Buy-to-let lenders typically want rent to cover 125% of mortgage repayments
As household budgets are ever more squeezed, more than four out of ten respondents in a study by BM Solutions (the buy-to-let sector of Lloyds Banking Group) reported that they were using the rental income generated to support their monthly expenditure. This is a 3% increase since the second quarter of 2013.
One of the most common drivers for landlords is to supplement their pension fund, according to the report. It claimed 75% of landlords say property is their pension with bricks and mortar making up 62% of the average landlord's retirement provision.
Confidence in the buy to let sector hit a six-year peak towards the end of 2013, putting it almost back to pre-credit crunch levels, with 68% of landlords claiming they were confident of the sector's prospects for the future.
More than a third agreed that property investments offered a better return than shares as a long term investment, with “reduced risk and the opportunity to add capital investment”. But like any market things can change and it’s important to know the risks as well as the benefits.
Here are some key things to consider if you are looking at joining the landlord brigade:
Location, location, location
Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. Towns with good commuting links or universities could be a good starting point.
Do your sums
It is important to work out what you will gain from rental income. Don’t forget running costs including mortgage costs and agents fees that will eat into your return.Over the past three months, the average rental yield in the UK dipped by 0.1% to 6%, according to BM Solutions. In comparison, the average rental yield was 6.2% in the last three months in 2012, 6% in and 6.1% in the first three months of last year.The strongest performing region was the North East achieving a return of 6.7%; conversely the weakest area continues to be the Yorkshire and Humberside which report yields of 5.7%.
More than a third of landlords reported at least one void period over the past three months, an increase of 3% on the previous quarter, with 65% of those being unexpected. Average void duration has however, fallen by five days to 64 days. The instances of void periods were greatest in the North East and lowest in South East. Two-thirds of landlords attributed the challenge of natural turnover and finding good tenants to replace those vacating properties as the most common reason for unplanned void periods.Analysis reveals that the average tenant has stayed in the same property for two and a half years, with one in 10 staying in excess of five years.
But it’s crucial to build up a buffer for those times when the property could be empty. Missed rental payments are a bitter pill to swallow for landlords. The good news is that the proportion of tenants in arrears has fallen to its lowest point in three years - an average of 1.7 tenants per landlord. The average amount owed by tenants has fallen to a three year low this quarter, down by £358 to £1,532. It is possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost from around £50.
Getting a mortgage
Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments. Mortgage rates for buy-to-let properties are competitive these days in line with the rest of the market. Coventry Building Society is offering a two-year fixed rate buy-to-let mortgage at 2.79% and a fee of £1,999 if you have a 35% deposit. But remember that while rates are low today they are expected to rise and you need to make sure you can meet the inflated repayments.