With rents going up and property prices hitting new 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? Many people invest in a buy-to-let property just to impress their friends as it seems a trendy thing to do. Investing in property is a long-term commitment with many potential ups and downs along the way. If you are not clear on the reason for investing from the outset your enthusiasm is likely to run out very quickly.
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? If you are planning to build a portfolio this will require a lot of management time and may take take up much of your leisure time, are you prepared for this? Alternatively you could instruct a letting agent to deal with your investment and just sit back and reap the rewards, but this will come at a cost.
What type of property are you going to buy?
Will you concentrate on small residential properties, student accommodation or even commercial properties? Specialising in one type of property investment is the most sensible option to start out. Once you are fully versed in one property type you can then start to expand in to other types if you wish.
What is your exit strategy?
Will you eventually sell and if so when? Many people see a buy-to-let investment as a future pension so you need to be clear on when you want get access to your investment funds. Selling up one or a number of buy-to-let investments takes time and property markets fluctuate so good timing is crucial to get the most out of your investment.
2. Poor property choice
Not every property, or area, will be suitable for a buy-to-let investment. You should invest in an area where there is a proven demand for rental property and in properties that will appeal to potential tenants. 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. Ask estate agents to keep your informed when any potential investment properties become available.
Find out the expected rents on the type of property you are interested in and make sure this is sufficient to cover all the outgoings on the property.
Remember 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. A first-time investor should keep things simple and go for standard property types in areas with rental demand and don't take on anything that needs a lot of work as this will increase costs and delay the renting process.
3. Not doing the sums or watching the cashflow
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. Don't enter into this investment with rose-tinted glasses. Be realistic and always overestimate on costs rather than underestimate. 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 mortgage payments, maintenance, insurance, letting agents fees and an allowance for void periods when calculating rental yields.
Keep a close eye on the cashflow
Landlords should keep detailed records of all income and expenditure and record these in a spreadsheet. This will enable you to see the profit and loss on a monthly basis together with future projections. Make sure you are putting money aside for potential high-cost repairs, such as a new roof or boiler.
You should also review each property in your portfolio annually, so that you can ascertain the profitability or otherwise of each investment. If an investment is costing you money on a monthly basis then it may be wise to sell the property to recoup your investment.
4. Not vetting tenants
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 and you should also read this article for more information: "Using a letting agent vs doing it yourself ".
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. Buy-to-let investment is a business so treat it like one and be hard-nosed about the quality of the tenants you are prepared to let your property to. Better to be patient and wait for a good-quality tenant than let to the first tenant that comes along and live to regret it.
5. Not understanding the legal issues
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. Read this article for more information - "Guide to tax on income from a rental property".
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.