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Borrowing to buy-to-let… do the sums add up?

Read the headlines over the past few weeks and you could be forgiven for gnashing your teeth if you haven’t had your savings invested in buy-to-let properties in recent years.

An investment of £1000 in 1996, according to lender Paragon, would have realised up to a whopping £13,000 in 2014 – knocking traditional investments into so many cocked hats.

Moreover, those who saw the biggest returns were those who borrowed money to buy their property – because the interest rates they paid were less than what they received in rental income. Many were able to actually build a portfolio of properties on borrowed money.

So it does beg the question: is this where you should be putting your hard-earned money in 2014? And should you be borrowing to invest too?

Certainly, there are no signs of the demand for buy to let diminishing – even though Help to Buy has undoubtedly enabled many people to move from rented accommodation. We still aren’t building enough new properties to meet growing demand.

Added to that, we are seeing real growth in house prices.

And – because the financial market is always quick to spot a good opportunity – there is now a plethora of buy-to-let mortgages available, including a number which will share the risk with you. There is even one that relies on crowd funding. As long as you’ve got a reasonable deposit as well as an acceptable credit rating, and you’ve done your homework, you could be on the road with a 20 or 25% deposit on a mortgage typically now below 3% (plus fees).

So – as it stands, the prospects look good… although there is no such thing as an investment with guaranteed high returns and no risk!

But the canny investor needs to consider a raft of factors.

Firstly, your ROI (return on investment) will come from two sources: rental income and capital growth. Rental returns after costs should (ideally) at the very least cover your borrowing costs – and do allow for some void periods.

Secondly, everyone in this market should have their eye on the longer game: capital returns through house price rises. And you don’t go into that expecting to make your money quickly – often you have to ride out dips in the market. It’s not an investment for someone who might need their money quickly – houses are highly illiquid unless you’re lucky or prepared to take a hit.

So what are the three quick tips you should remember most?

1               Have your funds ready – bargains crop up, such as repossessions or the last house in a new development. You’ll need to move quickly though, so get your mortgage in principle sorted.

2               Do your research on what areas return the best ROI in terms of rental yields – it’s very often the less fashionable locations. Building a portfolio of cheaper properties rather than one more expensive one spreads your risk too!

3               Look at house prices and see which way they are moving – and likely to move. Research the drivers of house prices – not least the schools.

4               Look at the mortgage terms available – fixed rates will give you certainty in the years ahead even if they are not the cheapest at the moment.

5               Take advice from an independent expert – such as a letting agent who will give you honest appraisals of what they will get for any given property.

And if you think that buying to let is for you, come and talk. We can certainly steer you towards properties to consider investing in, to set you on the way towards the first property in your portfolio!

One Response to “Borrowing to buy-to-let… do the sums add up?”

  1. Barry Denton says:

    I’m considering buy to let in Swansea area…. Can you let me know what you have please
    Thanks
    Barry Denton

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