Buying an investment property is very different from buying a family home or a holiday home. Here are some points to consider before parting with your cash.
Are you buying for capital growth or income?
Buying for capital growth essentially means using a property as a bricks-and-mortar savings account with your mortgage payments (or cash payment) being the funding and the property’s increase in value being the interest.
The big difference between a property and a savings account, however, is that you can only realize the capital appreciation in a property when you sell it. If you buy for income then you need to decide exactly how you are going to monetise your property.
There are basically two ways you can go about this.
One is to look for an affordable property and then work out how to use it to earn an income and the other is to think of a market you’d like to target and look for a property which will appeal to them.
Does it matter whether or not you end up owning the property outright?
If you opt for a repayment mortgage, you are guaranteed to end up owning the property outright (assuming you maintain the mortgage to completion) but the fact that you are repaying the capital as well as the interest means that your monthly repayments will be higher than they would have been if you had opted for an interest-only mortgage (interest-only mortgages are still commonplace in the buy-to-let sector).
This will lower your yield or, in other words, reduce your income. If you opt for an interest-only mortgage, you can still benefit from capital appreciation as you can keep the profit on the sale of the property at the end of the mortgage term (or at any point before that if you so choose), plus you will have lower monthly costs, hence a better yield, but you won’t build up equity in the property.
Always keep the law in mind in any decision
For the most part, when you are a private individual living in your own home, you can basically do what you like with it. There are, of course, limits to this, but it can be taken as a general rule of thumb.
When you become a buy-to-let property investor, you become a business with responsibility for the welfare of tenants and that is an entirely different matter in all kinds of ways. In addition to having to manage tax returns, you will also need to ensure that you manage your property within the law right from the point of putting it on the market to the point where one set of tenants leaves and is replaced by another.
What’s more, laws can and do change and they can be supplemented with further regulations set down by local authorities. Ignorance is not only not an excuse, it can become very expensive! With this in mind, you may find it very helpful to enlist the services of a reliable lettings agent, in which case you will need to factor the cost into your financial calculations.