Buy-to-let has been a great investment for many a landlord over the last decade, says financial advisor Mike Collins.
“But with soaring interest rates and ever-increasing monthly payments, it could be a nightmare for those who have purchased the wrong type of property or in an area with poor tenant demand.
“Buy-to-let can go wrong extremely quickly if you fail to get a tenant in- you could easily slip several months in arrears on your mortgage repayments.
“Similarly, if you’re looking to extend a property portfolio, you need to know the local area and know you can refurbish a property to the standard that buyers for that area will pay for. No one is going to pay for a 5-bed detached home in the centre of a student area, however pleasant it may seem.
“Here are some pointers to consider for both buy-to-let and property developments.”
Finance
There are many forms of funding you can get to finance your property development, depending on the size and length of your project and the property type.
If you’re planning on being a landlord for a buy-to-let then there are HMO (houses in multiple occupation) where you would lock individual rooms to separate tenants.
For a property you plan to do up, it may be a light refurbishment loan that you need, while commercial mortgages are needed when a business is being run on the property – and these come with some hefty rates at the moment.
Bridging loans are useful when you haven’t sold an apartment yet but want to purchase a new house – a bridge if you will – while you wait for a new deposit to come in.
Product options
On the current market options are limited, as many lenders pulled their products when the interest rates went up.
The Bank of England has raised interest rates by 0.75 percentage points – a level not seen since 2008, as the UK battles with soaring inflation.
It’s the 8th consecutive rise since December 2021 and less than a year ago, the base rate was just 0.1%.
But you will find that the options for those looking to develop property work differently and at different prices from those on offer for traditional landlords.
Buy-to-let is intended for those who want to buy or refinance property that they will let out as a long-term investment. That means it will generate income.
Short-term funding is more for those looking to develop property and resell it for profit. Rates are usually higher than you’d expect for a buy-to-let.
Location, location, location
Picking the right area is crucial to whether you make profit or loss! I’m not saying buy in the best part of town – sometimes this is going to be really expensive or just inappropriate. Property prices are at their highest right now so chances are they aren’t going to go up too much more.
Be aware of the cap on your property – that is, the most you will ever achieve for your property – and don’t spend more than that on it. The best thing to do is to find good areas before they get popular and house prices start to soar.
Fringe areas of popular towns are always good as people feel forced out of buying in the most expensive areas.
It’s also worth bearing in mind transport. Not every family has two cars to zoom about in. Young professionals will want easy access into cities, students will want bars and places to eat within touching distance, while young families will be keen to be near to good nurseries and schools.
More things to consider for your development
- Make sure you know the time frame and the work can definitely be completed on time. Some lenders will charge fees if you go over the loan term you agreed.
- Some lenders only operate through brokers, some of whom can achieve cheaper deals. It’s always worth tracking down a specialist with good reviews.
- Have a good exit strategy that you can demonstrate. Be able to show that similar properties are selling at the expected price or that if you plan to keep it, you can definitely get a buy-to-let mortgage when the work is complete.
Always seek advice from an independent mortgage adviser before you commit to any kind of funding.
