The property rental market is booming and rents are offering attractive yields if you are a landlord, so the question is should you sell your current home when it’s time to move, or let it instead?
The number of buy-to-let mortgages being taken out is now at its highest level for about four years, resulting in £1 of every £7 that was lent on mortgages overall going to landlords who are trying to build a portfolio of rental properties.
Low savings rates
One the key aspects that is driving this rise in mortgage applications is the fact that the average rental yield for a property is 5.3%, which compares very favourably with the best cash Isa rates around which struggle to break through an annual 2% return.
A fair number of homeowners become landlords almost by accident, as they find that they need to be away for their property and the area for a period of time for things like work commitments, so they decide to rent their house to cover the mortgage while they are gone for six months or more.
It is during this time that they then see that there is an opportunity to generate a second income by renting their property out, at yields that generally offer a better return than they can get for their savings elsewhere.
This prompts them to buy another property but keep their existing home by converting it to a buy-to-let, becoming a landlord in the process.
There is very high demand for rental properties due to an increasing population and a shortage of mortgage opportunities for young professionals who are finding it difficult to get on the housing ladder themselves.
There are an estimated 9 million people in the UK who need to rent property and 20% of these are families, so you would be unlikely to fail in attracting a tenant, especially if you are in an urban area with good road and rail links.
Letting is a business
An important point to remember if you are going to make a success of buy-to let, is that your venture should be treated as a business and not just a hobby, even if you only have one property to rent.
Those landlords that now have no difficulties financing auction property and buying up bargains when they see an opportunity, all started small and expanded their property empire through taking a business-like approach to the opportunity.
Where novice property investors tend to come unstuck is mainly when it comes to finances.
Buying a rental property or any property is obviously not a cheap exercise and the lending criteria for a buy-to-let mortgage will almost certainly require you to put at least a 25% deposit down. There are often fees associated with these mortgages that could amount to as much as 3.5% of the mortgage, so you will need to ensure you are properly financed.
The more money you can afford to put into the property purchase in cash, the more comfortable you will be in handling any rises in mortgage payments or coping with rental voids, when you have to pay the mortgage out of your own resources until you find a tenant to cover the cost.
The majority of lenders who offer buy-to-let mortgages will stipulate that the rental income is equal or exceeds 125% of the calculated interest-only repayment figure. If your mortgage payment is going to be £500 per month, you need to be able to demonstrate that the rental figure you can achieve is at least £625 per month for the deal to work.
Do the maths
Building a property portfolio with a regular rental income can be very rewarding, but you do have to get your sums right and treat the venture as a proper business in order for it to be successful in the long term.
If you invest for the rental returns rather than the capital growth and choose your areas and property wisely, it can certainly earn you a better return on your money that you can get with current savings rates.
You do also have to weigh up the tax issues involved. If you have money invested in an Isa you can get tax-free capital growth, whereas you will have to pay capital gains tax on the profit you achieve when you come to sell your rental property.
Get proper advice regarding your tax situation and remember that the more research you do, the higher the chance your property investment will reap rewards in the long term.
Leo Walsh enjoys sharing his property investment tactics online. Leo got his first mortgage in his mid twenties, and over a decade later, he has never looked back. His articles mainly appear on property investment websites.