Take control of these risks to increase returns
Buy-to-let investment could be your ticket to stunning retirement income. If you follow the 3+1 property investment strategy, investing in property UK could allow you to reduce your hours at work or retire early.
Rental income grows at least in line with inflation. UK property prices have doubled in every eight to ten years over the long term. Property prices are less volatile than shares and commodities. Buy-to-let investment is the ultimate lifestyle investment strategy.
However, none of these benefits of buy-to-let property come without risks. In a recent article, we discussed the macroeconomic risks when investing in UK property. These are the big things over which you have very little control – like inflation, the economy, and currency values. To minimise these risks, always invest in a country which is stable and economically active.
In this article, you’ll learn about the microeconomic risks of buy-to-let property investment. These risks are very much in your control. Balancing these is key to unlocking the real potential of your investment strategy.
· Location risk
When you invest in buy-to-let property, the most important decision to make is where. When you buy in the best places to invest in property UK, your investment will benefit from the strong property fundamentals that encourage high demand from buyers and tenants: shops, schools, transport links, major employers and major investment. It will help your property investment produce the capital growth and rental income you expect.
· Property condition risk
If the property you buy is in bad condition, you’ll need to spend money to bring it up to scratch and prepare it for rent. Older properties may not have the design features desired by today’s renters. They could have structural issues which are no longer covered by builders’ warranties, and while renovated older properties could yield high returns, they are more likely to need expensive maintenance and repair work (heating, plumbing, electrics, etc.). Other elements to consider include access, parking, and local amenities.
· Tenant and tenancy agreement risk
Your tenant can make or break your buy-to-let profitability. Short-term lets (such as holiday cottages) offer the highest potential return, but also the highest tenant risk. Longer-term residential letting provides more consistent and constant income, but you’ll need to make sure you track down top-class tenants for consistent rental income.
Having identified and vetted your new tenants, ensure you write a comprehensive and watertight tenancy agreement, with terms and conditions that are in line with current laws and regulations.
· Rental rates risk
Never overstretch your rental rate. Research the market, and request a rent that is attractive but also reflects the condition of the property. If you provide white goods and furniture, for example, you may be able to charge a higher rent than unfurnished properties.
If your rent is too high, you could suffer from expensive and extended void periods. If you charge a rent that is too low, you won’t be maximising your income; it could also put off potential tenants, suspicious that there must be something wrong with the property. It is far better to calculate your finances based on an average rent compared to other similar properties in the area. It will be more attractive to tenants and reduce the risk of void periods.
· Leverage risk
When you invest in property, you get to make money on other people’s money. Investing with a buy-to-let mortgage allows you to leverage your investment, earning income and capital growth on the mortgage amount. However, a high loan-to-value (LTV) mortgage could increase your financial risk. If the property value falls and you need to refinance or sell, you’ll need to find extra capital.
When you use a buy-to-let mortgage to finance property investment, make certain that the conditions attached work in your favour. Consider, too, if you should fix the mortgage rate while interest rates are at record lows. My advice would be to speak to a mortgage broker with experience in the buy-to-let market.
· Property management risk
If you are investing in the UK property market from abroad, or are investing in an area far from your home, you’ll need to employ the services of a property investment manager. You must get the right one – one you can trust, who has experience in the buy-to-let market and covers the location where you have invested. It’s likely that as your property portfolio grows, you will invest in different areas. Consider whether you want to have several property management relationships, or if it would be easier to use a national investment property manager with local capacity.
· Taxation risk
While tax laws affect everyone, how they affect you depends on your personal circumstances. There are investment strategies and structures that you can use to minimise your tax liability, and therefore increase net returns. Foreign investors should also consider if there are double taxation agreements in place in their country of residence.
All these risks can be mitigated and controlled:
- You choose which type of property you buy, and where you invest.
- You decide which investment property management company you use.
- The investment property manager’s tenant finding and vetting procedures determine the quality of your tenants.
- Choosing the best mortgage and how you invest is your decision.
Contact one of our team today on +44 (0)207 923 6100, and we’ll make sure you have all the information you need to make an informed investment decision, minimise microeconomic risks, and maximise buy-to-let investment returns.
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