At the close of 2010, the Royal Institution of Chartered Surveyors (RICS) predicted that house prices in Britain could fall more than 2% in the next year. Although, while this is bad news for homeowners, assuming the commercial mortgage market holds up, the fall in house prices could spur an increase in the level of interest in investing in property. Could, therefore, 2011 be the year of boom for Buy to Let?
At a time when house prices have already tumbled, and with the RICS UK Housing Market Forecast predicting further drops, this could on the face of it seem like an odd time to advocate investing your money in property. However, the golden rule of investment applies – it always pays to consider the longer term.
The Buy to Let (BTL) market isn’t for everyone. You need to think about it carefully as a business proposition. There will always be a sizeable initial outlay (specialist BTL mortgages usually need a deposit of at least 25%, and other costs such as arrangement fees are normally higher too), and you need to be prepared for monthly outgoings too – not just mortgage payments, but letting agent fees, landlord insurance and so on.
However, if you have the money to make that initial investment (and let’s face it, the rates of return on other types of savings and investments are hardly attractive at the moment), then Buy to Let could be the ideal solution. As lenders stick to tighter underwriting criteria than ever before – particularly for first time buyers – more and more people are driven to renting.
The initial paperwork and calculations, when considering buying property to rent, should include your projected rental yield, how much you intend to charge in rent and what you feel your continued expenditure will consist of during the rental term. Getting clued up on these figures will help you determine if it will be a worthwhile venture.
In simple terms, these exact figures can be calculated by subtracting your total annual costs from your total annual projected rental yield and then dividing the sum by the total of your initial costs. When I say total annual costs I include mortgage repayments, maintenance/repair costs and letting agent fees. Similarly, by initial costs, I include fees such as the initial deposit, surveyor and solicitor fees and renovation/decoration and furnishing costs. It is always best to seek financial advice if you are unsure of how to go about the calculations.
This can be a useful calculation as it not only gives an estimate of whether Buy to Let is a feasible investment (if it works out as only one or two per cent then you might want to reconsider), but you can also change the variables to understand how the different factors will influence the profitability – a better mortgage interest rate, shopping around for a cheaper solicitor, or increasing the monthly rent you’re asking just slightly can make or break the success of the venture.
The Buy to Let lending market is extremely specialised and therefore you are unlikely to find the best rates and deals on the high street, through either banks or building societies. Therefore, don’t be afraid to approach a mortgage broker, contrary to popular belief, they are there to help you!
It is even more important that you approach a broker if this is the first time you have looked into renting property. Independent brokers who work on a ‘whole of market’ basis will be able to help you find the best rates and deals on the market. They will additionally be able to understand your personal circumstance and exactly what form of mortgage or financial assistance would suit you best.
So, is 2011 the right time to Buy to Let? With the housing market as it is at the moment, and the reletive availability of commercial property finance now has never been a better time to enter the letting market. The environment is favourable for landlords and demand for rented property is increasing almost daily. So, if you are looking for a new adventure as we enter the New Year, then consider buy to let as the biggest and best investment of your lifetime.