So you’re interested in investing your money but you just don’t know where to start, and you’re unsure if bank interest or stocks are an optimal route of investment. You’re considering investing in a buy-to-let property so that you can put your money into something tangible while reaping the long-term financial benefits of being a property owner, but where do you begin?
Before you start thinking about fun things like the potential income, it’s important to understand the commitment of the investment. Being a property owner can be time-consuming and requires hard work. Between determining your target audience, location, leasing terms and a mortgage, it can all be overwhelming. If you’re expecting buy-to-let to be an easy investment for your money, turn away now.
Note the tax changes
The financial side of buy-to-let has changed considerably in the last couple of years. The stamp duty rules on an additional property mean that if you buy a second home, holiday home or buy-to-let, you’ll be expected to pay an extra 3% on top of the usual stamp duty amount when purchasing a property. The ramifications of this are that where you would originally pay £5,000 stamp duty on a £300,000 property, you would instead be paying £14,000. Want to know how much it’ll cost you? Check out the stamp duty calculator from the Money Advice Service here.
A change to tax relief could have an impact on your plans, too. Before April 2017, landlords could deduct mortgage interest costs from their income when doing their taxes, however, this has changed. You can now only offset 75% of your mortgage interest, and this figure is being gradually reduced to zero by 2020.
Focus on the finances
From September 2017 there have been changes to buy-to-let mortgages. The Bank of England has placed tougher requirements on lenders, and so lenders will be changing the way they offer mortgages. They will now look at the entire property portfolio of landlords when making a decision on an application in order to see whether the properties are turning enough of a profit. The threshold for this is unclear. Ray Boulger, from broker John Charcol, has put it this way: “let’s say you have ten properties and eight are generating rental income in excess of mortgage payments and the other two are not, but the shortfall is covered by the other eight. Is that going to be acceptable? For some lenders, it will be, for others it might not be”.
A new stress test will be performed on buy-to-let mortgages, too. The test checks to see if landlords can afford repayments if interest rates were to hit 5.5%. This could rule out many would be investors who realistically have the means to buy the property, but fail to pass the theoretical stress test. In addition to this, landlords could even be asked for a business plan. If you’re thinking that this is becoming more of a business than simply an investment, you’d be on the right wavelength.
This hasn’t just had an impact on landlords – lenders are not too happy either, with many of them evaluating whether or not to step down from offering buy-to-let mortgages at all.
So why are these mortgage changes being made? When they were announced by former chancellor George Osborne back in 2015, the changes were designed to turn people off of investing in the rental property sector, with the idea being that first-time buyers would stand a better chance of getting onto the property ladder. Could the future of buy-to-let be even bumpier given that we know government policy seeks to actively discourage it?
Buy-to-let mortgages can be higher in interest than a conventional mortgage, so shop around different brokers, lenders, and rates to ensure you are getting the best possible deal for your money. You should feel confident and comfortable during any financial transaction without facing the dreaded “buyer’s remorse”.
Research, research, research
Start taking notes as to what areas and property types give the best return. For example, is a 2 bedroom flat in Gidea Park giving a better return on investment than a terraced house in Elm Park? Consider who your target tenants would be – with Havering having a high commuting population, does the property have close travel links? Whatever area and property type you’re considering, the research needs to be done to ensure you are getting the most out of your investment.
Plan the details
The best thing about being a buy-to-let property investor is the complete control and freedom you have over the property. Decorating and renovating any part of the property always makes for a fun project, and if it’s done right you’ll have tenants queuing up to live there.
As the owner, you have control over rental agreements and the kinds of people you want living there, so make sure to think about this before putting it on the market. Do you want singles? Can they have roommates? Do you want a family? Do you want just a couple, no children? Should they be allowed to bring their pet? Those are the questions you need to ask yourself. Organising what and who you want in your property is important to the success of your investment. Be prepared to dip into the rainy day fund for situations where the property may sit unoccupied or need some unplanned repairs completed.
Your estate agent handling the letting should be requesting references and background checks to make sure they’re who they say they are, and that they’re able to pay each month. Sit down and make a list of the ideal tenant and go from there. It’s better to have some sort of perspective on who should rent from you, without being discriminatory.
Reap the benefits of the Havering property market
In recent years, investing in a buy-to-let property has been financially rewarding. Housing markets have been on the increase so rental costs have followed suit. The general plan for buy-to-let is that the funds collected from your tenant pay back the mortgage on the property, and you’ll make a profit on the remaining funds. As time progresses and the property value increases, the long-term investment becomes even more lucrative.
So should you invest in property within Havering? In the last five years, we have seen house prices near Crossrail increase by a staggering 48%. On top of that, last year our borough recorded the biggest annual increase in asking prices in London. Those who have taken the plunge by investing in property here have seen enormous financial gain that is still continuing today. Is it time for you to get involved?