- Real Estate
Being a Buy-To-Let Landlord
Background of Author
I am currently a Lead Software Engineer working for an international engineering company that manages a team of Engineers in the UK, India and Poland. I have worked in the software engineering for 27 years.
Why Become a Buy-To-Let Landlord?
Since 2008 the world economy had suffered the worst recession since the Second World War. Unemployment in the Western world shot up as a result and there was a squeeze on people's earnings. The cost of food, fuel and the everyday household items has increased faster than the earnings of most working people. In order to safeguard a good rise in income for your household a lot of people are considering alternative forms of passive income. Passive income enables a person who is still working in a full-time job to make money without affecting their full-time work. It provides security and a better way to make your money grow than keeping your cash tied up in a bank account.
How to Get Started
OK, so you would like to get started as being a Buy-To-Let landlord? So how do you start? I have been a buy-to-let landlord for 2 years now and when I started I needed to consider the following factors:
1) Where is my target area going to be?
2) How do I raise the finance?
3) Do I manage the property myself or use a professional management company?
Choosing a Target Area
Choosing a target area is one of the most import things to consider when being a Buy-To-Let landlord. When buying a property a typical question might be:- "What are the 3 most import things to consider when buying a property?". The answer is "Location, Location, Location". Always try to choose a central city location (not in the middle of the countryside). People prefer renting properties that are located near to schools, shops, railway stations etc. An important thing to consider is what typical yields can be expected for properties being rented in your target area? I spent a lot of time researching the cost of properties and the rental returns for properties in my home city and surrounding cities and towns. I was very glad that I did this research because, as it turned out my own city did not provide the best returns! The cost of property was too high compared to the rentals returns (an average yield of only 4%). I decided to choose a city that was 1 hour's drive from where I am currently living. It had a much better average yield of around 7%. In case you are wondering, how do you calculate the gross yield? Well, this is a simple calculation, you multiply the rent per month x 12 and divide into the cost of the property. For example a rent of 575 per month x 12 = 6900 per year. If the cost of the property is 95000, then 6900 / 95000 = 7.26%. That's a fairly good gross yield. I wouldn't consider a place with less than a 7% gross yield.
How Do I Raise The Finance?
The most likely way to raise the finance is through a mortgage. A word of warning though:- banks charge a high interest rate for Buy-To-Let mortgages. To get around this problem I remortgaged my own home and got a much lower interest rate. Also go for interest only mortgages and not repayment mortgages. The reason for this is that 100% of interest for interest only mortgages can be offset against tax. Only the interest portion of a repayment mortgage can be offset against tax!
Do I Manage The Property Myself?
In my case I decided to use a property management company to look after my property. They normally charge about 12% for 1 property and then go down to 10% for 2 or more properties. The reason I decided to go for a property management company was for the following reasons:
1) I didn't want the hassle of advertising my property and showing tenants around.
2) I have a full-time job and don't have enough time to run a business.
3) The target location I chose was a 1 hour drive away.
4) Professional letting agencies are good at vetting tenants. I had a bad experience a few years ago when some tenants trashed my property!
Well, you might be asking what happened after 2 years? In my case things have gone pretty well. The rental market is very strong a at the moment. Allowing for all the costs my net income has risen 15% last year. Which is better than the average pay rise!
I accept no responsibility for the advice I have given in this article. Please note the suggestions provided here are from my own experience. Please always consult a professional financial adviser if you are unsure about the correct course of action. But good luck with whatever you decide to do!