Investing in a buy-to-let property may be right for you, if you:
Prefer investments that feel more tangible than stocks and shares
Are willing to tie up your money for a long period of time
Understand property prices can go down as well as up
Are willing to take the risk that you may not earn a profit on your investment
Understand and accept the additional risks that go along with borrowing money to buy a property
Understand and accept the costs and time involved in owning and running a property and the impact that this will have on your potential return
Understand the tax implications - some major tax changes have come into force that may make this type of investment less lucrative and therefore less appealing for ordinary investors and accidental landlords
Can afford a buy-to-let mortgage if you need one and are able to meet the new lending criteria being introduced
What is a buy-to-let property investment?
Buy-to-let investment is very different from owning your own home. When you become a landlord, you’re effectively running a small business and you have important legal responsibilities.
How does buy-to-let property investment work?
To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit.
Keep in mind that a mortgage comes with risks. If you need to sell the property for a loss, the sale price may not cover all that you owe on the mortgage. You would need to make up the difference. Also remember, that if your tenants leave and there is no rent coming in, you still need to make your mortgage repayments.
Once you buy a property, you can potentially earn a profit in two ways:
Rental yield: what your tenants pay in rent, minus any maintenance and running costs, like repairs and agents fees
Capital growth: the profit you earn if you sell your property for more than you paid for it
Risk and return
The amount of rent you can charge varies according to a number of factors, including wider market trends outside your control
If you can’t find tenants – or if you can’t charge the rent you expected – you may not be able to cover your mortgage repayments
If house prices fall, the value of your property is likely to fall as well. You may not be able to sell it for as much as you hoped
If you have to sell and the sale price doesn’t cover the whole mortgage, you’ll have to make up the difference.
Major repairs or difficult tenants may increase your costs – and trouble – unexpectedly
If the housing market does well, you may be able to sell your property for a profit
Access to your money
To access your money, you’ll need to sell the property or take out another mortgage. Both take time. A new mortgage would need to be approved by the bank.
Charges
You’ll need to cover the costs of buying, which can include:
Solicitor’s fees
Property tax
Survey fees
There are also running and maintenance costs associated with any kind of rental home.
A sales or letting agent will also charge a fee. If you want to use an agent, compare costs to make sure you get the best deal.
When you sell the property you might have legal and marketing fees to pay.
Protection
Landlord insurance isn’t legally required, but taking out a policy can help protect you and your investment
Buildings insurance – which you’ll need if you have a buy-to-let mortgage – can also help protect your investment
Buildings and land are valuable so you may find yourself targeted by fraudsters
Tax
Buying a buy-to-let property or second home comes with additional property taxes.
There is also Capital Gains Tax (when you sell a buy-to-let property) and income tax (on any profit you make from renting out the property) to pay.
Buy-to-let landlords have previously been able to offset their mortgage interest payments and some of their costs against their income but this has now been phased out and replaced with a 20% tax credit on all finance costs (which includes mortgage interest).
Landlords can no longer automatically deduct 10% of their rental profits as notional 'wear and tear'.
If things go wrong
The kinds of consumer protection that cover most investments don’t apply to buy-to-let properties. So it’s all the more important to find out everything you can before you commit to a property and a mortgage.