When I bought a property in the UK, I knew I wouldn’t be living there forever, and the place had to be attractive for me to live for a few years, but also as a rental for the following years. I also knew it would be hard to get a mortgage later as a self-employed person, so selling my main residence and buying another place to serve as a rental was not really an option. Here is what I looked for in the property:
Obviously, the first step is to know what the property would rent for if you have to put it on the market, so I compared with a few similar properties, and calculated what the monthly rent would be. Over the total price of the property, you get the rental yield. A property can give you little cash flow between what you get in rent and what you pay as your mortgage, but you will still be building equity, so it can be a good investment. However, if the yield is lower than investing the money elsewhere, then you have to factor how much risk you are taking by renting a property and how much risk would your money be taking elsewhere. For example, a property renting at £1,000 a month that is worth £120,000 yields 10%, which is a great rate. If the same property is worth £300,000, you are only yielding a bit over 3%, and your money would probably be better in your ISA.
Obviously, the more money you put down, the lower your mortgage repayments and rates. Buy to let are different than traditional mortgages, as they usually ask you to put 25% or more down. Rates also tend to be higher. So make sure you can comfortably afford the mortgage. Generally, lenders won’t approve your mortgage if you make less than 125% of the mortgage repayments in expected rent. I would advise that you get even more breathing room to account for vacancies, repairs and normal wear and tear.
Search until you are blue for the best rate! There are tons of companies, like Just Buy To Let, who offer buy to let mortgages that will suit your needs. A small difference in the rate can mean a huge difference in repaid interests over the life of the loan.
My tenants are renting with all bills and utilities included, so it was important for me to get a place with a good internet connection, access to cable TV and so on. Also, nearby services are important. How far is the supermarket? How complicated is the parking situation? If you buy a three bed flat with only one parking space, your tenants may have need for a second space, where can they park? Is the property close to the train station, or at least a bus stop?
I was lucky to have a university nearby, that provides a steady stream of potential tenants every year. Who will you rent to? Buying a family home in a place mostly occupied by young single household, with no schools close by can mean a high rate of vacancy. Make sure you buy the place that will meet your tenants’ expectations.
Remember, the property will not be for you to live in, so it has to be perfect for your rental target.