If you are looking to set up a lucrative passive income stream on your way to achieving financial freedom, investing in a Buy to Let property is an excellent route to take.
Buy to Let property investment refers to purchasing a property without the intention of residing in it. Instead, investors rent the property out in the hopes of eventually achieving a high return on investment (ROI).
It is important to note that this is a long-term strategy and requires substantial planning and strong execution for success.
In this article, we will provide you with a solid understanding of the foundations and mechanics of Buy to Let property investment. We will also offer advice and tips on practical aspects of such an investment and reveal its potential within the UK market.
What are the costs to buy an investment property?
The cost of buying a property will directly impact your ROI (return on investment), so you should be mindful of all of its components.
Apart from the price paid to acquire the property, you will face other costs. For instance, you may have to pay the fees for a solicitor, a surveyor (not compulsory but recommended), a mortgage broker, and a sourcing agent. Plus, there will be the mortgage cost itself and stamp duty.
For stamp duty costs, be sure to check out this helpful video explaining what it is and ways to keep it at a minimum.
Hiring a competent mortgage broker can be particularly helpful if you want to own a portfolio of properties. Doing so will ensure that you can continue to borrow with ease as If you need to borrow money from the bank.
And remember, if you work through an estate agent to acquire your property, it will be the seller who will be the one covering the agent’s fees.
What are the costs to hold property in the UK?
The costs involved in holding a property in the UK is an aspect of Buy to Let property investing that beginners tend to ignore or underestimate.
These costs include landlord insurance fees, ground rent and service charges, and maintenance costs. In addition, you may have to hire a property manager and prepare for void costs when your property remains without tenants.
The landlord insurance fee is necessary because of the possibility of extreme damages to the property due to fires, thefts, and severe weather. And this cost tends to be higher than the typical homeowners’ insurance cost.
In addition, you will have to bear management fees involved, especially if your goal is to establish a passive income.
This way, you’d avoid the inconvenience of having to deal with minor issues such as leaky taps now and then.
Then there are payments for ground rent or service charges, which vary widely depending on the building and the location.
And they can skyrocket for leasehold properties, so you will need to be mindful of them and make sure to incorporate them into your budget.
One more aspect to consider is void costs.
It is inevitable for a property not to have a tenant, at least for some duration.
And there is also the possibility of encountering a bad tenant that you’d wish to remove from your property. In some cases, eviction can take up to six months.
Do make room in your budget for such a situation (at least one month per year).
In addition, there are maintenance costs to keep up to the expected standards of existing and potential tenants.
Boilers, pipes, and drains are just some things that might require repairs, and the cost for plumbers is ever rising.
Gas appliances will also need to be checked and tested by a registered gas engineer.
So set some money aside for such eventualities every month.
And if you provide fixtures and furnishings to the tenant, you have to accept that they will get damaged and replaced.
Therefore, it is best to buy well-known brands rather than cheap ones that won’t last.
And while you keep a firm eye on costs, you should also reevaluate the property’s rent from time to time.
This flexibility will not only help you improve your immediate returns but will also prove to be very valuable down the road if you wish to borrow to refinance your property or to sell it outright.
Most tenants understand rent increases and don’t bother leaving just because of a small extra amount they have to pay each month.
What types of properties should you buy to let?
With Buy to Let properties, your main objective should be to purchase below market value (BMV) properties. Doing so will allow you to pour money into refurbishing the properties to charge a decent amount of rent.
One focus a lot of beginner real estate investors have is to buy good-looking properties.
However, there is a risk attached to this mindset. The less costly a property is, the less appealing it will be for prospective tenants to get attracted to it and decide to reside in it.
Instead, your concentration should be on identifying motivated or distressed sellers.
These are folks who need to sell their properties quickly, perhaps due to financial or family issues. As they are more willing to sell soon, they will accept a reduced offer.
A good ballpark figure to have in mind while looking for properties to buy is a 10-20 percent discount on the property’s actual value.
Experienced investors are always on the lookout for properties to which they can add value to profit later.
Consider this scenario: You scan the market and spot a property that you appraise to be worth 100,000 pounds.
And the property’s owner happens to be a motivated seller, trying to get it off their hands as soon as possible. So you negotiate and manage to purchase the property for 80,000 pounds.
Now, this is not where the story ends. Remember, you ‘saved’ 20,000 pounds instantly by buying the property below market value.
So you can invest that excess amount back into the property and revamp it.
Keep in mind that refurbishing costs can often go beyond expectations.
To avoid this scenario, make sure to analyze the condition of central heating, wiring, plumbing, fixtures, and fittings properly before making your investment decision.
Nevertheless, it’s best to keep a 10-20% cushion in your budget to accommodate such a potential increase in renovation costs.
Your goal will be to add value to the property through quick renovations that will immediately add to the property’s value. These include finishing kitchens, updating bathroom sanitation, and making drywall renovations.
What is the best area to invest in?
For Buy to Let investing, you should try to identify an area with a high rental yield, i.e., where the rental income relative to property value is the highest. And you will need to ensure there are potential tenants available in the market.
For example, a neighborhood with a lot of demand for a specific type of property and few competitors supplying that type of property would be ideal for finding tenants.
And make sure to avoid areas where only investors are looking to make money in the market, and there are no home buyers interested.
Instead, try to buy the worst property in the best area. Such a location will have easy access to health services, schools, shops, and sources of entertainment.
It will be cheaper for you to buy but will have great potential, attracting many potential tenants, especially families.
The UK is a great market to make Buy to Let investments. So whether you intend to buy a property and make a profit out of its value appreciation over time or to hold it and reap the rewards of a high rental income, you’ll find plenty of opportunities to achieve your goals.
To help you out, we have prepared a free guide showcasing the 22 top cities in the UK where your investment can yield the highest possible returns.
Do I need to invest where I live?
Another common misperception that novice investors have is that they need to invest in the area where they reside. They feel that being in the vicinity of the property they will hold for a while is a requirement for success.
But this is not the case.
You do not have to invest where you live. You could even be living in another country and still profit from Buy to Let investments. All you need is a team of professionals working on your behalf.
But, of course, you will have to carefully pick the team members, with a particular emphasis on finding the right sourcing agent, mortgage broker, property manager, and contractor.
So it would be prudent to spend a decent amount of time setting up the most communicative and cooperative team possible.
Is this a Beginner-friendly investing strategy?
Buy to Let strategy is the foundation of all real estate investing, regardless of your experience. Moreover, it is the least risky strategy you can apply while investing in property.
A lot of new real estate investors out there are looking for the perfect deal. But, unfortunately, such a deal does not exist!
Of course, before investing, you should carry out all the necessary due diligence and plan everything with your budget and the target financial results in mind.
But delaying taking action can result in losing out on lucrative opportunities, so don’t fall into that trap.
Whether you are based in the UK or anywhere else in the world, buy to let properties can easily give you an extra stream of income on a monthly basis, plus the capital growth over the long term will create real wealth for you and for your future generations.
Not only is it a strategy that beginners can apply, but it is also sustainable and easily replicable if you wish to build a portfolio of properties.
However, you should be aware of several types of costs involved in buying and holding Buy to Let properties.
And it would be best if you also choose the right area to invest in to make the highest possible return.
We hope after reading this article you have a better grip on how Buy to Let property investing in the UK works.
And remember, the right time to make this investment is now, so please make up your mind quickly.
But before proceeding, read our article on How to Execute a Buy to Let Property Investment in the UK, which provides an in-depth analysis and free resources to aid you with this first and perhaps most crucial investment step>>