What is a buy to let property?
Buy-to-Let is essentially what it sounds like. Investors buy a property with the intention of renting it out to tenants and creating a stream of passive rental income. As an asset, a buy-to-let investment is best suited as a medium to long term investment.
Buy-to-Let investment is much different to simply owning your own home. As a landlord, you’re pretty much running a business, marketing your property to tenants who are effectively your customers.
Why invest in buy-to-let?
As a physical asset that is still in high demand across the UK, buy-to-let property represents a reliable and versatile investment. While all investment comes with risks, property is generally seen as being more stable than investments such as stocks and shares. Crucially, for investors, property investment can provide two different income streams, from rent paid by tenants to capital growth on the overall value of the property. As renting grows in popularity as a lifestyle choice, property represents an alluring investment opportunity.
Current undersupply and demand
It helps that the Buy-to-Let property market is still a viable investment field, despite government measures. The rental market is growing at an unprecedented rate alongside the rise of ‘Generation Rent’, driven by issues with affordability and a rising undersupply of residential properties while demand for rental properties grows. Experts anticipate that the private rental sector will grow to make up a quarter of the wider UK market in the next five years, a huge jump in the last 20 years. With the market already worth an eye-watering £1.29 trillion in 2016, it’s easily the fastest growing property sector in the country.
The wider UK market has already seen an increase in the average price of UK flats, which has risen by £1,250 per month since 2013. These increases equate to nearly £75,000 over the last five years and don’t seem set to stop.
With the population expected to swell to around 74 million in the next 20 years, the potential demand for housing is vast. Many of the major ‘first’ cities are falling behind on delivering housing quotas, increasing the impact of the ongoing residential undersupply. This means that the Buy-to-Let sector is still a very viable opportunity for a lucrative investment. Investors would be wise to consider a Buy-to-Let market that is fuelled by the incredible demand, growing rental yields and low-interest rates that are creating a ‘perfect storm’.
How does Buy-to-Let Property Investment work?
To buy a property, investors will generally use their own cash or take out a buy-to-let mortgage alongside a smaller cash deposit. Once a property is bought, there are two common ways of making money: capital growth and rental yields.
Rental Yield/Rental Income – This is the ‘passive income’ that makes Buy-to-Let so attractive and so suitable as a long-term investment. It’s calculated by what your tenants pay in rent, minus any maintenance or running costs.
Capital Growth/Capital Gains – The profit you earn if you sell your property for more than you paid for it. This is good for investors that like to buy a property, make improvements and sell quickly, otherwise known as ‘flipping’. This is more suitable for short-term investment strategies but can also be a major factor during medium to long-term strategies, especially as property prices rise.
A Buy-to-Let property investment may be for you if:
- You want an investment that’s more tangible than stocks and shares
- Understand that the market can go down as well as up
- Understand that the risks that can come and go with borrowing money to buy property
- Accept the costs and times that go into owning and running a property
- Are willing to tie your money up for a longer period of time