If there is one market in the UK which reflects the rise of the property market it has to be the buy-to-let market, the sector which many people just love to hate. However, the buy-to-let sector has a very important role to play in society and a vital role to play in the UK property market. It has also spawned a great number of property millionaires and dispensed many to the pain and heartache of bankruptcy.
So what is buy-to-let, what are the risks and what are the benefits?
The buy-to-let market
While the buy-to-let property market has always been a part of the UK property scene it was not until the mid 1990s that we saw the major growth which brought the sector to the attention of the masses. This was a period when house prices were moving higher and more and more first time buyers were struggling to get on to the ladder. It was also around this time that more and more people started to go mobile with their work, spending short periods of time in many different areas of the country and looking for accommodation (the age of internet and mobile office by any other name).
There was also one piece of government legislation which sewed the seeds for what was to become one of the largest sub-sectors of the UK property market, the 1988 Housing Act which overnight abolished security of tenure for tenants and basically allowed landlords to evict problem tenants easier than before. While the act caused uproar in many areas of the UK it was a pure and simple piece of capitalist legislation which prompted the rise and rise of the buy-to-let market and took the power away from difficult tenants.
As ever, when the financial markets spotted the potential growth of the buy-to-let sector they wanted a slice of the action and we saw the emergence of new and exciting mortgage offers specifically for the buy-to-let sector. As the sector began to take off in the 1990s competition in the sector continued to grow and this resulted in more investor friendly specialists arriving on the scene, to the delight of the UK’s army of new landlords.
While there are a number of calculations which buy-to-let mortgage lenders use to work out the amount which they can lend there are two main trains of thought. Some lenders will offer a mortgage based on the rental income which would normally be anywhere from 120% to 150% of the monthly mortgage payments. This extra, over and above 100%, acts as a buffer for other costs which may be associated with keeping the property in good condition and possible periods where the property may not be let.
However, some of the specialist buy-to-let mortgage companies like to work on a mixture of rental income and salary income for the landlord, which can often work out at three times annual salary plus half of the rental income for the year. Either way the terms for buy-to-let mortgages are on the whole much more customer friendly than traditional mortgages – predominately because you would expect to have a rental income to cover your payments even if you were out of work.
Benefits of buy-to-let
There are many benefits to investing in the buy-to-let market which include the ability to affectively pay off the mortgage on your property through tenant rental payments without having to dip into your own salary income – assuming that you are in employment. In a perfect world this type of asset is a self-financing investment.
As you build up your buy-to-let portfolio over time it is possible that you could own a number of properties which are still earning rental income but where the mortgage has been paid off over the years. In this situation many buy-to-let landlords have been able to retire and live off their rental income which would no longer be required for mortgage payments. If the landlord has a number of properties this can add up to a substantial amount.
Apart from the fact that you are building up what could turn out to be a very lucrative property portfolio as you pay off the mortgages on each house, you can also use the income from those with no mortgage to actually fund a bigger and better property. Not only do you have asset backing which will please the banks but you also have a fairly steady income stream from your properties to cover you new mortgage payments.
Risks of buy-to-let
While we always seem to hear all of the good sides to buy-to-let in the press it is not all plain sailing and there will be times when newer landlords, who maybe bought at the top of the property market, could see mortgage payments increasing fastest than their rental income. In this situation we have seen a number of buy-to-let properties repossessed by the banks and once prosperous property portfolios start to crumble.
While a recession to the buy-to-let market can be a double edged sword in many ways, with more people looking to rent if they have been forced out of their homes, it is the lack of income and increase in the chance of rental defaults which can cause cash flow problems for some buy-to-let landlords. What can start off as a small short fall can often get worse very quickly and rip the heart out of what might otherwise have been a good property portfolio.
Even though few buy-to-let brochures will mention maintenance, there will always been something which needs done to your property on a regular basis, from new windows, to new equipment to gardening, which can all fall under the responsibility of the buy-to-let landlord, depending how the agreement is structured.
One last disadvantage of the buy-to-let market is still the troublesome tenant, the ones who won’t pay, wont move and the ones who cause damage to your property. Even though the laws are there to get problem tenants evicted it is not always as easy as many would have you believe.
While on the surface the buy-to-let market may seem fairly straight forward and easy money, this is far from the truth. However, that is not to say that you cannot make very large returns if you get your timing right and structure your operations in a focused manner.