Investors who are new to Investment Property always have a ton of questions for us about the basics. Buying a profitable rental property is challenging, and if YOU are keen to start making lifestyle supporting passive income, here are the 8 top questions we get asked that you want answered…
YouTube Video > > >
1) Should I Buy Outright or Use a Mortgage?
Use a mortgage – this is hands down the most crucial decision factor between whether your investment provides a life changing return or a mediocre one.
If you buy outright you might need to spend £100,000 or more on one rental property, whereas for the same money you could buy up to 4 mortgaged properties in the same area.
In terms of monthly profits, you must pay some mortgage interest, but your revenues are 4 times higher.
In most circumstances, using a mortgage is the obvious choice. The rest of the market is doing it, and this is factored into rental prices.
And who can afford to spend £100k or more on one undiversified asset?
2) Do I Need a Special Type of Mortgage?
Yes – the best model in our opinion to buy investment property is with an interest-only mortgage.
This is in fact the default mortgage type for buy-to-let property purchases. We invest for cash flow, and this is not achieved if we must repay hundreds of pounds of equity each month under a capital repayment mortgage structure.
By being patient and holding the property for 30 or so years, we expect the equity to build to a high enough amount to make the loan balance negligible. This is achieved when the house value increases.
3) How Much Money Do I Need to be Able to Invest?
In some areas of the North of the UK, a decent rental property can still be bought for around £100,000. A buy-to-let mortgage will let you put down a deposit of no less than 25%, so that’s £25,000 of capital.
Add to this stamp duty of £3,000 and legal fees, and you’re looking at around £30,000 for the average investment.
Don’t live in the north? No problem! – you should be using a property agent to manage your assets anyway. There’s no need for you to live down the street from your rentals.
You could also go halves with a friend – up to 2 people can be listed on a mortgage. More friends can be involved if you buy through a company structure.
On this note, buying through a company can open the option of 20% deposit mortgages although this is not common– an upfront cash saving of 5% on your deposit!
4) Do Landlords Spend All Their Time Fixing Toilets?
I have never fixed a toilet in my life, and I don’t intend to! The only landlords who would are doing so because they’re “accidental” landlords (i.e. they’ve inherited a house), or they have bought a property based on reasons other than the highest profit margin available. Maybe they thought it looked pretty.
They don’t know what they’re doing finance wise and are forced to cut costs on maintenance. No, pay a plumber to do it for you, and have a management agent arrange it for you.
5) Should I Set Up a Company to Buy Property?
This is up to your preference and circumstances. Note that limited company mortgages carry higher interest rates than personal mortgages.
But companies are a way to protect your wallet from the tax man, and you pay tax at the corporation tax rate, currently 19%, which is cheaper than paying income tax which you’d pay if it was owned in your own name.
But you’d also have to pay dividend tax when you take your profits out of your company.
Whichever method you use, don’t plan to change it later, as you’ll incur stamp duty and legal fees to do so. Make your choice now; and stick with it.
6) What If Interest Rates Go Up?
If interest rates went up, the cost of your mortgage would go up, and your profits would go down.
But the same would be true for every other landlord in the country – will they all just continue taking that hit to their profits?
No, they would all raise their rents at the first opportunity, out of necessity, and so could you.
The Bank of England knows this, and they know that by raising interest rates, most of the additional cost will inevitably be passed on not to the landlords, but to the tenants.
So, they are reluctant to raise interest rates significantly as a result, unless it’s spread over a long enough term to allow rents to rise gradually.
As always, there is a risk that an investment will lose money, and interest rate risk is one of the biggest for property investors – only invest what you can afford to lose.
7) Do Tenants Have All the Power Now?
In June 2019, new laws have come in that mean tenants don’t have to pay agent fees – these costs are likely to be shared now by the agent and the landlord, so factor this extra cost into your profitability calculations before investing.
It is the latest in a string of new laws that give tenants more rights. What this really means is you need to be aware of the rules now more than ever, and extra careful not to fall into any traps by accident.
A good management agent will hold your hand regarding the rules; they’ll make sure that new tenants have a good credit history, will chase up late payments, and help with any evictions.
Avoid taking on problem tenants in the first place using proper referencing, and take out legal cover insurance for evictions, just to be extra safe.
8) What Are the Scary New Tax Changes
We always get asked about the tax changes to mortgage interest – it’s something that seems to strike fear into the hearts of wannabe investors.
But you may not need to worry about this one – if you are a basic rate taxpayer, the impact is negligible.
The main effect being that your taxable income is increased by the amount of the interest, which could push you up into the higher tax bracket by a small amount.
If you are a higher rate taxpayer, you will be stung by this if you own your properties in your own name. Two solutions are to either buy in the name of a spouse who is a basic rate taxpayer, or to buy using a company.
What other questions do you have us about property investing? Let us know in the comments below.