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Buy Let Property Investment

Buy Let Property Investment

Buy to Let Mortgage Tips

The volatility of the stock market and the continuing trends of low interest rates are making buy-to-let investments an attractive addition to an investment portfolio. A share of stock in a company can take a leap in value but can also plummet disastrously. A home’s value can also rise and fall, but its performance will generally mirror that of a blue-chip stock, gradually moving upward in value over the long term. It is true that home prices took a major hit after the housing collapse of 2008, but that type of movement is much less common than the gradual increase, and those who are able to hold onto their properties long enough are likely to see their values recover and then exceed their 2007 levels — if they haven’t done so already.

If you have considered adding a buy-to-let property to your portfolio, though, there are some things to consider. You can make a lot of money through these investment vehicles, but only if you do them the right way, and if you are prepared for some hiccups that can arise along the way.

First of all, remember to read the fine print before you go to closing. Different lenders have different fee structures for their loans. Larger banks are not likely to charge a significantly higher interest rate on the loan than they would for a primary residence mortgage, but pay close attention to those fees. Whether they are flat amounts or percentages of the loan, take bids from three or four lenders — and let them know you’re shopping around — to get the best deal for your note.

It is also important to compare the value of this investment with what you could get out of the same money in other types of investments. After all, you are risking tying up money in a property that could drop in value, even if you are bringing in rental income each month. If you can find a mutual fund that brings in 8 to 10 percent annually each year, for example, that is definitely something worth considering. The best use for a rental property is to add diversity to a portfolio that is already humming along, rather than starting your portfolio that way.

Another important consideration is the area where you purchase your buy-to-let property. Different parts of the same city obviously perform differently, but realtors and savvy investors know the areas that are slightly undervalued and where you can swoop in and get a deal. Finding a realtor who is an expert in investment properties is a definite must, but common sense can also rule out some areas for you. Just because a property is cheap does not mean it is a solid investment. After all, it might be in a terrible part of town, it might be sitting on a cracked foundation, and it might have black mold that the owner knows about but you don’t. Work within your budget, but also find the types of properties where reliable tenants will want to live.

Setting the rent at the right amount is crucial. You’ll have to research rents in the area to make yours competitive, and then find a mortgage that allows the rent to sit between 125% and 130% of your mortgage payment. This lets you pay your property taxes and insurance while squirreling away a small amount for maintenance and repairs. Don’t skimp when it comes to buying that homeowner’s warranty, either, because it’s a lot cheaper than replacing things like the air conditioner, the furnace and the hot water heater yourself.

Don’t be reluctant to purchase a property that is a good drive from where you live. Even if it’s another suburb or another part of your city, you can often find properties that are about to hit a “boom” and increase in value — and where young families are starting to move. These are often the best tenants because they are ambitious about building savings and buying a house, even though they aren’t quite financially ready to do so yet.

Finally, don’t be afraid to say no to a deal that seems fishy. Sometimes people are in a hurry to jump right into investing in real estate and take the first property that seems minimally promising. However, sometimes those homes pop up for a reason, turning into white elephants over time. Do your due diligence to get the right property for your needs.

Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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