You may have come across people buying their own rental properties and having the urge to own a property. You may already know, you need to be careful with your investment, know the law, have a provider network, find and build a relationship with trustworthy tenants, and document your financial activities correctly. It is not an easy task.
If you’re considering the pros and cons of buying your first rental property, here are some of the top tips by SPV Mortgages for doing just that:
What is the ‘why’?
Why do you want to invest in a rental property? It is going to require considerable effort and possibly financial sacrifice. Even if you have an inheritance fund or lump sum, there are several other ways to invest.
Why go through that? Many people see entering the real estate market, possibly in addition to full-time employment, because they dream of a lavish retirement or want to give their children property or healthy inheritances. Everyone needs a ‘why’ to achieve a goal. So what is yours?
What is the exit plan?
For most people, whatever their business, there is an exit plan. During a person’s lifetime, which is limited, there has to be a reason and an exit plan to take out a 25-year mortgage. Of course, you don’t necessarily have to sell at that point. But it could.
You may be able to get incredible returns from your property if you are a contractor yourself. If you can manage the repairs yourself or with a low-cost team, you could see a 600% return on your investment.
You may have only managed to scrape together 10% of the price of the property. So only £10,000 on a £100,000 property. But 25 years later, that property could be worth £500,000. The bank only needs £100,000 back and you keep £400,000 Even with inflation, it’s a good retirement fund for ownership.
If you had a portfolio of five £100,000 properties, you could sell one for £500,000 and pay off the mortgages on all five. You now own four properties and can sell or continue to rent without mortgage payments and leave substantial inheritances.
Carefully calculate the mortgage term you need and roughly what you want to do at the end, and make sure you have the funds to pay off the mortgage if you don’t want to sell.
Do I have the time?
Managing a property and a lease can take a considerable amount of time. If you have your why and exit plan clear, you should ask yourself if you have what it takes to juggle this added responsibility over others, such as full-time employment and child care.
Am I cut out to own?
One of the main reasons for getting into this business is to have an affinity for this type of work. The costs that can result from removing a supplier from the yellow pages can turn a profitable business into a loss.
Large owners have a reasonable understanding of the construction business and have close contacts. For example, your dad is a plasterer, your brother is a plumber, your cousin is an electrician, and you know how to paint and decorate. And her mother and sister are quite capable of arranging furniture and designing within a budget.
Dad will be happy to contribute to your success and your business. He doesn’t want to get paid to set up the kitchen. That’s the kind of workforce that great owners, and hobbyists, in particular, have.
Location
Location is an important consideration. As an owner, you may be considering buying some local properties. But if you live in an area where home prices have risen at a much lower rate than others, buying further away is a better idea.
Calculate your operating costs realistically
You can use a calculator to get an estimate of the interest-only repayments you would need to make. You have to calculate all of your operating costs from your gross income, and there’s a lot more to deduct than the mortgage.
There are expenses like homeowners insurance, and two important things are often overlooked. Don’t forget the government still wants a share of your earnings and depending on your day job that could be up to 40%.
In addition to this, the amount you must set aside for maintenance and repairs is calculated at 1% of the property value or up to 50% of the rental income.
Know your legal obligations
We cannot stress this enough, but providing a home and shelter for people is a huge responsibility. You are responsible for making sure that the house is free of hazards. You must have gas appliances serviced annually and electrical appliances operational.
The structure of the house must be solid and any dampness or mould must be treated. Additionally, there should be smoke and carbon monoxide detectors and fire extinguishers on larger properties.
Things to Remember
If you’re still on the fence about becoming a homeowner, be sure to consider all of these tips carefully.
- Everything in life needs a why. Are you doing this to give your children a great start in life? A property or a lump sum to inherit? Or maybe you plan to retire early?
- You need an exit plan and a date. Therefore, you may need a longer or shorter mortgage term depending on when you expect to sell. You will need to be flexible and may have to wait to get the best asking price.
- Owning some properties will be a reasonable waste of time, so make sure you are prepared for this.
- Do you know anything about property and property care and have connections to vendors?
- Be sure to buy in an area that will rise at least because of inflation. Research where you can get the best return while still managing the property yourself.
- Make sure you consider all the costs involved in owning a property before you start and that you are also aware of your legal responsibilities.
