If you want to be a landlord there are things to consider before taking the plunge – here’s what one property expert advises
Should I be a property landlord? “I’ve been asked this question many times,” says Staffordshire-based Robert Macfarlane, professional landlord and director of MD Properties. If you are considering moving into the letting business and becoming a landlord, here are Robert’s tips to make it a smooth transition.
Your First Purchase
Let’s look at how a first time property investor would get started. You’ll need a deposit. This, on a buy to let mortgage, would normally be 20/25% of the purchase price. Assuming you have little knowledge of property and the local market it would be prudent to approach an estate agent for advice. They will be up to speed with demand in a particular area and what rental return to expect. What’s best to buy? This may be dependant on funds available; there is nothing wrong with a one bed property but I find three bed properties offer a better return.
For example, if a property is available at £160,000 and you decide on a deposit of £40,000 – a deposit of 25%, leaving a mortgage of £120,000 – an interest-only mortgage would (in most cases) be the best option and a lot of lenders subject to criteria will lend on rental properties up to the age of 85.
On top of the deposit, other costs have to be considered such as legal, mortgage fees and stamp duty. Will the property be ready straight away to rent out or is there some work to do? If work is required there are more potential costs to consider, but, of course, this depends on whether any renovations have been reflected in the purchase price.
Personally as a first purchase, unless you’re pretty hands on, I would recommend a property that’s ready to go. It’s going to let quicker and the sooner the income stream comes in the better. In the example above, let’s assume the mortgage is £400 per calendar month and the rental income is £650. This gives a gross profit of £250 per month, less for example agent fees and maintenance.
It would also be prudent for a landlord to have an emergency fund for when the unexpected happens e.g. a new boiler required, or for void periods when the property is unoccupied.
How does the future market look?
Looking at the positives, if we wind the clock on say 10 years the interest-only mortgage could well be a similar amount dependant on interest rates. However, the rental income could have risen quite easily to £750 per month as demand increases producing a bigger profit. In fact it’s forecast by 2030 as many as 50% of the population could be renting. Importantly the value of the property (whilst no guarantee) could be worth over £200,000. So with income and capital growth, property can be a solid investment. It must be remembered though generally speaking if you wish to reap the rewards it’s not a short term investment.
What’s your motivation?
Each landlord will have reasons for going into property. One common one is to help their children onto the property market; the ‘bank of Mum and Dad’ buy the property and work out a deal for the siblings to take over. Or the property is sold and profits are gifted to the siblings which forms a deposit to help them on their way to purchasing a property.
A common example in Staffordshire is the parents buying a student house. For example, two siblings move in and the rental income off the other rooms pays the overheads. So in effect the two children are living rent free. At the appropriate time the property would be sold and profits and perhaps the original deposit used to help the children purchase a property.
Whatever your reason for going into property investment make no mistake it’s a bold step to take but with the right investment and good management of the property it can most definitely reap good returns.
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