What is Buy-to-Let and why might you consider it?
What is Buy-to-Let and why might you consider it?
Buy-to-let is just one of the many property strategies that there are to choose from and this article should give you some insight into all about what it is and why you might consider to choose this strategy.
The buy-to-let strategy is often the first point of call that people look at when first starting out in this industry because it seems to be the most obvious starting point.
Something to mention is that I am not a buy to let investor and although this is not a strategy that I am involved with, I do have one buy to let property which is something that I stumbled upon by accident. I am more driven to gain pots of capital and pots of cash rather than getting smaller amounts each month. So, something to consider is that this strategy is not something for those of you who want to earn larger pots of cash and do something with speed. By-to-let is more of a long-term strategy and a scale-based strategy. What I mean by this is that having one buy-to-let property isn’t going to change your life and neither is five or six. If you choose this strategy you will need a portfolio of properties to really get the return that you are looking for. This can then lead to tremendous results such as monthly cash flow and leverage.
What is buy-to-let?
Buy-to-let is all about physically buying properties with the purpose and intentions to rent them out to an end user. This strategy was extremely popular during the 80’s and 90’s and something to mention is that it is actually becoming a lot less popular because its becoming more and more difficult to ear the profits compared to what it used to be.
So ultimately, if you choose this strategy your aim will be to buy an array of properties to rent out to earn and generate a rental income each month. There is also an argument to say that through this strategy you will also be earning capital growth through the ownership period of the property. For example, if you purchased a property 30 years ago, today it would have most likely doubled and if not more in value from the day that you purchased it. Therefore, you have earned money twice, on the cash flow and the capital growth.
Why invest in buy-to-let?
- Purely for cash flow- buying properties to ensure they good a good rental yield
- Invest with the idea of capital growth - looking for the property to go up in value as well as a rental yield
- Invest for a pension pot – invest so the monthly rent covers the mortgage so it 20 years’ time you own these properties outright, meaning that you have a retirement plan in place.
Another thing to mention is that over the last few years investing in buy-to-let for cash flow has become more of a struggle if you are looking to leverage the ownership. This is because the margin between the rental income and the mortgage cost is getting smaller and smaller and with the introduction of things like clause 24 (the new tax criteria) buy-to-let is becoming less attractive and this is all down to the government wanting us to all own our own homes resulting in them not really like the buy-to-let industry. This then effects how they then create legislation. Their driver is to legislate to make it more difficult to operate in the buy-to-let space which ultimately makes it easier in the development space.
The numbers behind buy-to-let.
Generally speaking, people who want to operate in the buy-to-let space need to a have a good credit rating around them. The caveat around buy-to-let is the ability to be able to leverage finance which has become more difficult. You need to be able to show that you are earning certain amounts of income and be prepared to demonstrate a good business plan. For example, you need to show that the rental income covers the mortgage costs and then some more. The finance around buy-to-let is generally aimed at those who have:
- The ability to leverage finance
- A good credit rating
- A good level of income
If these features aren’t something that you have but you are really keen to work in the buy-to-let space, then there are some things that you could consider. You could…
- Work with the right partner
- Look at rent to rent opportunities
Where to purchase a buy-to-let property.
When it comes to where you should purchase a buy to let property there are a few thoughts. Some people say that you should buy in your local area because then you can control the property more closely and because you will know more about your own area than you will over other areas. Other people often say to you, that you should look for the place where you can get the best yields and the truth is that it’s entirely down to you. Its completely subjective.
The one thing that I would say is that you want to be operating in an area where the rental values are higher than the property values as this will produce you better results. For example, you need to be mindful that in some areas the actual cost of the mortgage can outweigh the rental income that you would get back. Therefore, it is a case of really understanding your numbers before you purchase anywhere.
In theory, buy to let can work anywhere so long as you put the right energy and diligence into it.
When to purchase a buy-to-let property?
Choosing the right time to purchase a buy-to-let property is down to you to and your due diligence. You need to understand what is happening in the external environment. For example, the introduction of new clauses such as clause 24. Not only this but you need to evaluate your own situation and determine if you are in the correct position to leverage the debt and secure finance.
So overall if you are looking to build a long-term model which includes a portfolio of properties which could ultimately provide you with a passive income then buy-to-let might be the strategy for you.