Buy to Let
Investing in buy to let property became popular in the 1990’s due to the introduction of Buy to Let mortgages.
In the current climate it has become difficult for a first time buyer to get a mortgage to get on the first rung of the property ladder. Therefore renting has become increasingly popular. Needless to say this is very good news for the property investor. You can create a great monthly cash flow if you do your sums correctly at the beginning.
So what does Buy to Let investing mean?
The basic idea is that you buy a property, using some capital of your own and some borrowed money (the mortgage). You then find some tenants to rent the property to. They pay you rent to live in the property. Hopefully the tenants cover all of your costs of owning the property and give you some positive cash flow. In addition to this cash flow, you get the benefit of significant capital growth as the property increases in value overtime.
The key to successful buy to let investing is to purchase a property in a location where there is strong rental demand and the rent “Stacks up”. This means that the rent is enough to cover all of the costs and still leave a profit for you at the end of each month. Each year you will have to pay income tax on your rental profit. You can use a calculator like this one to find out how much your repayments will be.
The main costs you have to cover will include:
- Interest on your mortgage (always get an interest only mortgage)
- Landlord insurance (make sure you get Landlords Insurance and not just a household policy)
- Management fees (if you use a letting agent to look after your property for you)
- Service charges (if you have a leasehold property)
Make sure you know how to work out the rental yield on a property. The calculations are shown below:
Gross Yield = annual rent/purchase price
Net Yield = annual rent less running costs/purchase price
We find it much safer to work with the net yield, as this gives you a truer picture as to what will end up in your pocket at the end of the month.You should also build in some contingency to your figures in case of a worst case scenario happening.
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