What to look for in a buy-to-let investment in London
The headlines are full of economic gloom and Brexit uncertainty. Surely now isn’t the time to buy an investment property?
While it might be a tricky time for owner-occupiers, this is a great time for buy-to-let investors, especially those looking to buy in London. The rental market is buoyant and interest rates are low. Prices are falling or at least not rising.
Cheaper property, cheap mortgages and plenty of tenants means this could just be the perfect time to start or expand your London property investment portfolio.
The London rental market
London is never going to go out of fashion. Even through the toughest of economic storms, there will always be a need for a good supply for rental property in the capital as young people move to the city to begin their careers and build new lives.
The average rent in London is £1665 a month and rents have increased by 3.1% over the last year, according to Homelet. That’s a significantly better performance than the rest of the UK. With London excluded, the average UK rent is £794 a month, with rents increasing 2.2% over the last year.
Both in and beyond London, it’s likely that more and more people will be renting for longer. Recent figures suggest that over 50% of adults under 40 will be renting their homes by 2025. And any possible crash is unlikely to change that: mortgages tend to become harder to get in a falling market as lenders try and avoid risk.
Why buy-to-let decisions are different
So, you’re persuaded that this is a good time to get into buy-to-let. But if you’ve only bought as an owner occupier before, how can you become a knowledgeable buy-to-let buyer? Here’s what you need to know.
While there are great opportunities for investment in London, that doesn’t matter if you don’t have the budget you need.
Lenders generally have tougher criteria for buy-to-let investors than for owner occupiers. Rather than a multiple of your salary, they’ll look at whether your proposed investment is a viable business.
They’ll usually want to see that:
- The rent will cover at least 125% of your mortgage repayments, and often up to 150%. This is because there are many other costs that come with being a landlord (such as agency fees, insurance and repairs) and the rent needs to cover them all. Bear in mind though, that buy-to-let mortgages are usually interest only, so the repayments are lower.
- You have at least a 25% deposit. This is because buy-to-let mortgages are riskier for lenders than owner-occupier mortgages.
- You earn at least £25,000 a year and have a good credit history. This shows the lender that you will be able to cover the mortgage from your own pocket if you have a temporary shortfall in rent.
Buy-to-let mortgages usually come with higher arrangement fees than residential mortgages, especially if you want the best rates. You’ll also pay 3% more stamp duty than on a residential purchase.
Make a budget that takes into account the mortgage you can get, and all the other costs of being a landlord.
The first thing to remember is that you’re not buying for you. Properties in safe, well-connected areas with good transport links and local facilities such as shops, schools and GPs are always going to do well.
Areas just beginning to undergo regeneration tend to offer the best returns, with rising rents and low prices.
To get ideas of where to invest, take a look at our blog on London hotspots.
If can work out who to target and find a property that meets their needs, you’ll be on your way to a stable income and a successful business.
Young professionals will want to be in lively areas with fast journey times into the city centre. They’ll look for quality, but often won’t mind not having outdoor space. For more on shared living and renting to sharers head over to our website www.lyvly.uk/landlords
If you want to let to students, look for properties near universities or with good transport links to them. For families, you’ll need to consider schools and will need to look at larger properties with gardens.
If you want to let to sharers, whether students or professionals, make sure you invest in a property that can comply with HMO regulations. These vary locally, but include regulations on room sizes, bathrooms and kitchens. Not every property is suitable: tread carefully before you commit and get advice from the local authority.
Type of building
Houses might seem more desirable, but they often come with higher costs. They’ll usually be more maintenance involved, especially if there is a garden. Flats can be better value, but as they’re usually leasehold you’ll need to factor in leasehold charges and the cost of renewing the lease.
New or old?
The idea of investing in a new-build flat with lower maintenance costs and no immediate work to be done is appealing. But older properties also have advantages.
They often have more character and can appeal to a wider range of tenants than new-builds. They can be better value, as they’re less likely to be affected by price falls and more likely to see rises. This is especially true in central areas of London where people often want to live in a characterful older property.
You may also want to think about buying a run-down property and renovating it. This can offer great returns but it can be risky. If you do it, make sure you have plenty of contingency funds.
Want more help with buy-to-let?
Buy-to-let doesn’t have to be daunting. Many highly successful landlords were once where you are now: weighing up the pros and cons and trying to figure out how and where to invest. It’s worth the work: the average landlord earns £15,000 a year. Maybe not enough to give up the day job, but enough to make it a highly profitable sideline.
If you want more advice on your buy-to-let investment, contact us at firstname.lastname@example.org