The UK’s buy-to-let market has certainly taken a hit in recent years due to aggressive government action intended to make investing in residential property less attractive. There is no doubt that regulators have achieved their stated goals. But that does not mean buy-to-let is dead. In fact, the reality is just the opposite. Making money in buy-to-let is still possible. You just have to know how to do it.
From the mid-1990s until about 2017, residential buy-to-let was consistently one of the most profitable investments one could put money into. Why? Because people need somewhere to live. Housing is one of the fundamental basics that people cannot do without. As a result, there will always be a rental market to tap into.
Recent changes in stamp duty and mortgage interest relief have made it more difficult to compete in the buy-to-let market today. That makes the two fundamental principles of buy-to-let success more important now than they have ever been. Those two principles are financing and pricing.
Financing Buy-to-Let Properties
There is a pervasive myth that persists among people who don’t know how to buy-to-let property investing works. That myth says that you have to be independently wealthy to invest in a property portfolio. It is not true. The vast majority of successful buy-to-let investors started out with a single house financed by a mortgage.
Yes, buy-to-let mortgages do exist. They remain at rock-bottom rates as lenders compete for their share of the market. This is good for investors in that it gives them more choices for financing their properties.
Solid advice from a mortgage broker with experience in buy-to-let is key to choosing the right financing options. An appropriate mortgage with the right rates and terms can set up an investor for a very good future by making the purchase of a first property both affordable and attractive. But note that not every buy-to-let mortgage is equal. That is why property investors rely so heavily on brokers.
A mortgage broker, by nature, has access to exponentially more deals than a single bank or building society. Such widespread access is key to property investing. Mortgage brokers are in the best position to get investors the deals that are right for each unique property they are buying.
Pricing Buy-to-Let Properties
Next up is the critical component of pricing. When investors talk about ‘pricing’, they are talking about the price paid for a property as compared to the amount of expected return. Pricing is important for a number of reasons, beginning with the fact that lenders are generally willing to lend only so much on a rental property.
The general rule for buy-to-let mortgages says that the monthly rent on a given property should be between 125% and 150% of the scheduled mortgage payment. For simplicity’s sake, let us say your monthly mortgage payment on a given house is projected to be £100. The lender would expect that property to generate monthly rental income of £125 to £150, at the very least.
This simple rule determines the starting point for pricing. You can quickly calculate monthly mortgage payments based on current information, then compare your estimated payments against what the rental market will support in that particular area. This will help you figure out if a house you are looking at is worth investing in at the current price point.
Other Things to Consider
Beyond the fundamental principles of financing and pricing, would-be buy-to-let investors should be looking at a few other things. For example, what is the demand for rental housing in a particular market? As any experienced investor can tell you, some markets are stronger than others.
Towns with large manufacturing and/or educational bases are good targets for rental property. Manufacturing towns tend to have a lot of blue-collar workers more apt to rent than buy. Towns that are dominated by universities tend to have a lot of tenants by way of regular and graduate students who only need a place to live for a couple or so years. Tourism markets are similarly strong.
Landlords should also be considering:
- Neighbourhood Conditions – Renters tend to be very choosy about the neighbourhoods they live in. They are concerned about things like crime, neighbourhood schools, access to amenities, and so forth.
- Property Condition – The condition of any property has to be considered before purchase. A property requiring an excessive amount of renovation may ultimately not be worth the price paid.
Making money in buy-to-let is possible even in an environment of higher taxes and more regulation. The key is knowing how to creatively get around the barriers while staying within the boundaries of the law. You can do it, just like so many others currently are. The bottom line is that there is money to be made in property.