Buying To Let

Talk of investing in bricks and mortar and fortunes made from buying property to let used to fuel dinner party conversations.

At the peak of the buy-to-let boom in August 2007, according to Moneyfacts, borrowers could choose from 3,662 mortgage products.

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Lender appetite and investor demand quickly dried up in the credit crunch. Lenders pulled back from the market and withdrew thousands of products while even the most savvy of investors started to get spooked.

Now the market is slowly returning. In September 2009 there were 179 buy-to-let mortgages available, according to Moneyfacts figures, and 239 in November 2009.

What is buy to let?

Buy-to-let is an investment where you buy a property, usually with the help of a mortgage, and rent it out. When you rent out your property you become a landlord and with that comes extra responsibility. You will be responsible for carrying out all repairs, ensuring the safety of gas and electrical appliances and ensuring that the furniture and fittings meet fire safety requirements.

Profits from renting out property are also taxable, so you will have to pay income tax and stamp duty when you buy your property and capital gains tax when you sell it.

Finding the right deal

But before you take the plunge you still have to find the right deal and that could prove difficult. Lenders have continued to tighten criteria and have restricted the number of properties a portfolio investor can have as well as the maximum total that they will lend to an individual landlord.

Generally you will need a deposit of 25% to secure the best deal - although less competitive deals are available for investors with just a 20% deposit.

Research the market

Just like buying your own home choosing a buy-to-let property is all about location, location, location. Find out about the demand for and supply of rented housing in the area you choose to buy - letting agents can help or you can do this yourself.

Depending on the type of tenant you are trying to attract generally your property should be close to local amenities, shops, transport and possibly schools.

Getting mortgaged

For first-time buy-to-letters it's wise to adopt the same approach to a buy-to-let mortgage as you would a normal mortgage. Don't just walk into a high street bank as they will have a limited range available, and may not have any products available at all.

To make sure you can access the entire market you should speak to an independent financial adviser or independent mortgage broker.

Charges for buy-to-let mortgages are normally higher than those for your own use. Lenders will calculate how much they are prepared to lend by taking into account how much rent the property will produce - generally around 125% of the monthly mortgage interest payment.

Also you should always try and keep aside enough cash, around three months rent, in order to continue making mortgage payments during any periods when you don't have tenants and the property is empty, and to cover unexpected repair costs.

Using a letting agent to find a tenant for the property will normally cost you between 5% and 10% of the rental income. If you use a managing agent to look after the property you can expect to pay around 10% to 15%.

As with a normal residential mortgage you should review your mortgage arrangements on a regular basis - this could save you thousands and help manage your finances. Again, an independent financial adviser or independent mortgage broker can help you do this.

How much you can borrow will determine the size and type of property you can buy. However you will also need to ensure that you can afford the properties upkeep. For instance, does the property need much work doing to it? Can tenants move in straight away?

No quick fix

Buy-to-let can still make financial sense if you buy wisely and have affordable finance. But do research the market and always look at buy-to-let as a long term investment.

It's worth remembering though that buy-to-let is not without its pitfalls.

Tenants have rights and the wrong type of tenants could soon turn your buy-to-let dream into a nightmare.


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