Investing in residential property can be a rewarding and profitable venture. But before parting with your cash, you need to develop an investment strategy.
If you're wondering where to start, let whathouse.co.uk take you through the essentials when planning to purchase a buy-to-let property.
This article contains:
How to spot the hotspots
Research is essential when deciding on a location in which to invest. Ensure that the economic factors underpinning the local residential property market are sound. For example, consider:
In general, areas with a high rental yield coupled with high capital growth are an ideal investment.
Wherever you opt to invest, you must always analyse and plan a smart exit strategy, because while property prices can rise, they can also fall.
Financial strategy
Unlike most other investments, you can actually borrow money to make money when investing in property. This is known as gearing .
Unlike ordinary mortgages, your return on investment will be maximised if you take out an interest-only mortgage.
If your property portfolio grows in value over the years, you will accumulate equity. This can then be used to acquire further properties, by remortgaging part - if not all - of your portfolio.
However, the more heavily geared you are, the more risk you run, because while property prices can rise, they can also fall.
Interest rates
Because the cost of borrowing has risen on the back of cumulative interest rate rises in recent months, anyone wanting to enter the buy-to-let market under current market conditions will have to take out a mortgage at an average borrowing rate of around 5.5% to 6%, compared with approximately 3.5% to 4% in 2004.
Investors should, therefore, weigh up rental returns against the cost of taking out a mortgage.
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Rental returns
Rental yields in England hit a five-year annual low last year, down from 7.1% in 2002 to 5.74% in 2006, according to recent rental yield data compiled by Landlord Mortgages (LLM).
When taking all outgoings and potential rental voids in to consideration, some buy-to-let investors will now be making a net annual loss on their rental income.
You should aim for an initial rental yield of 6% to 10% of the total value of your investment, including interest and lending charges.
Capital growth
Although falling rental yields and increasing interest rates are not ideal for investors, potential capital growth should also be taken into consideration. Average property prices have risen by 66% over the past five years, according to Halifax.
Lee Grandin of LLM says: "Private investors need to be less concerned with high rental yield figures and more concerned with achieving sufficient rental income to cover their mortgage repayments. Savvy investors now need to concentrate on finding the right balance between the prospect of long-term capital growth, rental coverage and profit when they search for the ideal buy-to-let investment."
Buying property should be viewed as a medium to long-term investment, because although capital appreciation has been extremely healthy in recent years, property prices traditionally move in cycles of boom, bust and stability.
Therefore, most investors entering the buy-to-let market do so with a long-term investment strategy of 15 to 20 years in mind, according to Malcolm Harrison of the Association of Residential Letting Agents (ARLA).
Finally, always remember to budget for additional expenses, such as stamp duty, legal and estate agency fees, void periods without a tenant, decoration, and restoration.
In summary - Do’s & Don’ts
Good luck!
By Marc Da-Silva
See our property investments section for more articles.
Visit the Invest in Property Show for more expert advice. The next exhibition runs between 13-15 April at Earl's Court, London.
This article was published on 22 February 2007