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How Does Buy to Let Work?

House Network

Find out whether buy-to-let investments are still a viable business opportunity with House Network

For many years, investing in the UK property market has provided opportunities to make money for those in the financial position to do so. Many see buy-to-let as a profitable business venture; with the theory behind it being that buyers invest their money in a property to rent out, then hopefully watch their money grow as house prices possibly rise, whilst making a profit on the rental payments.

But, due new taxation rules soon to come into effect, will buy-to-let still be a potentially viable business opportunity?

What exactly does buy-to-let involve?

When you buy a property to let, it’s a very similar process to buying a property to live in, with a few added extras. The process includes buying the property where you’re usually expected to put down a 25% deposit, taking out a buy-to-let mortgage and some additional costs such as: landlord insurance, stamp duty, legal fees, income tax and maintenance and repair costs. There’s also making the decision to manage letting your property privately or using the services of a letting agent to advertise and organise lettings on your behalf.

The mortgage on a buy-to-let is often more expensive than an owner occupied mortgage but the interest rates tend to be much higher. The repayments on buy-to-let mortgages tend to be lower than on owner occupied properties, hence the opportunity for landlords to make money.

However, the amount you are able to borrow for a buy-to-let property is determined by the amount of rental income you expect to receive, so how much you can make on a property relies heavily on its desirability. The suggested housing crisis is a result of the demand for property in the UK outweighing the supply in certain areas, so when buying a house to let it’s really important to research what’s going on in the property market in the particular location of it.

Why would it no longer be a wise investment?

The buy-to-let property market is about to be shaken up. With the housing crisis set to continue, the government are attempting to price out private landlords to make way for first time buyers.

Recent plans to increase stamp duty announced by George Osborne in the Autumn Budget, as well as introducing plans to place further reductions on buy-to-let lending by adding a 3 percentage point surcharge on the purchase of additional residential property costing £40k and above from April 2016. There is also the added complication of from 2017, landlords will no longer be able to deduct the mortgage interest from rental income before working out the tax liability, which could mean that profits will be harder to make.

It’s all about the location

Despite all the changes, buy-to-let can still be a property investment worth making if you do it right. The popularity of the location of the property is crucial to ensuring your buy-to-let venture is a success. In areas where there is a huge demand for rental property, such as London, buying to let is more likely to be successful. It’s the areas which are more remote and less popular that are likely to be hit the hardest by the new reforms. Outside of the capital, go for large towns and cities, such as Manchester and Birmingham, where people want to live. A lot of landlords benefit from privately owning properties near a university campus or in commuter towns as housing in these areas is always in demand.

Average rental prices in the area you’re looking to buy need to be considered. In order for you to make a profit, the rental payments need to be more than the mortgage repayments in interest. For example, in areas like the north east where house prices are already low, it’s going to be difficult to make any money. It’s worth checking out future developments planned for the area, such as new shopping centres and transport links, as if you can buy a property in an area which is soon to be up and coming, you should be able to make a lot of money in a short space of time. However, it’s not wise to make an investment on a gamble which depends on house prices rising.

Perhaps, the safest option with buy-to-let is going for a town or city where you know other landlords are already making money. Although, capital income is the overall goal, focusing on the short term is the best way to ensure you’ll be making money from your buy-to-let property. Focus on being able to pay the mortgage repayments and cover the costs and overtime your venture could indeed pay off.

If you do the research before diving in to buying a buy-to-let property, you’ll find it can still be a very viable business opportunity.

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