03 Oct Are you a first time buy to let investor?
If you are investing in buy to let for the first time, the good news is that, if you hold onto property long enough, you’ll find it very hard to lose money. The bad news is that it’s very easy to make a lot less money than you may have done if you’d known what to buy in the first place. With the new tax changes, it is more important than ever to get it right.
New tax changes mean that if you take out a mortgage and buy a property that doesn’t give you much of an income every month, you could find yourself paying out more money every month than you are getting in! That doesn’t mean that property investment can’t be profitable if done correctly.
It isn’t unusual for people to buy a property investment, see what the rent will be and assume they’ll make a decent profit but after they have taken off their mortgage repayments, maintenance, managing agent fees, service charges and ground rents they find themselves with nothing or less than nothing. With new tax changes people will find themselves having to pay tax on their nothing or less than nothing!
Why? Because the government is phasing in the removal of tax breaks so you can no longer offset the cost of your mortgage repayments, this means you need to pay tax on the rent paid not your profit.
If your annual rent is £10,000 and your mortgage is £8,000 and you are a high rate tax payer you will find yourself paying a serious amount of tax on no profit! If you are a low rate tax payer you may be unaffected but the £10,000 is added on to your income for your tax bracket.
How do you avoid this situation?
– Buy wisely. You need to make sure your combination of income and lending is correct. If you don’t intend to use a mortgage, you will be unaffected. If you want to take out a mortgage you need to buy something with a very healthy monthly profit. You can’t just find a nice looking place that people will want to rent because of its location.
Which buy to let properties offer the highest income?
Multi let properties, multiple tenants in one property. Also known as HMO’s (Houses of Multiple Occupation)
Small properties – A studio or one bed apartment will give you a better return than a 4 bed house let as a normal buy to let.
Properties in less affluent areas – Properties in affluent areas will give you less income because prices are much higher in relation to rental income
Student accommodation – HMO’s also come into this category, big institutions like to invest in high end student halls, these are now also available to buy as individual rooms.
If it is your first time investing in buy to let, take some guidance from property investment professionals. Most letting agents will understand where to buy an investment property if you want it to let quickly but they may not have a good understanding of buy to let costs and income. Anyone at Broadgate is happy to chat about it over email or over the phone free of charge.
5 common mistakes made by first time buy to let investors
- Buying with your heart and not with your head – properties, for most people are bought with the heart more than the head. People buy properties because the property has a good feel about it when they walk around it. First time investors often buy investment property if it feels like a nice place to live and they think that tenants will like it. Estate agents will usually agree that it will let well but very few will consider whether the property will make you a good profit, which is the only reason an investor is buying it in the first place. There really should be regulation in the same way that there is regulation in other investments. All buy to let purchases should have a big return on investment tag at the bottom to show how much return you receive on the investment. Too many people look at property as a capital growth investment without enough consideration for the income that can be earned from rent alongside. Usually heart properties are the least profitable.
- Not considering the running costs – Management, maintenance, insurances etc. all add up. Before buying a property, any first time property investor should be working out the costs to see how much money they will be left with at the end of each month.
- Being reliant on income – Some first time buy to let investors are reliant on the income from the property. Then, if there is a couple of void weeks where there is no rent or if there is a significant maintenance bill then the landlord finds it difficult to manage. It is only OK to be reliant on income from your rent when you have enough properties to spread the risk.
- Buying the wrong type of property – There are many different avenues for first time buy to let investment. You can buy a smart city centre buy to let, this will usually be very easy to let and often the tenants will be reliable but it won’t make you a great deal of return on your investment each month. At the opposite end of the spectrum you could buy a property in a less affluent location and rent it to local authority tenants or asylum seekers. These types of properties will give you a much higher return but will usually require a lot more involvement from you and/or your managing agent. There are lots of other types of property in between.
- Buying to let incorrectly – This may involve taking out the wrong mortgage or buying in a way which is not tax efficient. It is important that you speak to a good mortgage adviser if you intend to borrow money or a good tax adviser.
Should you buy with a cash or mortgage?
– This very much depends on your attitude to risk. Borrowing heavily is a good way of gearing your investments and maximising your profits. This suits some people. However others don’t like the additional stress this brings in terms of fluctuating mortgage rates and house prices. If you buy cash, the rental market fluctuates very little so you know what rental income you will receive each month.
Most decisions in buying to let for the first time come down to your attitude to risk – Here’s an attitude to risk scale from least risk to most risk.
- Buy a property but don’t let it. You would be crazy but it’s the least risk. In the same way not getting a job is the least hard work!
- Buy a new property with a warranty, in a popular letting area and don’t take out a mortgage.
- Buy an older property in a popular letting area and take out a mortgage.
- Buy a really cheap property in an unpopular area and borrow as much as you can.
Numbers one and four on the list above may seem a little crazy to you but I have seen people choose number one for their investment strategy and I’ve seen people choose number four. Most of them are probably very content with their decision because they chose it to suit their attitude to risk and return. Just make sure that if you are a first time buy to let investor you choose the right type of property for you.