Buy-to-let is enjoying a bit of a renaissance of late, with more mortgages available, higher rental yields and high demand. But have you considered the investment risks?
With any investment the return you will get is uncertain – you could even make a loss.
With a buy-to-let investment, you can earn money in two ways:
- Income (from rent)
- Capital growth (through the value of the property going up)
On the other hand, you can also lose money if:
- Your outgoings exceed the rent you make, or if the property sits empty.
- Property prices go down.
So, if the possibility of losing money doesn’t sit comfortably with you, then maybe a savings account would be more appropriate.
Capital growth on a buy-to-let property
The nature of buy-to-let, as with most investments, is that you have to be prepared to invest your money for the long term to give your investment the best chance to grow.
We are living through unprecedented times and, although the past performance of property has been stellar, past performance is no guide to future performance – there’s just no way to know how a particular investment will turn out.
Income from a buy-to-let property
You receive buy-to-let income in the form of a monthly rental payment from your tenants. The rent you can expect to receive from a buy-to-let depends on your property, its location and a variety of other factors. It goes without saying as well that your property also needs to be tenanted.
From a buy-to-let investment, income is particularly important as you will have regular costs to cover.
Aside from the costs of buying your property – Stamp Duty, valuation/ survey fees, legal fees, mortgage arrangement fees, re-decorating, etc. – you’ll have numerous day-to-day maintenance and management costs:
- Letting agent’s fees
- Mortgage interest (and capital if you opt for a full repayment mortgage)
- Landlord’s insurance
- Annual safety checks (on the boiler, etc.)
- Rent Guarantee insurance (designed to protect you for untenanted periods or against having tenants in arrears)General building maintenance
- Stamp Duty
- Income Tax
- Capital Gains Tax
- Inheritance Tax
You should also consider putting aside a little each month in a contingency fund. This could cover costs such as redecorating your property in order to attract new tenants and to cover your costs during any untenanted periods.
Borrowing with a BTL mortgage
Borrowing money to help fund a buy-to-let purchase is becoming more commonplace.
A buy-to-let mortgage allows you to invest in a property with a relatively small amount of money and reap all gains in house prices rises and incomes.
However, because it’s now considered more normal to borrow to fund a buy-to-let purchase, you may not have considered the additional risks that are inherent with borrowing to buy-to-let, risks that may have been overlooked by some investors in the recent house price boom.
Conclusion – the human element
It’s easy to see why buy-to-let is an attractive investment: you can physically see your bricks and mortar and manage it in a way you just can’t do with shares or other investment routes.
However, it’s easy to overlook the very real investment risks associated with buy-to-let, the considerable costs you might incur, not to mention the drain this type of investment might have on your time, and the stress it might have on your life – that’s even if you employ an agent (untenanted periods can still be a financial worry for instance).
If you want to have an easy life as an investor, there are less involved ways of investing, such as through an investment fund (within or outside of an equity ISA).
Borrowing to fund investment is a risky business – you’re not only risking money you’ve got, but also money you haven’t got, money that would have to be paid back if your buy-to-let loses a marked proportion of its value.
Before entering into any investment you’re always best advised to seek professional guidance – from an independent financial adviser and maybe from an accountant as well.