buy-to-let risk – When you buy a new rental property, you take a risk. Markets can fall as well as rise, mortgage interest rates change, renters are not always who you think they are. There are risks all along the rental property journey.
But there is much that you can do to reduce the risks of buy-to-let, and increase your chances of making a great investment. Here’s what you need to think about:
Your target market
Generally, the properties that offer the best returns are sharer properties and small flats aimed at young couples. A property let to four students, for example, will generally bring in more rent than the same property let to a family. That said, families tend to stay in properties longer, and can be better tenants. Think about what’s most important to you.
The local area
Choose an area that fits your target market. If you want to let to students, find out where they want to live. They will usually want to be near the local university, or on a direct transport link to it. Young couples and professionals will value proximity to transport links and local nightlife. Families want to be near parks and good schools.
Look, too, at what is likely to happen to the area over the next few years. If a major transport link is being developed, that could push prices up quickly, meaning a property bought now could be a great investment. The same could apply to schools, or big retail developments. Also look at whether an area is ‘up-and-coming’. If you see upmarket shops and cafes being opened in a previously down-at-heel area, it’s likely to be a good investment.
Do the maths
Look very carefully at whether your rental income will be enough to cover your costs. Lenders usually expect to see that your rent will amount to at least 125% of your mortgage repayment. If you want to make returns early on, you’ll need it to be higher than that. That 25% needs to cover periods without tenants, repair bills, landlords insurance and provide a cushion in case rents fall.
Remember that property prices could fall, too. You may make money on rising prices when you buy a property to let, but you shouldn’t assume it will happen. You should be making money on rental income if you want a solid investment. Interest rates could rise, too, increasing your mortgage repayments. Remember that rates are currently very low – the only way is likely to be up for your repayments. Make sure you’ll be able to deal with that when it happens.
Doing well in buy-to-let will always mean taking a risk. Just make sure you only take risks that you can manage.