How to Invest in Rental Property
Table of Contents
Property has always been one of those investments that people love to debate over and whether or not it’s still the right way to go about trying to make a profit from your money.
Over the years, there have been many changes to stamp duty, interest rates of course, and rising taxes, but the question still remains: How can I invest in rental property and is it still worth it?
Well, today, we’re going to look at what you need to be aware of when you go down this path, the benefits and drawbacks, and the process it takes to start investing in rental properties.
Making Sure You Want to Become a Landlord
Investing in rental property isn’t just one of those investments where you can just throw money into it and it’ll grow on itself. Of course, money is a huge part of it, but a lot of time and effort are required if you want to become a landlord.
Some landlords can spend 2-5 hours a month on their rental properties, but others can spend 20 hours+. This is not to mention finding the right tenants, choosing the right property, and all the time spent on maintenance before the sale of the home.
If you want to become an effective landlord and one that doesn’t get taken advantage of either, it’s definitely worth learning all the laws in your state for properties, so you know all the rules of what you can and cannot do.
At the end of the day, if you’re willing to put in all these hours, investing in rental properties can still be a great way to earn income—you just have to be willing to put in the work.
Investing in Rental Properties
Now that you know the effort required to make this happen, what are the steps you should take to effectively invest in rental properties?
1) The Location Matters
Think of a rental property as if you were buying a property for yourself. Would you want it to be in a location that:
- Has schools nearby
- Is easy access to public transport
- Is near supermarkets for food shops
- Is close to any healthcare facilities that you will need
- Is close to places where you can do fun activities
- Has low property taxes
Yes, you’d probably want it to have most of these, if not all, if possible. Of course, it may not tick every box, but these are some of the factors you should be looking for.
2) The Type of Building You Want to Go For
According to Simply Business, the highest rental yield and the best type of property to go for is a two-bedroom house, as that is the one with the highest demand.
However, you may be a person who wants to invest in a new build for the eco-friendly and energy-efficiency benefits—despite the higher price tag. Or, on the other side, you may want to go for an old building simply for the lower price tag.
And although the look of a home may suck you in, you still need to make sure that the features are generalised and will be functional universally, rather than what you think is a good investment.
3) Having a Set Budget For Your Property Price
Though you may see a home that you think will bring you profit, you need to stick within your own budget. If you overextend yourself financially, you won’t be in a stable place to be an effective landlord, causing impulsive decisions rather than the right ones.
4) You Have to Understand the Tax and Licenses Required
Whether it be taxes or licenses, you must know what is required of you when investing in rental properties. Whether or not you make a profit depends on the total cost of ownership, not just the mortgage and rent price, so make sure to look into the tax implications of rental property.
Also, you may need specific licenses to become a landlord, so it’s always a good idea to check with the local council to find out.
5) Make Sure the Building You Choose is Reliable
Now this is easier said than done, because homes are very unpredictable when you own them, but there are certainly factors that determine whether a home is more likely to cause issues from the get-go. Therefore, assessing the property for any damage and wear that could lead to issues down the road will be paramount in your purchase decision.
6) Financing Your Chosen Property
Now that you have looked at all the other potential factors that could sway your decision, you need to finance the property. Typical buy-to-let mortgages require a 20 to 40% deposit for a down payment with 25% being the most common, so it’s a lot more expensive than a regular residential mortgage.
Not only that, but you’ll need to:
- Be at least 18 years old
- Have a reasonably good if not great credit score and history
- Have a good income-to-debt ratio
- Be earning over £25,000 annually
Once you have all of that aligned with what lenders are looking for, you’ll be ready to apply, but it’s always worth speaking to experts before you make decisions on your own too quickly.
How is Money Made in Rentals?
To determine whether or not you’re making a profit or loss from your rental property, you need to make sure you’re gaining a rental yield after covering:
- Mortgage payments
- Council tax
- Maintenance costs
- Utility costs
- Landlord insurance
- Any letting agent or estate agent fees
If your rental income has covered and surpassed all of these costs, then you’re well on your way to making rental income. Of course, it’s not going to be black and white, but this is a good way to calculate it.
What Are the Benefits and Drawbacks of Investing in Rental Properties?
| Benefits | Drawbacks |
|---|---|
| It can provide steady income on a monthly basis | There is a higher initial deposit compared to normal homes |
| There are tax advantages to getting a buy-to-let property | There is a lack of liquidity as most (if not all) your money will be in the rental property |
| Properties typically appreciate and provide long term capital growth | There are risks you’ll have to face with the property market conditions |
| It diversifies your portfolio, if you invest in other assets too | There are unexpected costs in the short term that you may have to pay for due to maintenance and repairs |
| It can be used as a hedge against inflation (not always guaranteed) | It can take a lot of time and effort |
Rental Property Investment FAQs
When investing in rental properties, there are questions that are commonly asked, but of course, we can only give generalised answers. If you want personalised advice, get in touch with our team today!
The short answer to whether buy-to-let investment is still worth it is that even though there have been significant changes in the industry, if done correctly, you can still make great amounts of profit from this investment. It’s always worth speaking to experts, however, to see if it’s the right decision for you.
Whether or not you should invest with someone else depends on your financial situation and trust with each other, because although it’s a smaller investment upfront, your views need to be aligned and the way you work with the property needs to be identical; otherwise, there may be potential arguments down the line.
As mentioned previously in this article, the typical buy-to-let mortgage is between 20 and 40, with 25% being the most common deposit for a rental property. This is because buy-to-let properties are seen as a bigger risk to the lender, so they need to make sure you’re financially able beforehand.
