Buy-to-let properties are getting the attention of many, most especially of those who are looking to invest their money to replace income and increase savings. Over the past decade, this type of property has proven to be a good investment; however, just like any other venture, buy-to-let properties have advantages, as well as disadvantages.
Before discussing the two facets of buy-to-lets, let us define what these properties really are.
What is a buy-to-let?
Buy-to-let properties are properties purchased by property owners and investors with the intention to rent it out to tenants rather than living in the property itself. Seen as an investment, buy-to-lets generate income by letting the rent charged to tenants cover the monthly mortgage for the property.
Mortgage is also different when it comes to buy-to-lets. Usually, a standard residential mortgage is required for a property bought specifically for the owner to live in. Buy-to-lets have a different type of mortgage which can be more difficult to get because of the added risk of renting it out.
Buy-to-let mortgages also ask for higher fees, arrangement fees and even a higher deposit, which is around 20% to 40% of the property value.
Now, what are the benefits of buy-to-let properties?
The Pros
Any property is an investment.
Prices of properties change very quickly over time; however, it is common knowledge that property values, despite the number of changes, will increase in the long term.
According to research, prices of properties, on the average, end up 34% higher than their value a decade ago and will even reach up to a 212% increase after 20 years. This is an extremely significant increase which can generate a huge amount of profit once the property is sold.
If maintained, managed and cared for aptly, any property, including buy-to-lets, is an asset and a good investment. Once a property investment has been handled well, profit from it can replace employment income, giving you the opportunity to do what you want with your time freely. Buy-to-lets are also a good supplement pension for retirement.
Buy-to-let properties are also a good opportunity for investors to diversify their portfolio to lessen the exposure to risk if one asset drops.
It adds extra income.
To make a venture on buy-to-let properties a success, the property must be rented out to tenants who will pay and cover the mortgage of your property. If a low buy-to-let mortgage rate is acquired, a higher profit will be deduced from the tenant’s rent.
The demand for rental properties have increased over the years. In addition, the shortage of people looking for a place to rent out is less likely as studies have found that most Millenials, particularly professionals aged 20-35 years old, are not interested in buying their own properties. The secret, however, is to buy a property in good locations (near business districts and offices) to cater the target market.
The Cons
It is risky.
As mentioned, all types of investments have risks. For buy-to-lets, there’s a risk of an empty property. To make a rental property profitable, you have to make sure that there are tenants letting all the time. This is the challenge since mortgage payments need to be paid with or without tenants renting out the property. If the property is empty, mortgage payments will come from your own pocket and you won’t have income.
In order to avoid this, you must always take the extra effort of finding tenants. This can be done by advertising your property at various property or rental and social media sites to attract prospective tenants. Property management services are also offered to maximise the value of your property investment, minimise its risk and to retain occupancy levels.
Aside from tenancy problems, another disadvantage of buy-to-let properties is it does not generate profit immediately, limiting your access to your money. It can take a few months before you take back what you have paid for the deposit. Selling the property may also take some time as you want to wait for the property’s value to go up.
Higher fees must be paid.
When investing on buy-to-lets, there are certain costs that you would have to pay including the Stamp Duty, conveyancing costs (fees paid to a solicitor or licensed conveyor for legal matters) and insurance fees. Other costs such as the council tax, ground rent, property repairs and maintenance costs should also be considered.
Since 2016, the government has now required 3% more of Stamp Duty when purchasing a buy-to-let property. Mortgage lenders will also increase the rental cover to 145% and a 20% basic rate will be applied to tax relief on mortgage interest starting this year.
There is too much responsibility.
Having your property rented out means that you are responsible for maintaining the property and managing the tenants’ problems. Like other investments, buy-to-let properties can be time-consuming. Whether you’re a full time or a part time landlord, it will be your job to attend to their needs.
To ensure that your property is well-taken care of, you have to find good tenants. Do this by checking references and credits of potential ones. Repairs and maintenance are sometimes costly depending on the condition and damages in the property.
Written by Heidecel Serrano