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With rents going up and property prices below their recent peaks many people may think that this is a good time to enter the Buy-To-Let market. Whilst property may be a good investment in the long term, if you make some fundamental mistakes at the outset it could all turn into a nightmare.
So, here are my top 5 Buy-To-Let mistakes and how to avoid them.
1. Not having a business strategy
Entering the Buy-To-Let industry should be viewed exactly the same as starting up a business. Many new landlords will start out without having a clear idea of their goals and the strategy they are going to adopt. Every landlord should create a business plan covering the following areas.
- What is the purpose of the investment?
Are you looking to create a surplus monthly income or build a capital amount, or both?
- How many properties do you want to have in your portfolio?
Are you just looking for one investment property or are you going to scale it up to a full-time business?
- What type of property are you going to buy?
Will you concentrate on small residential properties, student accommodation or even commercial properties?
- What is your exit strategy?
Will you eventually sell and if so when?
2. Poor property choice.
Not every property, or area, will be suitable for a Buy-To-Let investment. Here are some tips for buying the right property.
- Do your research
Find out the areas where rental demand is high, searching the property portals and talking to estate agents will give you some idea.
Find out the expected rents on the type of property you are interested in.
- You are buying a property to rent, not to live in
Many new landlords will buy a property based on their tastes rather than viewing it as an investment. If you do this you may end up paying more for the property and find it difficult to maintain.
3. Not doing the sums and watching the cash-flow
It’s not enough to just assume that if the rent covers any mortgage then everything will work out fine. You must sit down and calculate the real cost of your investment before you buy. Here are a few pointers.
- Calculate the true cost of buying
Make sure you include stamp duty, solicitor’s fees, mortgage fees and maintenance required before you make a purchase. This will give you a clearer idea of your return on capital.
- Don’t under estimate the ongoing costs
Make sure you include all your ongoing costs such as maintenance, letting agents fees and an allowance for void periods when calculating rental yields.
- Keep a close eye on the cash-flow
Landlords should keep detailed records of all income and expenditure and record these in a spreadsheet, this will enable you to see the profit & loss on a monthly basis together with future projections.
You should also review each property in your portfolio annually, so that you can ascertain the profitability or otherwise of each investment.
4. Not vetting tenants
- References
It is vital that you take up references regarding employment and previous rental history as well as carrying out a credit check. A letting agent can help in this area.
- Quality
You should make a judgement regarding each tenant on whether they will look after your property whilst renting it. Ask questions about their lifestyle and write into the contract your view on pets and any other restrictions.
5. Not understanding the legal issues
- Landlord responsibilities
There are some legal requirements that landlords must adhere to that could have serious consequences if ignored. Some requirements are around safety standards, others concern the treatment of tenants in situ and on eviction, if needed.
- Don’t forget the taxman
In general terms if you are making more than £2,500 income from property (after deducting allowable expenses) each year you will need to file a self-assessment tax return. It may be worthwhile using the services of an accountant to help in this area.
Conclusion
As with all investments you need to do your homework to get a good return and Buy-To-Let is no exception. Don’t expect short-term miracles but if you avoid the mistakes mentioned above your investment may return good dividends.
Further reading: The Buy-to-Let Guide, Can I nominate my buy-to-let property as my principle residence to avoid tax?,
