Property is a national obsession with us British. A house isn’t just a place to live. We see it as a long-term investment. Some of us go beyond thinking only about our own house in that way and go on to buy houses for others to live in and they become landlords. But is this a good way to make money?
What are the ways landlords make money?
Landlords make money by charging rent but also by expecting to see the value of the property they have bought increase. House prices have more than doubled over the past 20 years as the number of people living in the UK has increased, but housebuilding has not kept up with demand. With returns like that you can see why investing in property can feel safer than say the stock market.
The increased demand for a place to live is also reflected in rents. Renting is having a resurgence with many buyers struggling to amass a deposit to buy their own home or just deciding renting makes more sense for them. Apart from the London area which has been particularly impacted by the Covid crisis, rents pretty much everywhere else are going up.
So, where’s the catch?
Recent Governments have sought to professionalise the rented sector which has forced out many smaller landlords. Tax incentives – such as the ability to claim tax relief on mortgage interest payments – have gone. A new range of regulations – from Energy Performance Certificates to schemes to protect tenants’ deposits – have made life more challenging for landlords. But providing you do your homework there are still good returns to be made.
Where to invest?
Many landlords when they start out choose to buy property where they live. After all you have local knowledge on where people want to live. You will also be nearby if there are any problems. But you still need to make sure the investment makes sense. Landlords do that by calculating the rental yield. That is the yearly rental income they will receive for a property divided by the amount they invested to buy it – then multiply by 100 to get a percentage. Professional landlords look for a yield of between 5% and 8%.
If you choose to buy more properties, you may look further afield. The biggest yields now are in the North, especially in the North West. The big estate agencies regularly publish reports on property prices and rents so its easy to do your own research.
Ensure you have the finance in place
It’s important to have the finance in place so you can swoop quickly on your chosen property. You will need a special buy-to-let mortgage – unless you can afford to buy with cash. Most landlords choose interest-only mortgages as they are much cheaper. But you will need a plan to pay the debt at the end of the day – perhaps when you sell the property.
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Two or five-year fixed rate interest rate mortgages are a popular choice. But lenders are keen to ensure you can really afford the borrowing so they will expect the rental income to cover at least 125% of your mortgage interest payments – even if interest rates go up considerably. They will also want a sizeable deposit of at least 20%. Buy-to-let mortgages are a little more complicated than a residential mortgage. So, it’s a good idea to use a broker such as Property Master that can find the best deal by matching you and your property against the criteria of every lender in the market.
Now do you feel ready to join the ranks of Britain’s landlords?
By Angus Stewart, Chief Executive, Property Master, the leading online buy-to-let mortgage broker
Angus has worked in financial services for over 30 years. He began his career at Barclays working in both personal and business banking. He struck out on his own and has built businesses in the area of financial services data management. Just three years ago he launched Property Master which is the first online mortgage broker specialising in the buy-to-let sector. In his spare time Angus flies light aeroplanes. He also loves to scuba dive.
