What to Do Before Investing
There are several important things you need to do before you consider investing any money. No investment is risk-free, so you want to make sure you are in a healthy place financially before you put any money down.
Here are some useful ways you can help secure your finances before you invest.
1. Pay Off High-Interest Debts
While you don’t need to be debt-free completely to begin investing, paying off high-interest debts like credit cards is a good idea, as they generate compound interest which stacks over time.
These kinds of debt can eat into your savings fast, and due to the high-interest rates, can be hard to shake. Paying them off while you have funds available is highly recommended for this reason.
2. Set Up an Emergency Fund
As we mentioned earlier, no investment is risk-free. If the worst should happen and your investment falls through, you need to ensure you have enough left aside to look after yourself and your loved ones while your finances recover.
As a rough estimate, putting together savings of between three to six months’ worth of your expenditure will allow you to cover essentials like housing, bills and food while you get back on your feet.
Luckily, buy-to-let is one of the safest and most stable investment classes in the UK, but it’s still a good idea to prepare for the worst-case scenario to be on the safe side.
Questions to ask yourself before you invest
1. What are Your Investing Goals?
The first thing you need to ask yourself is what you are looking for from your investment. Every investor has different goals and is in it for their own reasons.
Maybe you are looking to start a buy-to-let business to break out of the 9-5 cycle, or maybe you’re investing to have some extra income for things like holidays or big expenses.
Decide on a reasonable goal to work towards, which can help inform the rest of your decisions moving forward.
2. Are You Investing Short-Term or Long-Term?
The next thing to decide upon is how long you want to be investing for, which your investment goal should help you decide.
Short-term investments are generally considered any investment over 12 months or less, while long-term investments often take several years to fully reap the rewards.
Investing in buy-to-let for the short-term means focusing more on collecting rental income from tenants, and benefiting less from capital appreciation. This is not the ideal method for buy-to-let investments, but can still net you some strong returns.
For those looking for a long-term investment with high returns, buy-to-let property is ideal as you can make a consistent passive income through collecting rents, while capital growth allows you to benefit from rising house prices over time.
3. What is Your Risk Tolerance?
While every investment strategy comes with its own levels of risk, investors have to decide how much risk they are willing to accept. This is what is known as risk tolerance, and can decide what kind of investment you want to make.
Some investors are fine accepting a higher level of risk with the hopes that they will win big, while others choose a smaller level of returns in exchange for a safer investment.
Property is one of the safer investment classes due to being a physical asset, while the high potential for returns makes it ideal for any level of risk tolerance.
4. What is Your Investing Budget?
Once you have answered all of the previous questions, the next stage is to decide how much you are willing to invest in buy-to-let.
You shouldn’t bet the house on any investment, so deciding on a sensible budget is a must.
Many high-quality investment properties can be bought with a budget as small as £100k, and there are ways of spreading out the cost of investing so you’re not spending such a huge amount in one go.
You could borrow a buy-to-let mortgage to pay it off over time or use a payment plan with a property investment company to buy in sizable chunks.
Thanks to the wide array of buy-to-let properties on the market, you don’t need to worry about how to buy-to-let with a smaller budget as there are many ways of making it work.
Finding the Right Investment Property
With all those questions answered, now you have to find the right investment property to fit your needs.
There are several factors you should decide upon which will help you filter down what properties you are looking for.
- The type of tenant you are looking for – be it students, young professionals or a wider tenant class, decides what properties are suitable for you.
- What kind of property do you want to buy? There are several main types of buy-to-let property. These include HMOs (House of Multiple Occupancy) where multiple tenants share the same property, student property which is only for university students and standard buy-to-let properties where a small handful of tenants share the properties at most.
- Is the property a freehold or leasehold? A freehold property is one where you own the land where it is built, while a leasehold means you are signing a long-term lease for the land when buying the property.
To make sure you are buying a buy-to-let property that is likely to net a strong return, you should look for a combination of these factors:
- Location – You should look for buy-to-let properties in areas with high demand from tenants. These often include major cities, as the mix of employers and universities draws in demand from a wide variety of tenants.
- Rental Yields – Rental yields are a percentage indicator of how much of a return you will make on your investment on an annual basis. A yield between 4-5% is considered average, but you can find yields of 6% or higher to give yourself a better return quite easily.
- Affordability – Property can be expensive, especially in large cities, so finding something that is affordable for you is a priority. Many buy-to-let properties in popular areas are sold for below-market-value prices, and this helps you make a higher return.
