Here are some of the key things you’ll want to think about before beginning your search.
You can potentially earn a profit from a buy-to-let property in two ways:
Rental yield is the return you expect to make on your property, through rental income.
To calculate rental yield, take the rental income you expect to make in a year and divide it by the purchase price. Then convert the result to a percentage by multiplying it by 100.
For example, if the property costs £250,000 and the predicted rental income is £12,000 a year, the rental yield will be 4.8%.
For a more accurate picture of return on investment, you may want to take into account other outgoings, such as letting agency fees, insurance and maintenance costs.
What makes a good rental yield? This can vary depending on location. Local estate agents and property websites can offer guidance on what rental income you might expect.
Capital growth is how much the property may go up in value by the time you come to sell it.
Ideally, you’d want both a good rental yield and capital growth when considering a buy-to-let property. You can research areas where this is most likely to happen.
Bear in mind, you’ll be selling a property that’s not your home, so there will be capital gains tax to pay. You may also have to pay tax on the rental income you receive. Always seek tax advice, as tax rules change and will depend on individual circumstances.
One approach to buying rental property is to have an idea of who your target tenant is, and focus your property search on them. For example, are you looking to rent to students, professionals, families or retirees?
Once you know, put yourself in the shoes of your target tenant and ask what you would look for in a rental property.
A good tenant will look after your property, pay their rent and bills on time and treat neighbours with respect. Whoever your target tenant is, it’s important to carry out the necessary reference checks.
A letting agency can find and vet tenants for you, for a fee. They can also collect rent or fully manage the tenancy. Fees will depend on the level of service offered and is often a percentage of the total rent.
A promising buy-to-let location is one where people would like to live, not necessarily the cheapest or most expensive area.
To select the right area, consider a number of factors, such as:
Also consider where the property is, in relation to you, as its owner. Many investors choose properties close to where they live, allowing them to use their knowledge of the local market and keep an eye on their asset.
If you choose to employ a property management company, rather than be a hands-on landlord, you could potentially look further afield.
Some properties will be suitable for let, relatively quickly, once they’re safe and secure for tenants. Other properties may need fixing up and renovating first.
This can affect your profit margins, and the time it takes before you start receiving a rental income, which you’ll need to consider.
Before you buy a property, you should arrange an independent survey to flag up any potential issues. You can choose the type of survey you’d like, depending on how much detail you need:
If you have a mortgage to pay on your buy-to-let property, you want to avoid extended periods of no rental income. It’s important to consider demand for renting the property and its location, as well as the quality of your letting agent, if you use one.
To help you manage your money, you can set a minimum term on the tenancy, such as 12 months. You can also add a reasonable notice period for terminating the tenancy agreement, to give you time to find a new occupant if you need to.
Your property may be repossessed if you don’t keep up repayments on your mortgage.