Soaring rental rates may make investing in buy-to-let property seem increasingly enticing to those with sufficient capital to put down as a deposit, but do you stand any chance of profit from a direct bricks and mortar investment?
Investing in buy-to-let involves purchasing a property with the intention of letting it out. Specially designed buy-to-let mortgage loans are available for this purpose. Such mortgage loans work in a similar way to other mortgage loans in that you repay the loan in monthly installments plus interest. However potential monthly rental payments on the property will usually have to equal or exceed a minimum amount, usually 125% of monthly mortgage repayments.
Buy-to-let investing has risen significantly in the last year, with the number of mortgage loans issued increasing by 17% according to the Council for Mortgage Lenders (CML), in comparison to relative stagnation across the rest of the housing market.
In July average rental prices per month in England and Wales reached a new and enticing high of £725 which would convert into an annual income of £8,700 before tax. The rise in rental rates has in turn led to an increase in average yield, which rose to 5.3% in July.
However, once costs such as insurance, voids, maintenance, agency fees and mortgage costs have been taken into account return on your capital investment- a minimum of 25% of the cost of the property- may end up significantly depleted.
There are a number of additional factors you may want to consider when considering investing in a buy to let property, such as whether the property you have chosen is in a desirable location, and how you would manage if the property stood empty for a period of time.
While lending is at a high and the potential yield is higher than that seen on many savings or investment options, repossession of Buy-to-Let properties reached an all-time peak of 0.24%.
A recent report suggests that buy-to-let property prices could grow by 2% per year (PricewaterhouseCooper) between 2012 and 2025 as demand for rental property continues to increase, investment risks remain high, particularly in an uncertain economic climate.
Just because a buy-to-let property is a physical investment, it doesn’t mean that it comes without risk. It’s important to remember that your property may be at risk if you do not keep up repayments on your mortgage.
The property market is certainly no way to make a fast buck and though reasonable returns may been seen in the long term, short term pitfalls should be considered very carefully indeed.
This post was written by John Hughes who is the resident blogger at Independentfinancialadvisor.co.uk, a UK based site that provides access to financial advisors as well as to debt advice charities for those struggling with their debts.