Buy to let is regularly dubbed an ‘easy road to riches’. With the number of rented households in the UK increasing by a massive 50% since 2009 (according to the English Housing Bulletin ), the appeal of buy to let is stronger than ever.
But in order to make the most out of buy to let, you need a good knowledge of the property market and a solid understanding of your tax responsibilities as a landlord. There are risks you need to carefully consider when deciding if buy to let is the right investment path for you.
No guarantee on investment return
As with any investment, the return you could earn is usually dependent on external forces, such as the property market and interest rates. In the worst cases you could even make a loss.
When it comes to buy-to-let investments, there are two ways you could earn money: through rental income and through the value of the property increasing – i.e. capital growth.
However, just as prices go up, they can also go down and even crash. There’s also no guarantee that you’ll be able to rent the property out all of the time, so you need to make allowances for that loss in income .
Buy to Let is no quick fix
Investing in property is not necessarily a one-way bet. Those who bought at the height of the last housing boom, for example, may not have seen any capital growth yet. But property investment is a long-term investment; most have to wait years before they reap the fruits of their labour.
Deposits and a mortgage are not the only outgoings you need to think about when investing in buy to let. Other fees include:
Make sure you speak with a tax adviser who has experience in buy to let before you make an investment.
You could lose what you put in…and more
Usually, when you invest, you can't lose more than what you've put in. But most people who embark on a buy-to-let investment need a mortgage – and as soon as you borrow money in order to invest, you increase the risk. Not only could you lose the capital you’ve invested, but also some of what you have borrowed.
Location is key
A yield is essentially what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agents fees. At the time of writing, yields are around 3%–4% in central London, and 5%–6% elsewhere in the UK.
As geography plays such a big part in the return you might get from your Buy to Let investment, it’s important to research this carefully. You want to buy property in an area where yields (rent) – not just capital – will appreciate.
Unfortunately, the types of consumer protection that cover most other investments don’t apply to buy-to-let properties. So it’s all the more important to find out everything you can before you commit to this type of investment.