Buy-To-Let-Property: Crucial Tips For Success

Many people are thinking about getting into the buy-to-let-property market. Often, their prime motivation seems to be setting up a pension for themselves. However, if they don’t watch their steps, they might be getting an unwanted reality check.

What’s Been Happening In The Buy-To-Let-Property Market?

First, let’s review recent developments around this type of property.

The population of the UK is growing More people started to work mobile The number of council-owned properties has gone down Divorce rates have never been higher in Europe Increase of broken families There are often not enough properties to satisfy demand.

A rising demand for properties has been the result of all these developments. There’s no indication that this will change anytime soon. Moreover, interest rates have never been so low during the past 10 years. To top if off, the number of lenders offering buy-to-let mortgages has been rising, leading to a further increase in demand for property.

All in all, we shouldn’t be surprised to see that prices of property have doubled between 1998 and 2002. Let’s review some numbers.

Some Examples

The following are real-life examples from the United Kingdom.

Two-bedroom terraced property in Middlesex, UK

This property is on the market for GBP 210,000 while the monthly rent is GBP 800.

(Yearly rental x 100) / property price = yield

GPB 9,600 x 100) / GPB 210,000 = 4.6%

The breakdown of costs is as follows:

Mortgage interest (6.5%): GBP 11,602 Buildings insurance: GBP 250 Void period, say one month: GBP 800 Management 12% plus VAT: GBP 1,269 Yearly gas certificate: GBP 70 Repairs, say 5% of rent: GBP 480 Total costs: GBP 14,555

Deduct expenses (GBP 14,555) from the rent (GBP 9,600) and you have made a loss of GBP 4,955.

Two-bedroom terrace property, Newcastle area, northern England, UK

The yield here is (GBP 5,400 x 100) / GBP 60,000 = 9%.

The breakdown of costs are:

Mortgage interest (6.5%): GBP 3,315 Repairs, say 5% of rent: GBP 270 Void period, say one month: GBP 450 Buildings insurance: GBP 220 Management 12% plus VAT: GBP 793 Yearly gas certificate: GBP 70 Total costs: GBP 5,098

Deduct expenses (GBP 5,098) from the rent (GBP 5,400) and you have made a profit of GBP 302.

Conclusions For Buy-To-Let-Property

As you can see from these numbers, you will only be making a profit in Newcastle, while in Middlesex you’ll be running at a loss. So it matters where your buy-to-let-property is located!

In general, property in northern England and Scotland seem to give a good return on investment. The yields are 7 to 8% there, and the prices are below the national average, so the chances of making some money are considerable. However, don’t wait with getting into the market, because a lot of first-time buyers seem to be getting into the market currently and this may drive up prices.

You’ll have to remember that if you buy to let, it’s similar to running a business. You’ll have to take into account the costs that any business makes. First, you have the following set-up costs:

Fees for land registry Stamp duty Solicitors’ costs Costs of setting up a mortgage Valuation fees

Depending on the location, these costs may run up to 2-3% of the purchase price of your property. That’s quite an amount.

Second, you have the following ongoing costs:

Property management Costs of maintenance and repairs Tenant deposit scheme Property tax Void periods, averaging one month/year House insurance Mortgage payments

Always make sure your numbers stack up, then it doesn’t matter where your property is located!

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