What you should know before Investing in Buy-to-let

The trend of investing in buy-to-let property has been rising over the past few decades. The soaring property prices and the regular monthly rental income make it a lucrative investment for investors. Due to these reasons it is now looked at as a popular way of generating wealth.

But there have been dramatic changes in the buy-to-let landscape in the last two years. If you are planning to make a similar investment following are certain factors that you may have to consider first.

Rising Costs

Renting out a property no longer offers the great returns as it used to offer once. The government has made changes to the tax system in an effort to cool down the housing market. These changes in the past few years have robbed the buy-to-let investing trend of the much attraction that it possessed once.

The gradual reduction of tax relief on mortgage interest, which may reach the basic rate of 20 percent by 2020 and the additional 3 percent stamp duty surcharge is now holding back investors to put their money in this particular vehicle of investment.

Moreover, the government has resolved to take action against the exploitation of tenants at the hands of rogue landlords and in a bid to achieve this, the government has increased the rights of tenants.

Complying with the increase in demands may prove to be too much for small-scale landlords.

Extra Work

If the property suffers any damage the landlord is the one who is responsible to arrange the money for repairing it. Also, the process of finding the right tenants can prove to be time consuming.

There is a way around this problem but it involves paying a letting agent to take care of these affairs on your behalf. However, resorting to this solution can cut through your rental income significantly. It is not uncommon for these agents to charge you somewhere close to 10 percent or more of the rental income generated.

A thing that you must remember here is that you should protect your assets, which is your primary residence and also your buy-to-let home by writing a Will using an online Will kit free.

Negligible Returns

Considering the efforts and time that need to be invested in managing a property, the returns may not seem very attractive.

Let us perform some simple calculations. The average rent paid by tenants per calendar month is reported to be somewhere close to £900. Annually it sums up to be around £10,000. The average price of a home at the end of this year’s first quarter was in the region of £226,000. If the stamp duty surcharge is included this amount rises to £232,780.

On the basis of these numbers, the landlords who enter this market today may yield a average rental income of 4.6 percent. If you were to deduct from this 10 percent towards income tax and letting agent fees, the rental yield a landlord is left with is around 3.4 percent. While these figures are only rough estimates one should note that it is just to illustrate how there is negligible return associated with buy-to-let investment.

It is also common for buy-to-let investors to use mortgages in a bid to improve returns. But this only adds a further cost in the long run. As the profit margins are so slim, replacing a shower or getting a radiator fixed can easily wipe away a significant portion of your annual rental income.

Another major consideration in buy-to-let investment is Capital Gains. But this only brings good news for investors. It is expected that the prices of homes may grow over the next few years, although it may be largely dependent on the region where the property is located. If you add a 2.5 percent yearly appreciation to the 3.5 percent annual income calculated above, you can produce a 6 percent return on your investment.

Some investors may be of the opinion that for all the work involved this level of return may not exactly justify the investment. With a little bit of research and guidance regarding equities in the FTSE 100 you may find that investing in certain stocks may support a dividend yield of slightly more than 7 percent. Compared to buy-to-let there is much less work involved in making this type of investment.