Buy-to-let question time

Q I want to buy an investment property but really don’t know where to start. What should I do first?

Lee Grandin, Managing Director, Landlord Mortgages answers: First, take a serious look at your finances. Can you actually afford to buy another property? Most buy-to-let mortgages require a deposit of 15 per cent of the property’s value so you will need to find this. Also, buy-to-let properties need maintenance so make sure you have the time and/or additional funds to finance it.

Now that you know your budget, you need to consider where you would like to buy a property and the type of tenant you are interested in. A good buy-to-let property appeals to different types of tenant and is close to essential amenities such as public transport and shops. If you intend to manage the property yourself, you also need to consider how far from your own home it is.

When it comes to buying, make sure you visit as many estate agents as you can and don’t be snobbish as many downmarket agencies offer great bargains. Also pick up some local newspapers to give you a feel for prices in the area. And check www.landreg.gov.uk as it lists the price of any property that has sold in the last few years to ensure you get a good deal.

Q I want to purchase a buy-to-let property but am unsure of where to buy. Should I listen to what people say about current hot-spots such as the area surrounding the future Olympic site in London or are there other factors I should be looking for?

John Heron, Managing Director of Paragon Mortgages, answers: The promise of high returns from properties in various UK hotspots may seem attractive but could be less so when problems arise and a landlord is forced to travel hundreds of miles to sort it out.

A letting agent can help to alleviate this problem but this is hardly economical for landlords with a very small portfolio.

Buying in proximity to your local area means that you are closer to your market and your clients, allowing you to solve unexpected problems more easily. If you have a number of buy-to-let properties closer together it can also make it easier to establish a network of trusted tradesmen to service your properties.

Wherever you decide to purchase a buy-to-let property, it is vital to research the local market thoroughly, not only to identify the level of demand for rented property but also to determine the type of tenant prevalent in the area, for example students or young professionals.

Q What are the most common mistakes made by investors and how do I avoid them?

Peter Charles, chief economist, Mortgage Express, answers: The most common error is buying a property at too high a price in an area that does not have a good demand for rental property. It may seem obvious, but a significant number of investors – particularly those who want to ‘hit and run’ and have no intention of staying in the market for long – have fallen into this trap and found themselves with a property they paid over the odds for which is standing empty much of the time. Another risky practice is buying an investment property at auction without looking at it first. Occasionally the result is positive – a cheap property in a good location – but often buyers finds themselves burdened with a house that needs significant renovation in an unsuitable location. The answer is to research carefully. Make sure the property stands scrutiny from both a structural and rental point of view, and, above all, check that the investment itself stacks up.

Q I know I need to get a buy-to-let mortgage if I want to purchase another property but how are they different from ordinary mortgages? Should I go for interest-only or repayment?

Lee Grandin, managing director, Landlord Mortgages answers: Buy-to-let mortgages are definitely different from ordinary residential mortgages. First, you generally need to find a deposit of approximately 15 per cent of your property’s value. There are lenders such as GMAC, which require a smaller deposit but this is far less typical.

And secondly, in order to get this type of financing, your potential rental income needs to cover approximately 125 per cent of the mortgage repayments. A surveyor or other property expert generally ascertains this on behalf of your lender. Due to these criteria, lenders are far more selective as to the type of property they will finance, so the more unusual your rental property is, the more difficult it will be to find a mortgage for it.

Buy-to-let interest-only mortgages have certain tax advantages as the payments can be offset as an expense against rental income for tax purposes. However, if you are relying on selling the property to pay off the mortgage, unless there has been some capital growth, it will simply leave you in the position you started. Is this a chance you are happy to take? Visit a mortgage adviser for further details.

Q How much rental income can I make from a property? I don’t want to have to spend lots of additional money keeping my investment afloat.

John Heron, Managing Director of Paragon Mortgages, answers: The income a landlord can make from a property depends on the type of property, its location, its condition and furnishing and the number and the type of tenants.

Additionally, the level of income will be affected by wider issues involving the performance of the rental market, the owner-occupier market and the UK economy as a whole.

According to our figures average rental incomes vary throughout the UK from an average of £6,734 in the North to £15,804 in Greater London.

Detached properties may attract larger rental payments, but one must also consider that this type of property typically requires a higher initial investment – therefore, yields can be somewhat lower than on cheaper properties, such as terraces and flats.

Furnish your property to a high standard and go for an area with a high demand to improve your chances of a steady income. It is also important however to budget for void periods and to maintain a buffer to cover the mortgage payments during these times.

Q What’s the demand like for rental properties in the UK?

Peter Charles, chief economist, Mortgage Express, answers: In general, demand for rental properties is increasing, particularly among young adults who appreciate the flexibility and low movement costs associated with renting.

Data shows that, over the past ten years, rental levels have risen at around 4 per cent a year. This is a rate very much in line with average earnings and we would expect rental levels to continue to rise at this rate, though this cannot be guaranteed. For example, prolonged void periods or times when no one is renting the property will cut into expected income. Statistics show that void periods have consistently averaged 28-30 days over the past five years and the fact that a landlord can expect a void to occur once every two years won’t be very reassuring if a property is empty for three months for the second time in one year.

Many landlords are happy to sacrifice an annual rate review to keep reliable and considerate tenants in their properties.