Avoid the ten pitfalls of buy-to-let
George Osborne's tax tweaks may have made life more difficult for buy-to-let investors in recent months, but the figures show he has done little to dent the British love affair with all things property. Figures from Fidelity have revealed that it's the third most common use of tax-free pensions cash (after reinvesting and topping up income).
There are certainly some people who have made a fortune from renting out property, and plenty more who take a vital income from it, but it isn't guaranteed. There are ten pitfalls that can lead you astray along the way. We reveal the traps - and how to avoid them.
1. The sums don't add up
Don't assume buy-to-let makes sense for you, sit down and work out exactly what you will have to spend at the outset on everything from the purchase price to the additional stamp duty and fees. Then factor in all your ongoing costs, including mortgage payments, maintenance and other costs, and subtract them from the rent you expect to receive. Lenders will expect you to cover your costs and have another 25% left over - as an absolute minimum. Do your calculations, and work out what you will make each month. Only then can you know if this will make sense for you.
2. You forget some of the costs
When you're doing your sums, as well as the cost of the purchase (including stamp duty), plus any mortgage payments, you need to factor in maintenance, fees, tax, and an allowance for unexpected extras.
3. You don't have any wiggle room
As George Osborne has already shown us, when you build an investment on allowances and tax breaks, there's always the chance that the rules change and you're left high and dry. Consider the allowances and rules you are taking advantage of - and plan for what you would do if they change. That way you have built yourself some wiggle room.
4. You can't find a tenant
In your calculations, you need to bear in mind that it's common to have a few weeks between tenants. It's often useful, because you can do any repairs and maintenance in this time. However, it's also perfectly possible to have a couple of months of vacancy between tenancies, so your finances need to be set up so you can take this on the chin.
5. You have nightmare tenants
When you are retired, you may want to put your feet up, but a buy-to-let property is a job. It takes time and effort to manage a property - unless you have the spare cash to get someone else to manage it for you. Ask yourself if this is what you want your retirement to be about.
6. House prices fall
Some people will be happy to break even on a monthly basis, on the assumption that over time the property will increase in value. However, this is a dangerous assumption, and if you're wrong, you will be left with a stressful and illiquid investment that ends up losing you money.
7. You pick the wrong area
You need to do your research, and find an area where house prices are affordable and demand for rental is high, so you get a decent return on your money. This may mean buying within the commuter belt, near good schools, or by universities - where tenants want to live.
In most cases, people buy near where they live, because they know the property market in the area and they can manage it more easily. However, you need to know whether this area is a good option for landlords before you take the plunge.
8. You pick the wrong house
You're not looking for a property to live in, but one that will fetch a decent rent without costing too much to run. That tends to mean a relatively modern property, decorated as a blank canvas for someone else to put their stamp on. If you buy with your heart and opt for a pretty period property, you could be making an expensive mistake.
9. You get the wrong tenants
You need to conduct all the property checks on any prospective tenant - or pay a professional to do so. Even then, any tenant can fail to pay the rent. It may be worth considering rent guarantee insurance - that will pay out if the tenant doesn't - and will keep an income coming in while you persuade the tenant to pay up or move on.
10. You can't sell up at the end of the process
Property is what's known as an illiquid asset, which means it's difficult to sell. There's no guarantee that the point at which you need the lump sum back will be a good time to shift property. You may not be able to sell quickly, and you may need to lower the property price to make a sale. Unless you can factor this into your figures - or guarantee you will never need the money in a hurry - this could land you in hot water later on.
Nobody ever said that getting an income from buy-to-let was easy, or that you are guaranteed to make a fortune. However, by going in with your eyes open, you can understand the risks you are taking, the work you are expecting to do, and you stand the best possible chance of getting exactly what you expect out of the investment.
