With interest rates remaining low, the idea of becoming a landlord with a low interest mortgage and high rental income has become an attractive option. After all, putting your money in property has generally been considered a relatively safe long term option. Although the 2008 real estate crisis caused some temporary concern for those wishing to sell… landlords holding for the long term just saw an increase in the demand for good rental property as more homeowners lost their homes and became tenants. In the U.K., there are special “Buy-to-Let” mortgages while in the U.S. they are called non-owner occupied mortgages but “But-to-Let” is easier to say, we’ll stick with that. With a buy-to-let mortgage you can watch your investment grow as house prices rise and at the same time enjoy a steady income from your tenants. However, it’s not always a free ride – becoming a landlord carries a lot of responsibilities that are often forgotten.
Choosing a Buy-To-Let Mortgage
Savings rates may have hit rock bottom, but on the bright side these days it’s easier to get a cheap mortgage. This makes buy-to-let an investment that’s particularly suited for the current economic climate. But conversely, this means that as the markets recover and rates begin to rise, buy to let will be less profitable so the key is to lock in mortgage rates while they are low and not rely on variable mortgages to save a fraction of a percent.
Research the Market
A run-down apartment (or flat) in an unpopular area might not just be a bad investment, it might be a real liability if you struggle to find tenants or if you need to make a quick sale. The old real estate adage “Location, Location, Location” still holds true. There’s no substitute for good research – take a look at properties currently on the market and take a step outside of your own experiences to consider what your tenants might be looking for. Students who rely on public transport will not want an expensive house that’s difficult to get to, while families will prefer good schools to good nightlife.
Calculate the Yields
Landlords are unlikely to earn a ton of cash overnight, they are not “flippers” after all – so concentrate on the rental yields of your chosen property. Ultimately, buy-to-let is a long term investment. If you buy a house for 150,000 and rent it out for 1,000 per month, that gives you a gross annual yield of 8% (yearly rental income divided by house price). Don’t forget, of course, that your net yield is after expenses such as insurance, mortgage, maintenance and agency costs so you will get much less than that. The key is to know how exactly much your expenses will be and have a very good feel for rental rates in your chosen neighborhood. Various online calculators are available to simplify the process. But goal of renting is generally not so much the annual yield but that the tenants are paying your mortgage. Year to year rents generally go up while your mortgage payment stays the same, and your yield is based not on what the house is currently worth but on how much you paid, so your annual yield should increase as time goes on. And when the mortgage is paid off you will net a nice retirement income with the possibility of selling the property for a cash windfall.
Insurance
You need to be properly insured if you’re thinking of becoming a landlord – getting cover if you’re letting a property can protect you against accidents and unexpected bills. You’ll need at least a policy that gives building cover. Cover for liability is also essential and you might want to consider contents insurance if you’re providing the property furnished.
Should You Find An Agent?
This is one part of becoming a landlord that is entirely down to personal choice. Agents will take a fee to advertise the property and deal with any problems that arise, making the rental a “hands-off” investment. But you have to find a good agent. On the other hand, if you’re prepared to put in the work – advertising the property online, being on call at a moment’s notice and fixing problems yourself – you can make much more, but every potential landlord will make their own decision on this point.
See Also:
Resources:
“Houses for sale” by I See Modern Britain on Flickr
