The Ups And Downs Of Buy To Let Investment
According to data from the Communities and Local Government’s English Housing Report, the number of privately rented properties in the country has risen from 3.4 million in 2009-10 to 4.4 million in 2013 – 14. This big increase in volume doesn’t surprise me as yields for buy to let properties are through the roof, and investors are clamouring to get a piece of this pie.
However, before you take your chances in buy to let properties, you must first assess the risks involved carefully:
There are two ways to make money from buy to let: income from rent and capital growth.
Buy to let landlords get income from the monthly rental payments of their tenants.
It’s hard to pin point an average yield for every buy to let property, since different factors affect the amount you can ask for every tenant. The type of property, location, amenities offered, and other factors have a great influence on how much landlords can charge for every room.
Owning a fully-occupied buy to let property is the goal and dream of many investors. Not everyone is lucky enough to experience this, though.
There are times when tenants leave and there’s no guarantee on how quickly you can find a replacement. This is where the problems come in.
Most landlords use the rental income they receive to pay off some taxes and expenses related to maintaining a property like Stamp Duty taxes, valuation/survey fees, legal fees, mortgage arrangement fees, re-decorating, as well as day-to-day maintenance and management costs.
In the event that these costs add up and you are not receiving enough rental income to at least cover these costs- you’re going to be in big trouble. Some investors are forced to use personal money to pay for these costs. This is a big no-no, since this will only lead you to larger debts! Wiser investors, on the other hand, save up a portion of their rental income every month as a contingency fund. Then they apply these “savings” to costs during any untenanted periods or any unexpected expenses.
You need to have lots of patience if you’re planning to buy and hold property. Waiting for property values to go up takes time, and sometimes, your expected capital growth gets hampered by a market crash, like what happened in 2008.
Now, market dips are always part of the game. Eventually, prices do go back up to your favour. But if you were planning to sell at the time of the crash, then you’ll end up losing money if you push through with the sale.
Good investors have contingencies for these kinds of scenarios to mitigate losses. So if you are planning to invest in buy-to-let properties, you must plan out your finances carefully to account for emergencies such as this one.
Remember, when you need to borrow money to invest, the potential loss won’t be just the money you put in, but also the amount you’ve borrowed PLUS any interest due. Therefore, it’s possible to lose much more money than what you initially put in.
But again, greater risks also mean greater rewards if things work out. So your goal as an investor is to do your homework: understand the risks, plan carefully how to mitigate these risks and increase your chances of reaping greater returns.
At the end of the day, the decision will be up to you. Are you willing to take the added risk for the chance of enjoying better rewards? Or do you want to play it ‘safe’ and stick your money in a savings account instead?
Personally, while people usually don’t lose big with a savings account, no one in the history of finances has gotten rich by stashing money in a savings account. If you want to imrpove your wealth, you really need to invest. The challenge is how to invest wisely.