Successfully managing your buy-to-let property
Property investment offers a great opportunity to make money, but this rarely happens by accident. Buy-to-let properties need to be well-managed on an ongoing basis to continue to deliver good returns.
During the credit crunch, landlord repossessions rose to their highest level mainly because investors weren’t able to keep up with their mortgage payments. This may have been due to tenants not paying the rent or the property not being in a good enough condition to let, leaving it for months rather than days or weeks. Having a property repossessed by a lender can mean losing the deposit and paying out more costs associated with selling the property.
If repossessed and the property is sold for less than you owed to the mortgage company, the lender can recover further debt, having up to six years to pursue those that default.
Looking for a property for less than its market value...
Although it is impossible to guarantee a property will always increase in price, if you are able to purchase something at less than its true market value (i.e. less than a surveyor’s valuation), this can create a safety net in case of a fall in market values.
But the most important thing to ensure is that you are able to afford your investment property, not only today but also in the future. That means keeping a close eye on your costs, the biggest of which is likely to be your monthly Buy-to-Let mortgage payment.
We know that rents tend to go up and down, according to supply and demand, but are typically ‘capped’ by wages. That means if wages are stagnant, rents tend to be stable as well, and you may not necessarily be able to pass on any increase in your own costs to your tenant.
How to ensure you can afford your mortgage payments...
You can fix the mortgage so the payments don’t vary, even if rates go up.
Although you would not necessarily be able to benefit from lower payments if rates were to fall, you would have the peace of mind of knowing that your mortgage payments will be the same each month.
This is particularly helpful if you have locked in rent levels for 6 or 12 months under an assured shorthold tenancy agreement.
Ideally, any investment property you buy will increase in value and the rent will always be higher than your costs, leaving enough spare cash to both pay for periodical repairs - such as a new boiler or mending roof damage – and cover immediate costs should your tenant stop paying the rent.
There is also the option to insure your rental income, so even if the tenant doesn’t pay, you can claim on your specialist landlord insurance. There are various different types you can take out; some pay out immediately, as soon as your tenant misses a payment, while others may expect you to fund the costs for a short period of time.
Finally, put money aside just in case there are times when the rent is higher than all your costs. Consider keeping a fund of a few thousand pounds if the property is in very good condition, up to £5,000 if you know the heating system or roof will need work in the next few years.
That way, if a big home improvement bill comes your way, you will be able to cover the costs without risking any mortgage payments.