Buy-to-let investment can be a great way to accumulate wealth. We give a simple overview of how buy-to-let property investments work.
If you look at the Time’s Rich list, many people have either made their money in property or made their money elsewhere and then put it into property. They say success leaves clues and this guide explains the ins and outs of buy-to-let so you can successfully invest in property yourself.
What is a buy-to-let?
This is when you buy a property and then rent it out.
A buy-to-let mortgage is a loan that you can use to buy a property to rent out. This is great because to purchase a rental property you only have to put in 20- 25% of the purchase price and the mortgage lender funds the rest.
You then find tenants and charge them rental payments, which pay the mortgage. If you purchase high yielding properties, the rent will also cover all other costs and still generate a monthly income.
Do I need a buy-to-let mortgage?
Yes. This is because buy-to-let mortgages differ from standard residential mortgages in many ways. When you apply for a residential mortgage, the lender uses your salary to determine whether you can afford the repayments. With buy-to-let mortgages, the lender can look at the rental income of the property instead. This means that you don’t have to have a large salary to get a buy-to-let mortgage.
Can I get a buy-to-let mortgage?
The following things help you to qualify for a buy to let mortgage:
? Good credit history – a good track record of managing credit will help you get a good buy to let mortgage.
? Deposit – most lenders will require a deposit of 20 – 25% before they’ll approve you for a buy-to-let mortgage. However, some may ask for more, depending on what the property is worth and how much rent it could generate.
? Age – mortgage lenders will consider applications from anyone over 18. Many of them may have maximum age restrictions in place too. For example, they might want to know that you can pay off your mortgage by the age of 75.
How to make money from buy-to-let
The rent you charge should cover all your costs and also leave some profit. Most landlords want you to do this in a number of ways:
? Rental income – If you purchase high yielding properties, the rent will cover all costs (tenant management, maintenance, insurance etc.) and still generate profit for you each month.
? Capital growth – this is the difference between the current value of your investment and the price you initially purchased it for.
? Rental growth – As with the value of the property, rent also tends to increase with time
? Building a portfolio – As your property appreciates in value you can re-mortgage to fund additional properties.
What is an interest only buy-to-let mortgage?
An interest-only buy-to-let mortgage is a loan secured against property, where the borrower only pays off the interest on the loan each month, rather than repaying the capital borrowed. This means you have more money in your pocket each month. You could use this extra income to build up a pot to fund your next mortgage deposit.
Banks are happy to offer an interest only mortgage as they understand that property tends to appreciate over time. This means they generally have increased security in the property as the years progress. However, at some point you may need to pay the loan back. For this reason interest only mortgages are not for all investors.
What is a repayment buy-to-let mortgage?
A repayment mortgage means that your monthly repayments are higher because you are paying off part of the debt each month. At the end of the mortgage’s life, the debt will be paid off in full and the borrower can either:
? Keep it and continue to rent it out; keeping all of the rental income
? Sell the property and you get to keep the full sale amount
Costs When Purchasing a Buy-To-Let
If you are new to buy-to-let then fees can be one of the greatest unknowns. It’s vital to consider the costs that might be attached to your investment property:
- The deposit is the money that you must pay towards the purchase price of the property, Lenders require 20 -25% or possibly more, depending on the lender’s criteria
- Mortgages come with charges that you may want to consider. These extra fees include arrangement fees and surveys
- Stamp duty land tax will be charged if you are using this property as an investment and not part of your main residence.
- Solicitors are used to legally transfer the ownership of the property from the seller to the buyer. This is called conveyancing.
What is the profit from a buy-to-let?
If you purchase a high-yielding investment property then you will make a profit every month, after all, costs have been deducted. On a typical 2 or 3-bed terraced house, monthly profits can be between £250 and £300 per calendar month. This is after subtracting all costs including:
- Tenant management
- Maintenance
- Voids
- Landlord insurance
Buy-to-let landlord insurance
Renting out a property can be very profitable. As a landlord, you are responsible for the safety of your tenants and any accidents or losses that might occur on your property.
Luckily, there is insurance in place to cover all these risks so you don’t have to invest your hard-earned money into something that won’t give you a return on investment.