Property – Buy to live, Buy to let

By at home

With readily available ‘buy-to-let’ mortgages and property development so popular, does investing in bricks and mortar provide a good foundation for your financial future?

When you see property price rises leaping ahead of inflation month after month, buying a building seems a tempting prospect.
Due to the current combination of low interest rates and a struggling stock market, where else could you hope to achieve such a potential growth in capital values? As house prices rise out of the reach of many would-be buyers, so demand for rented accommodation has grown. Local authority housing has also become scarcer as increasing numbers of tenants exercise their right to buy. More people are prepared to relocate due to work, while single-income households are the fastest-growing group in the house-buying public. These are only two of the many factors which add fuel to the letting market. So there is a ready market for rented accommodation. It would seem that buying property to let can produce a good return on your investment Ð and you can take advantage of special cheap mortgages, too. Let’s look at it in a bit more detail, though.

House prices have never been higher and, at some point, the bubble is likely to burst. Anyone who remembers the negative- equity nightmares of the late 1980s will need no reminding of how fickle the property market can be. If your mortgage bites a substantial proportion out of your income, think carefully about the long-term implications of taking on another loan. Interest rates may be low at the moment, but even a small increase can have a big impact on your finances once you have taken on extra responsibilities. You need to be sure that the money your property brings in is enough to cover all the outgoings: there is more than just the mortgage to think about, with repair and maintenance bills, insurance and other costs. Unless you are particularly confident about your abilities as a landlord, you will need to appoint an agent to look after day-to-day affairs.

Another issue is ‘voids’, periods when your property has no tenant and, consequently, is producing no income. This might be for a couple of weeks, but what if it were to last for months? Before letting any property, study the local market carefully. In some parts of Britain, particularly major cities, so many people have bought to let that there’s a glut of property available, and tenants are in short supply. Property in some inner-city areas might look like a bargain on paper but, if you don’t know the area, you could be pouring your money into a no-go zone that people are trying to leave, rather than move into. The same goes for the state of repair. ‘Requires some modernising’ is an estate agent’s phrase that can cover a host of evils from rewiring to a new roof.

When you are buying a second property, the pressure is not the same as when you are looking for a new family home. You are likely to have more time in which to find the right property and be less burdened by a chain of buyers and you can put that extra freedom to good use by doing plenty of homework, checking the history of the building and seeking the right advice before you commit yourself to what will be a sizeable investment. And don’t forget the legal aspects. Your property will need to meet certain safety requirements and you will need a proper agreement in place to protect your assets should any legal dispute arise.

Property development
Buying a house or flat to rent is only one way of making money from the property market. Small-scale property development can also yield rewards, but potentially involves much harder work and a greater element of risk. In its most basic form, it involves identifying a property that can be refurbished and resold at a profit.

Soaring house prices in many parts of the UK make the prospect of achieving a quick profit seem simple. There is a real danger, however, that we are reaching the top of the market and that prices will begin to cool, reducing potential margins.

Once again, meticulous preparations are needed before you take the plunge. Location is vital: look for areas that are ‘up and coming’. Communities which neighbour sought-after post codes are a good bet, as they attract plenty of interest from aspirational buyers who can’t yet afford their ideal home.

It’s essential to have a thorough survey undertaken to achieve the best possible picture of what you will have to do. A house might look ideal, but structural repairs, such as reroofing or damp coursing, will quickly eat into your profit potential. Professional fees and extras such as stamp duty must also be taken into account when doing your calculations.

Think carefully about what work you choose to do. Remember the property is a commodity which you want to make money. Don’t become emotionally attached or stretch your budget by equipping it with features you like yourself, but which aren’t really essential in making the property attractive to buyers. Add 20 per cent to your budget to allow for things to go wrong, which they will, and use reliable labour who know what they’re doing.

Buying overseas
A second home in France or Spain can seem a comparative bargain when you see the attractive prices. It’s a market that has enjoyed rapid growth in recent years and estate agents specialising in overseas property are no longer unusual sights in our high streets.

The basic price of that delectable ch‰teau may seem cheap, but you must take into account fees, taxes, searches and other costs associated with purchase because these can prove to be much higher than you’re used to. To be certain of finding what you want, you need to spend time in your chosen region. Even if you may only be using the property for a few weeks each year, basic amenities are essential. Converting an old barn in a remote rural area might seem like your dream come true, but if you’re looking to invest with a view to a good resale value, you will be better off looking at good communications and local facilities.

Obtaining a mortgage for an overseas property is easier than ever before and you can expect to be able to borrow up to 80 per cent of the value. Think carefully before deciding to take out a mortgage in a foreign currency as sharp fluctuations in exchange rates can have a big impact on your costs. Remember that if you choose to rent out your property, you will be taxed on the income.

So there are various ways in which buildings can provide income, not least simply by staying put and in good condition for 20-odd years. Yet these methods are not for the faint-hearted investor, nor the novice. As ever, you should never invest more than you can live without. And when it comes to a house, that can be a lot of money!

Tell me more about buy-to-let mortgages
The Association of Residential Letting Agents was formed in 1981 as the government helped give new impetus to creating more landlords, and ones who would offering better standards of rented accommodation. It has worked to promote good practice, professionalism and ethical standards among private landlords, providing training and advice. One of its key achievements has been its work with mortgage providers to establish the buy-to-let mortgage. It works much like a standard mortgage but is designed to help landlords avoid mortgage surcharges and commercial interest rates. Applicants undergo a status check but, unlike normal mortgages, the calculations take into account the likely income from rents. Repayment periods can be negotiated between five and 45 years and you should be able to borrow up to 80 per cent of the property’s value.

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