashed down to 0.5%.

This is especially true for many as a lot of buy-to-let deals do not have typical SVRs but a revert rate that tracks the bank rate.

However, new buy-to-let mortgage deals remain more expensive than residential deals and require a big deposit. Despite a recent surge in demand, many industry experts acknowledge that now is a tough time to get into buy-to-let.

But with property prices having fallen to more affordable levels, those who stick to the tried and tested method of investing for rental returns rather than capital growth are tempted. You will need a big deposit though and should not expect instant riches.

If investors are willing to accept that the value of their property may slide in the short term, and can ensure their property meets the criteria of at least 75% to 85% loan-to-value and returning 125% of monthly mortgage payments then it can be a good long-term investment.

4. Shop around and get the best mortgage

Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.

Read This is Money's buy-to-let section for details of latest buy-to-let mortgage deals highlighted and check lenders' websites, Skipton BS, BM Solutions, NatWest, Woolwich, Coventry BS, Platform (part of Co-op Bank) and Accord (part of Yorkshire BS) have been consistent in recent years.

Check some of the latest buy-to-let mortgage best buys in our tables.

If you are looking for advice consider using a specialist buy-to-let mortgage broker. Remember asking them for information means you are under no obligation to use them.

Mortgage finder: Speak to a broker about finding a mortgage 5. Think about your target tenant

Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.

Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious.

If they are young professionals it should be modern and stylish but not overbearing.

If it is a family they will have plenty of their own belongings and need a blank canvas.

Remember that allowing tenants to make their mark on a property, such as painting, or adding pictures or taking out unwanted furniture makes it feel more like home - these tenants will stay for longer, which is great news for a landlord.

It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance poliicy, available from This is Money's landlord insurance finder

Flatlining: House prices have remained broadly level for some years, Nationwide's data shows.

6. Don't be over ambitious - go for rental yield and remember costs HOW TO WORK OUT THE RETURN ON YOUR INVESTMENT

Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.

To work out your annual return on investment subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.

For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.

£75k mortgage at 5% interest rate = £312.50

£500 rental income x 12 = £6,000

Difference = £2,250

Deposit + buying costs = £27k

Annual return = 8.3%

Don't forget tax, maintenance costs and other landlord expenses will eat into that return.

We have all read the stories about buy-to-let millionaires and their huge portfolios. But the days of double-digit house price rises are gone, so experts say invest for income not short-term capital growth.

To compare different property's values use their yield: that is annual rent received as a percentage of the purchase price. For example, a property delivering £10,000 worth of rent that costs £200,000 has a 5% yield.

Rent should be the key return for buy-to-let. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.

If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.

Remember though, people rarely buy a home outright and they come with running costs, so mortgage costs, agents fees must be worked out and they will eat into your return.

Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term.

This means you will have benefited from the income from rent, paid off the mortgage and hold the property's full capital value.

7. Consider looking further afield or doing a property up

Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. The advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you.

Cast your net wider and look at towns with good commuting links, that are popular with familes or have a sizeable university.

It is also worth looking at properties that need improvement as a way of boosting the value of your investment. Tired properties or those in need of renovation can be negotiated hard on to get at a better price and then spruced up to add value.

This is one way that it is still possible to see a solid and swift return on your capital invested. However, remember to ensure that the price is low enough to cover refurbishment and some profit and that you allow for the inevitable over-run on costs.

A good rule to follow is the property developers' rough calculation, whereby you want to the final value of a refurbished property to be at least the purchase price, plus cost of work, plus 20 per cent.

On the rise: Rents have posted a strong performance in recent years, rising faster than wages, as this chart from Nationwide shows.

8. Haggle over price

As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount.

If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through. This can be a major asset when negotiating a discount, especially in a tough market such as the one we have now. Make low offers and do not get talked into overpaying.

Read This is Money's buying and selling guides for tips.

9. Know the pitfalls

Before you make any investment you should always investigate the negative aspects as well as the positive. House prices are falling and if this continues, will you be able to continue holding your investment? What will happen if you can't remortgage?

Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year - this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.

- Collapse of a buy-to-let let empire

10. Consider how hands-on you want to be

Buying a property is only the first step. Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.

You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.

If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.

Select a shortlist of agents big and small and ask them what they can offer you.

- Essential Guide: Tenants rights and deposit protection

This guide was first written in February 2006 and is regularly updated




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