How can landlords protect buy-to-let profits?

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It appears that Brexit and the political uncertainty is not worrying landlords in the UK, but tax and the economy is weighing heavy.

According to new research by Direct Line for Business, 41% of landlords in the UK are not that worried about Brexit, but cite tax and the economic outlook as their biggest concerns.  Only 28% of landlords thought Brexit was a short term issue.

The research also found that 32% of landlords are planning to remortgage their properties, which may in part be linked to the fact that 58% are planning minor renovations to their properties in the coming months.

Landlords positive about improving house prices (31%) and interest rates remaining low in the short term (29%). But clearly, many landlords are worried about increased taxation and potential rate rises and how this will impact BTL profits.

Without doubt, landlords face challenging times as they begin to experience the impact of the new tax relief changes and tightened lending. Any short term interest rate rises could be very damaging to the BTL market, which has been battered by the Chancellor over the last eighteen months.

Many investors may be forced to sell their properties if interest rates rise more than a couple of percent. Prices could fall dramatically and potentially lead to a similar situation to the 2007-2008 credit crunch, when many mortgages were forced into negative equity.

Fortunately, we can’t predict the future, but what is certain is that while demand grows for affordable housing across the UK, buy-to-let will continue booming.  Although it is likely that interest rates will rise in the next 12 months, investors can protect themselves from financial difficulty, if they make sound and well calculated investments in buy-to-let.

The problem is that many investors purchase buy-to-let property without carrying out thorough research on the local market and considering all the financials. If investors fail to make a considered purchase, they are at a much higher risk of losing their property when financial pressures hit them.

So what are the common mistakes that investors make when they invest in buy-to-let and how can they protect their profits?

Location, location, location

It’s a big mistake to buy a property in area you know little about.  Investors need to research the local area and understand market conditions.  Rent yields vary from town to town and it’s important to buy in area with strong rental demand.

Think about the potential of the town for buy-to-let eg Is the town in a commuter belt, are there good transport links? Are there good schools for young families? Where do the students want to live?

In most cases investors tend to invest in property close to where they live. This is a great advantage as they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.

Contingency fund

Many investors do not factor in the costs of owning a buy-to-let property with contingency funds. If you do not have a contingency fund in place to cover unforeseen circumstances, then they could fall into financial difficulty and potential lose their property.

As a general guideline, 30-35% of one year’s gross annual rental income should be put aside to cover rent arrears, void periods, maintenance, repairs and refurbishment, white and brown goods replacement and the ongoing rental costs, such as gas safety certificates and letting agent fees. This contingency may not be used and should not be seen as an additional annual cost, just part of the investment business plan from the outset for investment protection.

Cashflow

It’s vital to do the maths before investing, or you could be seriously out of pocket.  You need to buy an asset, not a liability and it needs to put money in your pocket every month.  Before you think about looking around properties, sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.

Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees.  Ensure you know how much the mortgage repayments will be and if it is a tracker, allow for the rates to fluctuate in your calculations.

Once you have the mortgage rate and potential rent sorted, then you must do the numbers carefully and work out how your investment will perform.  Ensure you factor in maintenance costs and work out how you will cope if you have void periods between occupancy?  These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker, allow for rates to rise.

Don’t’ be emotional

It can be easy to follow your emotions when purchasing a property.  The golden rule is don’t buy a house because you love it and would like to live there yourself. You need to love the deal and not the property. Any property you invest in must deliver on the financials.

Have a great team to rely on

Property is a team sport.  Investors need the support of a good mortgage broker, lawyer, accountant and builder.

Find unbiased professionals and source recommendations from other investors. Don’t rely on portfolio building companies for unbiased advice.  Often, they are trying to sell you something.

Leverage your time and don’t try to do everything yourself.