How Will I Pay for My Investment?
There are multiple different ways of paying for an investment property, and each of them comes with its own advantages and disadvantages. Figuring out which one is right for you is an important choice.
Will I Pay Upfront with Cash?
Some lucky investors have enough disposable income to be able to purchase their chosen investment property outright.
This means you won’t need to worry about mortgage repayments or interest rates, and the property will be yours from the get-go.
However, this option is unrealistic for many investors, depending on the amount of cash they have available in their budget.
Will I Borrow a Buy-To-Let Mortgage?
One of the most popular ways to buy investment properties is to use a buy-to-let mortgage.
This allows investors with smaller budgets to consider properties that would otherwise be outside of their price range.
Buy-to-let mortgages differ from regular residential mortgages, as you will need to put a larger deposit down on the property. Your monthly repayments will only cover the accrued interest rather than the mortgage itself.
Then at the end of the mortgage’s term, you can either pay off the mortgage, sell the property or remortgage.
This option eats into your monthly income through the interest repayments, but it means you can spread the cost of investing out over time and purchase more expensive properties than you otherwise could.
Will I Pay With a Payment Plan?
Buying your property through a property investment company such as ourselves here at RWinvest means you may have the option to use a payment plan when investing.
Payment plans allow you to split the cost of the property you are purchasing into smaller chunks of cash.
This is a more manageable way of buying properties for those who do not have the entire price of the property right away, allowing you to spread the cost of investing out over time.
Keep in mind you will need to put down a deposit on the property and then pay follow-up instalments at agreed-upon dates down the line. This is usually when the property is complete if investing in off-plan properties.
Therefore you need to ensure you have enough cash for the follow-up payments by the agreed-upon dates.
A typical payment plan may look something like a deposit of 50% of the property price upon initial purchase and then a follow-up payment of the final 50% upon completion of the property.
How Much Money Do I Have Avalible to Invest?
This may be the most important question you need to ask yourself, as you need to establish how much money to set aside to invest with and to establish an investment budget.
You may be surprised at how little you need to invest with, as you can invest in property with a range of budgets.
Can You Afford Your Deposit?
If you are planning on using a buy-to-let mortgage or a payment plan to purchase your investment property, you will need to consider how much you can afford for a deposit.
For a buy-to-let mortgage, you will need roughly 25% of the property’s price in order to put down a deposit. With payment plans, you may need a higher deposit of around 50%.
The actual amount you pay will, of course, depend on the overall price of the property.
For example, if you are buying a property that costs £100,000 with a BTL mortgage, you will likely need to have £25,000 upfront as a deposit.
Think about how much you have available for a down payment, and this will give you a better idea of what you can afford.
Can You Afford Property Taxes?
There are several different taxes you need to be aware of when investing in property. The two main ones you need to think about are:
- Stamp Duty Land Tax
- Rental Income Tax
Stamp Duty Land Tax is a tax you pay to the government when you buy property. If you are already a homeowner, there is an additional surcharge of 3% added to the stamp duty you pay on a property.
The government has just announced cuts to stamp duty, meaning you will likely pay less depending on the kind of property you are purchasing.
Rental income tax is a tax you must pay on any rental income you make from your property. How much tax you pay will depend on your income as well as your personal circumstances.
If you own an investment portfolio, then the profits from each property are added together to come up with a unified level of tax.
Can You Afford Maintenance Costs?
Owning an investment property means dealing with the maintenance costs that come with running it.
These could be anything from re-decorating between tenancies to paying for unexpected issues like plumbing problems.
This is where your ‘rainy-day fund’ could come into play, but you should also look to generate enough rental income to cover any unexpected maintenance costs that arise.
If you don’t want to manage the property yourself, you may want to consider hiring a property management company to handle the day-to-day operations of running a property.
Their job includes finding tenants, dealing with rent payments and resolving any tenant issues. This is highly beneficial for many investors, allowing them to get on with their day-to-day lives, but it will be an extra cost that you must factor into your budget.
Will The Property Bring in Positive Cash Flow?
Most investors will generate enough rental income to cover the costs of any mortgage payments and unexpected costs while still having some cash left over.
This means they have a positive cash flow. In simple terms, having a positive cash flow is when the rental income is higher than the expenses and outgoings associated with the property.
You will want to make sure your property has a positive cash flow so you can earn significant returns from your investment.
How Much Rental Income Can You Expect?
You need to think about your expected rental earnings if you want to work out if your property will have a positive cash flow.
Depending on your investment strategy, it may be tricky to work this out.
If you use a property investment company such as RWinvest to purchase your investment, then you will normally have an assured rate of returns for a set period of time.
This means you should know exactly how much rental income you will make through at least the first year of your investment.
If you’re planning on buying your property more independently, you can use similar properties in the same area as yours to work out a rough estimate of how much income you can expect.
Tools such as Zoopla’s Area Guide are really useful when trying to work this out, as they provide average rental prices for different postcodes around the UK.
We have a handy rental income calculator you may want to use to help with this.