A combination of low interest rates, rising house prices, nervousness about retirement and a distrust of pensions, has led to another buy to let boom.
If you are thinking of jumping on the bandwagon, where is the best place to buy an investment property? A new survey reveals all.
Buy to let yields
The most successful buy to let investors base their choice of property and location on the yield they will receive.
The simplest way to calculate the yield is to compare the annual rent with the value of the property; the higher the figure the better.
The survey by BM Solutions, a buy to let mortgage lender, shows that the best yields are not to be found in London and the South-East, where house prices have rocketed. According to the survey the highest yields are in the North-East and North-West where the cost of buying a property has not risen as quickly.
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Source: BM Solutions, July 2014
Whilst the yields may look attractive, compared to say savings accounts, they are shown before costs, such as letting agent fees, maintenance, mortgage interest repayments and of course tax.
Not just about yields
Although yield is probably the most important factor when choosing a suitable buy to let property, other considerations are also important, such as:
Rental demand Landlords hate having an empty property. You need to ensure there is sufficient demand in the area you plan to buy.
The right type of property This is crucial. Buying a property that is unsuitable for the rental market, perhaps only because you like it, is a mistake often made by ‘rookie’ landlords. Remember your market, if you plan to let to students an out of town property probably won’t work, likewise if your market is families, you should be near schools and other amenities.
Capital growth Yield is important, but at some point you will probably want to sell your property, that means buying in an area where you think prices will continue to rise.
Funding How will you fund your purchase? Will it all be cash or will you need a mortgage? Whilst interest rates are low, using a mortgage to fund part of your purchase could be attractive, but remember they are likely to rise over the next few years.
Expenses You must remember to include all costs in your calculations before you buy a property. Letting agent’s fees, maintenance, interest payments and insurance all add up. Remember the void periods too, and if you make a profit, you’ll pay Income Tax on it
Getting the right property, in the right location, for the right price and at the right time, isn’t easy. For those landlords who get it right the returns can be attractive compared to other options, but the pitfalls such as bad tenants, void periods, interest rate rises and falls in house prices, all need to be remembered.