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Since the end of the 1990’s, property investing has become far more mainstream thanks to the introduction of “Buy To Let” mortgages which has made it much easier for the average person to purchase an investment property.
The UK general public who have a fascination with home ownership, took to property investing like a ducks to water, spurred on by the proliferation of property TV programme such as Property Ladder which showed us all how we could make a fortune in property.
One of the attractions of property investing is that the long term trend for property prices is up. This is due to simple supply and demand. The fact that we have a shortage of accommodation in the UK and an increasing demand due to a growing population. However property prices are cyclical. Just like every other market, prices go down as well as up!
From the early 2000’s the UK property market experienced a boom until prices reached a peak in October 2007. At this point, the two main groups of buyers who stimulate the market (first time buyers and buy to let investors) stopped buying because the property prices were just too high.
As a result, property process fell by an average of 20% by the end of 2009. The UK media was full of doom and gloom about the property market and indeed it was not a good time to be selling a property. But property investors don’t sell property, they buy. So now is actually a great time to invest as long as you know what you are doing and always do your research to make sure you buy the right property.
The fundamental idea is that you buy a property, using some of your own money (the deposit) and borrowed money (the mortgage). You then rent the property out to some tenants who pay you rent to live in the property. The idea being that the tenants cover all of your costs of ownership and also give you some positive cash flow which is the return on the deposit you invest. In addition to this cash flow, you get the benefit of significant capital growth as the property increases in value overtime.
Currently for a typical buy to let investment you need a 25% deposit and can obtain a 75% mortgage. This mortgage is not dependant on your income but rather on the amount of rental income generated from the property. However your personal credit score will be important as lenders have tightened their lending criteria since the Credit Crunch.
The key to successful buy to let investing is to purchase a property in a location where there is strong rental demand and the rent “Stacks up”. This means that the rent is enough to cover all of the costs and still leave a profit for you at the end of each month. Each year you will have to pay income tax on your rental profit.
The main costs you have to cover will include:
- Interest on your mortgage (always get an interest only mortgage)
- Landlord insurance
- Management fees (if you use a letting agent to look after your property for you)
- Service charges (if you have a leasehold property)
In addition to these monthly costs you will need to allow some money for repairs and maintenance and if you have any void periods (where you have no tenants) remember you will have to cover all of the costs yourself so it is highly recommended to have a cash buffer to use in case of emergencies.
With all these costs and the hassle of finding and managing a property, you may be thinking “why do people do it for just a small profit each month?” The answer is they don’t! Most people invest for the long term capital growth. Historically over the last 60 years property has doubled in value on average every 7 to 9 years. It may take a while to recover from the last crash so let’s say it takes 10 to 12 years for prices to double again from now.
If you had a £100k property it could be worth £200k by the year 2020. If you had put a 25% deposit into the property your investment would have been £25k and the capital gain would be £100k. That is a fantastic 400% return on investment. You would not get that kind of return in a bank, in the stock market or in fact any other form of investment which is why property investing is one of the best investments you can possible make.
In future articles I will go into much more detail about how you can make Buy to let investing work for you.
Simon Zutshi, who is a financially independent property millionaire, is the author of the Amazon No 1 Best Seller “Property Magic” and founder of the property investors network who hold monthly evening seminars for investors in 12 cities around the country. Find out more details at www.pinmeeting.co.uk (opens new window)
