Are you looking for an extra income stream and considering a buy-to-let investment? It can provide a solid return, but there are classic mistakes that are easy to make.
Investing in bricks and mortar is easy to understand and can provide bountiful returns. However, there are a few pitfalls to avoid first, and here we outline some of the most common errors…
1. Buying in the wrong location
As a first step, check what rental income you can expect from a property, as making sure the figures stack up is key to buy-to-let success.
The amount of rent you’ll receive will vary widely depending on the location you choose.
So bear in mind that while it can be tempting to buy close to where you live, so you can easily manage the property yourself, this may not be best for profits.
Speaking to lettings agents in various locations you might be interested in can help. Ideal locations are where rental returns are high and demand from tenants is strong.
But that is also likely to make the property more expensive. Popular university towns or cities that attract a range of young professionals, are often good bets.
2. Failing to do your research
Failure to do careful research could be a costly mistake, so make sure you ask the right questions and are happy with the answers.
Useful questions may include: What is your target market? Does the property cater for their needs? Does it need any work doing?
Check out Zoopla’s Buy-to-let guide for more info.
If you want a property to appeal to young families, for example, check out whether there’s a playground and local schools nearby.
If you’re keen to attract the student market, buy close to a particular university, or for young professionals, near transport links.
The right research will help reduce the risk of the property standing empty – known as ‘void periods’.
Good tenants are the key to investment returns as they’ll look after your property, keep up with maintenance, and pay their rent on time – so you want to attract the best.
3. Forgetting additional costs
There are likely to be unexpected costs involved with any buy-to-let investments. These could include general maintenance, gas safety checks, and insurance.
It’s generally considered wise to have a pot of cash ready to dip into so you don’t have to borrow additional funds.
Don’t think you can offset every expense against your rental income. Only certain expenses are allowed – such as fees you pay to a managing agent, products bought to clean your property in between lettings, or service charges.
But installing a security system, central heating, or fitting a new kitchen, isn’t an allowable expense because they are seen as an investment in the value of your property. That means they aren’t considered solely a rental expense.
4. Buy-to-let not being right for you
Even if you have the capital to invest, you may find you don’t want the hassle of being a landlord.
Read more: Pros and cons of investing in property
But there are way to earn direct returns from buy-to-let without buying outright. You could invest in property portfolios only containing buy-to-let properties with Bricklane.com.
Bricklane investments are tax-efficient - you can invest through your ISA or SIPP (pension) - and there are also Standard accounts available.
The Property ISA allows income and gains to be earned tax-free up to the annual allowance of £20,000 for the 2017/18 tax year.
You can start investing from £100, with many investors using the platform as an alternative to owning buy-to-let property directly.
If you invest in a fund with Bricklane.com, your money will be used to purchase buy-to-let properties in cities around the UK.
You may choose from a fund focused on London, or another, called the Regional Capitals fund, that invests in Leeds, Birmingham and Manchester.
Your fund grows from rental income and moves with any changes to property prices.
Returns can be enticing. The London fund is up 9.7% since its launch in July 2017, while the Regional Capitals fund has risen by 14.6% since September 2016*.
Of course, past performance isn’t a guide to the future, and as with all investing, your capital is at risk. The value of your investments may fall as well as rise.
Tax rules apply to Property ISAs and SIPPS (pensions), and they can, and do change – with their impact depending on your personal circumstances, which may also change.
5. Not knowing your tax liabilities
If you’re going to stick to physical bricks and mortar, you need to understand the tax changes to buy-to-let investments in recent years.
There’s the 3% Stamp Duty Surcharge on second homes, which you’re liable for if you’re buying additional property in the UK. This applies to the entire cost – that’s a massive £10,500 on a £350,000 property.
Read more: Beat the rising cost of Stamp Duty
There’s also the gradual whittling away of mortgage interest relief – set to reach the basic rate of 20% by 2020, no matter what rate of tax you pay. This could particularly cause a dent in profits for higher-rate taxpayers.
Meanwhile, the standard 10% tax relief on ‘wear and tear’ costs for landlords was cut in April 2016, so you can no longer claim this as a way to bump up profits.
*Returns figures accurate as of 19/7/2018.
You might also be interested in...
- 3 ways property can boost your pension
- Beat the rising cost of Stamp Duty
- 3 ways to get a foothold on the property ladder
This article does not constitute financial advice. If you are unsure about whether investment is right for you, you should seek independent advice before investing, including tax advice.
Zoopla Limited is an introducer appointed representative of Gallium Fund Solutions Limited (Reference number: 487176) which is authorised and regulated by the Financial Conduct Authority.