To learn more about each of the above points, consider viewing our page on how to choose the right property to let out next. Now you understand this, there are several routes you can go down when debating how to buy a buy-to-let property.
Using Property Investment Companies
Property investment companies work exclusively with developers to sell buy-to-let properties to their clients. Many properties sold through investment companies are available only through them and are not on the open market.
This allows them to sell buy-to-let properties for below-market-value prices, and offer higher rental yields through links with property management companies that are experts in handling the day-to-day running of a rental property.
Many property investment companies also sell off-plan properties, which are properties still in the early stages of development and construction. This allows them to sell the property for cheaper than those that are fully built, meaning you can often avoid the repayments of interest-only BTL mortgages.
Using an Estate Agent
The traditional way of buying a property, estate agents can also be relied upon when searching for how to buy a buy-to-let property.
Letting agents sell properties on the open market, so you will likely have to pay top dollar for properties you buy from them. You will also have to cover agent fees when purchasing a property.
However, on the plus side, they are going to be extremely knowledgeable and experienced in their local area, so they can help guide you towards the best areas to invest in for what you are looking for.
Using a Property Portal
If you prefer to find the right property for you from the comfort of your couch, you may choose to use property portals. These are websites like Zoopla and Rightmove where developers and estate agents can list the properties they have for sale.
You’ll find the widest range of buy-to-let properties for sale on portals, and you can use their filters and settings to narrow down your search to what you are looking for. This means you have more information than ever at your fingertips.
The downside is that portals lack the personal touch of property investment companies and estate agents, and you will have to rely upon the advertising information and what is online to help you make your decision.
Once you’ve found the right property for you, the next step is to buy it.
The Purchase Process
Becoming a landlord can be an attractive option for property investors. For those just starting out in the buy-to-let world, it can be difficult to get to grips with all the financial considerations and responsibilities required of landlords. Take a look at our easy-to-follow guide to becoming a landlord to learn everything you need to know as a beginner buy-to-let investor
There are several steps to purchasing a buy-to-let property, similar to the standard process. Here is a step-by-step guide to help you understand how it works:
1. Make an Offer
You may need to negotiate the price of your chosen property, depending on how you are buying it. This is traditionally done when buying a property through an estate agent.
2. Reserve Your Investment Property
If you are buying through a property investment company, you will pay a reservation fee to secure your unit or property to ensure no one else can buy it while you are going through the process. Buy-to-let properties are popular, so you’ll need to make sure you secure your chosen unit.
3. Instruct a Solicitor
The next step, no matter what, is to hire a solicitor to help with the legal side of the process. Property investment companies will often give you a trusted solicitor to work with, which may give you discounted rates.
4. Arrange Your Mortgage (If You Need One)
If you choose to use a buy-to-let mortgage, this is where you arrange to borrow one. You may be able to find mortgage deals from different providers, so be sure to try and find the best one for you (we’ll go over this in the next section). View our page on buy-to-let mortgages next to learn more.
5. Arrange a Survey
If you are using a buy-to-let mortgage, you may need to have your mortgage broker conduct a valuation survey before approving your offer. This will look at issues within the property you should know about before you buy.
6. Exchange Contracts
The final step of the process is to exchange contracts, once all formal paperwork has been completed and the funds have been sent and received.
Many property investment companies have a dedicated client care team to help navigate this process, a massive benefit of using their services.
How to Manage a Buy-to-Let Property
Once you have purchased your buy-to-let property, the next stage is to manage it. Many act as buy-to-let landlords and run their property themselves, but this can be a lot of work.
You will need to:
- Organise viewings and contracts.
- Collect rental income.
- Deal with any issues tenants have.
- Advertise the property.
- Ensure any repairs and renovations are performed.
Many landlords choose to use the services of a property management company to help take the difficulty of being a landlord off their hands.
Is a Property Management Company Right for Me?
Property management companies handle the everyday running of an investment property for a monthly fee, acting on behalf of the property’s owner.
There are several benefits to using a property management company, including:
- More free time to earn income through other streams.
- The knowledge that experts are handling the management side of owning a buy-to-let property.
- Property management companies use the services of experienced and trusted contractors for any repair work.
- You don’t have to deal with any unruly tenants.
With all this in mind, property management companies might be the best choice for you, especially if you have little to no experience as a landlord.
What Taxes and Charges Will I Have to Pay?
Right off the bat, the first tax you need to worry about is stamp duty land tax or SDLT for short. This is a tax charged on any purchase of property, which is a portion of the purchase price of the property.
To learn more about taxes and charges, be sure to read our Buy To Let Tax Rule Guide next.
