There are a number of different investment types out there, from stocks and bonds to CFDs (contracts for difference) and commodities – and, of course, property. Property is a little different from some other investments, because it has an actual use for the purchaser and is tangible. For investors who are willing to take on some risk, property may the ideal fit.
This robust market offers a variety of avenues for budding investors to explore. This article focuses on the purchase of a property for the purpose of renting it out. This is known as buy-to-let. The following sections highlight some areas to consider, with the aim of making the process a little simpler for the beginner investor.
Consider the implications of investing in property
While properties may seem like a go-to option for those who want a stable investment, it’s important to know that property carries its own risks. For instance:
- The value of the property might decrease – While these instances are not common, in some situations a property may lose value – for instance, natural disasters, changes in the neighbourhood and even market changes such as the financial crisis of 2008/2009.
- You might run out of cash – Owning a property can have many ongoing costs for an owner, such as property service fees for flats and apartments, and insurances.
- It’s a costly investment that can take years to provide you with a good return on investment (ROI) – Property takes quite some time to reach the breakeven point and then generate good returns. Depending on the initial and ongoing costs of the property, this could even take a few years.
Research your target market
Buying a property in the heart of London gives you access to a long list of professionals that want to reduce their commuting time, but this also means that you must keep the property at a certain standard for it to remain desirable and offer you a high rental income. Properties on the outskirts of the city or in the country might not attract the same rental interest. The requirements in these parts might not be as pricey or sophisticated either.
It’s important to choose a property that will match your budget for maintenance, fittings and furnishings. You will also need to cover the costs if there’s a void period, meaning you don’t have a tenant and therefore have no rental income. This could severely impact your finances if you’re paying a mortgage on the property.
Decide whether to register a business
While registering as a business is not a prerequisite to becoming a landlord, it’s worth running the numbers by your financial adviser. You may gain certain tax benefits from registering a business, particularly a limited company.
Benefits of registering a limited company include tax relief for those who find themselves in a high tax bracket in their personal capacity. If they decide not to register a business and the rental income is paid to them personally instead of to the business, they will pay tax on this rental income according to their tax level.
A clue to another benefit of a limited company is given in its name – ‘limited’ – as the liability is limited to the company. If legal issues arise from the property, the individual can’t be held personally liable for them unless they’ve signed an individual guarantee (a legal document in their personal capacity as guarantee for the business) for that matter.
Deciding early on whether to register a business can save you a lot of money down the line. The downside to registering a business later rather than sooner is that the legal costs for transferring the deed of the property to the business may be high.
Consider the loan options
If you’re not making a cash purchase, for buy-to-let you’re looking at two different options when it comes to mortgages: an interest-only buy-to-let mortgage or a repayment buy-to-let mortgage.
An interest-only mortgage allows you to repay the interest only, and at the end of the term pay off the lump sum. This option is great for those who are disciplined, as they pay lower instalments (interest only). If borrowers save up the difference between their interest-only payments and what they would have paid for a repayment buy-to-let mortgage (which is the other option), they might be able to pay off the lump sum well ahead of time.
It’s important to know that a regular mortgage cannot be used to purchase a buy-to-let property. Even though buy-to-let mortgages tend to be more pricey than regular mortgages, they are specialised mortgages designed to help landlords manage their mortgage finance more effectively.