Unless you are fortunate enough to be able to purchase a property without the need for a loan you will need to obtain a mortgage. The type of mortgage that you will need is a Buy to Let Mortgage.
A Buy to Let Mortgage differs from the usual residential mortgage in that it is treated as a commercial loan and as such is usually subject to much higher fees than a residential mortgage and requires a higher deposit (40% deposit not being uncommon). The higher fees involved in a Buy to Let Mortgage can substantially increase the cost of a mortgage this is especially the case if the mortgage is a fixed rate or the tracking mortgage for a short period.
On the other hand, because Buy to Let Mortgages are classed as commercial loans they are not subject to the usual income and affordability tests that are required for residential mortgages. When assessing an applicant for a Buy to Let Mortgage the banks and other lenders take into account the experience of the applicant in letting property, the income to be generated by the property in relation to the costs involved (“The Rental Yield”). It is typical for buy to let lenders to require a rental income which will cover 125% of the mortgage repayments.
When calculating the amount of the capital and rents that you will need to attain when letting a buy to let property you will need to factor in the fact that interest rates on the mortgage may increase, repairs will be required, there will be times when the property is empty, management fees may be required and you may need to pay court fees should you be unfortunate enough to have a difficult tenant who, for example, does not pay rent and refuses to leave the property.
All of this means that you need to think very carefully about the area in which you purchase property, the type of property you purchase and your target market. You need to be sure that that there is sufficient demand for rental properties in the area that you choose, that the property is in a reasonable condition so as not to require a significant amount of repair/renovation and is suitable for the type of tenant in your target market.
The most successful buy to let landlords are those that take a long-term view. Bearing in mind the volatility of the property market it is rarely a good idea to base your buy to let investment on short-term capital gains. Property prices have always gone up and then down. Although properties in areas such as London have always been high relative to other parts of the country it is important to note that high prices equate to substantial investment and this is often difficult to offset against the rental income that can be generated. Further properties do need to be maintained and the standard to which a buy to let property needs to be maintained is governed by statute, the requirements of local authority licensing and the tenant for example, if a property requires a new boiler or if the roof begins to leak these repairs cannot be put off (as you may be able to do in respect of your own home) and you will need to be able to finance the repairs immediately.
B. The Type of Property to Buy
If you are looking to rent houses to one family /or a single household then you will be looking at terraced, semi-detached or detached properties or large apartments. If you are looking to rent to students or other single occupiers, you may look for flats or houses large enough to be divided into bedsits/small flats. If you are looking to rent to the elderly or disabled people then something such as a bungalow will be your target type of property.
It is common for those who are new to the buy to let industry, to opt for cheaper properties these being properties that are either in a poor state and require a lot of renovation or are in a rundown area. This is often a false economy. If the property is in the poor state and needs a lot of work to bring it up to a rental standard this this may mean that you will not be able to earn rental income for the property for a significant amount of time (weeks or months) whilst the renovation works carried out. The loss of rental income whilst renovation work is being carried out will need to be factored into the calculation along with your initial purchase price of the property as will, of course the actual cost of the renovation.
You may of course, be lucky enough to have the skills to do all the renovation work yourself or know a friendly builder who will carry out the work for you at cost price. However, whilst you are working on the renovation you will not be earning any other any money for the time spent and as such your loss of income will need to be factored into the cost and overall profitability of your buy to let project.
It is prudent to always remember the old premise “Time is money”. All the time that you are working on the property, or the property is being renovated, and in which the property is not being rented, the buy to let mortgage still has to be paid and interest on the mortgage is still accruing.
C. The Type of Tenant You Are Going to Rent the Property to.
It is very important to know your target market from the start. Your target market will have a significant influence on the type of property you are going to buy:
A young professional tenant is more likely to be looking for a modern and stylish property; a family will have a lot of their own belongings and furniture and are more likely to be looking for a property that they can mould to suit their likes and dislikes-a blank canvas; students are more likely to be looking for cheaper accommodation and are less likely to take care of their accommodation. A relatively comfortable property which is easy to maintain and clean is most likely to be suitable for students.
D. The Area in Which You Want to by the Buy to Let Property.
The value of the property that you can afford and your target market will largely decide the area in which to look for a buy to let property. The young professional tenant is more likely to be looking for a property with good commuting links to the town or city centre and parking is likely to be high on the list of requirements; a family with children will be looking for an area with good shopping facilities, play areas and a good school; students will be looking for accommodation close to their college or university and to the town.
It is also important to consider the impact that your potential tenant is likely to have for example it is unlikely to be a good idea to rent property in a quiet residential area to students as they are likely to be lively and create noise, which in turn, will translate to neighbours complaining and a lot of either your time or your managing agents time being spent admonishing the tenants and placating neighbours.
Choosing a property near to where you live will mean that you can keep an eye on the property and will save on your travel expenses however it will also mean that you are likely to be at your tenants “beck and call”.
Buying a property in a rundown area, may mean that you are less able to attract a good quality of tenant. This may result in rent arrears , difficulties in collecting rent and damage or neglect of the property. Further the level of rents that can be achieved in rundown areas will be lower than in more desirable areas.
It is advisable to check with the local authority of the area in which you intend to purchase a buy to let property before you purchase property. This is because many local authorities now require landlords to apply for licences to let properties out. Some local authorities also restrict the number of properties that can be let out in certain areas so that they can control the “mix” of residents within a neighbourhood for example the local authority may decide that there are too many single occupiers within an area that they wish to keep as a “family friendly” neighbourhood and in such areas they would be very unlikely to grant a licence for a property to be rented as a House of Multiple Occupation (“HMO”). It is important to research the local authority’s requirements for licensing buy to let properties as these may differ from one local authority to another and may involve extra costs in bringing properties up to the required standard.
When considering which type of property to choose for a buy to let property all four of the above factors will play a part, for example the affordability of the property will decide the size of the property and the area in which it is situated; the size of the property will govern the number of tenants that you can rent to and therefore the amount of rental income likely to be achieved. The size of the property and the area in which it is in will play a large part in deciding target market.