With buy-to-let representing a favourable investment in recent years, you’d be forgiven for thinking buying a home as an investment is a no-brainer, but it actually takes a great deal of research and skill. Indeed, finding the right home is arguably the most crucial part of investing in property.
Here, we take a look at the key things you need to think about before jumping in.
The local market
Many first-time investors choose a property near where they live, both for ease of location and because they understand their local property market. Going local has its perks, but it can also have its pitfalls too. If you’re not looking to be a hands-on landlord, and instead want to place your investment in the hands of a managing agent, you can look further afield. Always try to pinpoint markets on the up rather than those that have recently peaked. It can be tempting to go for towns where property has experienced huge increases in year-on-year capital growth, but this could mean you’ve already missed the boat. Areas with new transport links, growing leisure amenities or some kind of special appeal should be high on your list, but the key is to remember that ultimately you’re looking to make a profit. Speak to a local agent to get the lowdown on areas you might not have thought of and pinpoint places with increasing yields and the prospect of good capital growth in the upcoming years.
The property type
Whether you’re eyeing up a retirement bungalow or a student property, you need to know what renters are looking for in your chosen area and purchase accordingly. Property investors often find themselves battling with first-time buyers for new-build property, and while brand new homes may carry a rent premium in some areas, they also have a cost premium too, so if you’re on a tight budget you might want to consider other options. A renovation project may be time consuming at first, but could give you the opportunity to get the best deal with less competition from fellow investors. In some circumstances, a successful renovation job can result in you quickly recouping your investment.
The ideal tenant
Different types of tenant have different needs, and you should always picture who you expect to be letting a property to before buying it. If you can’t think of your ideal tenant, you’re probably buying the wrong property. In the first instance, consider what different groups of people want. Students are more discerning than people give them credit for, and are willing to pay a premium for city pads with en suite bathrooms. Families, meanwhile, will already own their own belongings and will appreciate a property where they can make their own mark, so ask yourself how much control you’re willing to hand over.
With stricter lending criteria and the advent of a 3% surcharge on stamp duty for buy-to-let investors, it’s becoming more expensive to be a landlord. With this in mind, it’s especially important to be aware of the fees involved when purchasing your property and not overstretch yourself. Buy-to-let investors usually need to put down a deposit of at least 25%, and interest rates can be higher than for owner-occupiers.
As a rule of thumb, ensure that your rental income will cover 125% of your mortgage payments, and if in doubt seek advice from an independent financial adviser.