Buy To Let (BTL) Property Investment: What, Why, Where, When and How?

We all know that property has been soaring in price over the past few years(in the UK at least) and has created an incredible amount of personal wealth for some people. Understandably, with all the hype from property programmes such as 'Property Ladder' and 'Location, Location, Location', people have seen the potential and decided they want a slice of the action. And why not?

Property is safe as houses! Did you know that property has created more wealth for people than any other kind of investment and remains the best possible long-term investment you can get involved with? In real terms property prices have risen by 7.6% per annum since the second world war.

So, you cant blame anyone for investing in property and what better way than to buy a property and let it pay for itself through rental income. Sounds simple doesn't it? Well remember that newbie investors should be careful about jumping on the property bandwagon without careful consideration.

Let's talks about the best way to get involved in BTL property investment...

The first thing you need to remember when considering Buy To Let Investing is that it's first and foremost a business. Tenants are therefore seen as customers. They give you money, so you need to familiarise yourself with what the customer wants. The best way to do this is get to know the market.

1. What do your customers/tenants want?

Firstly, study the market in the area you'd like to invest in. Browse your local papers. Look in the Properties To Let and Properties Wanted sections. Also contact a handful of letting agents and ask them what types of properties are in high demand. What kind of tenant do they come across most often and which areas are good for rental.

Study your area. Are there colleges or universities nearby? What about hospitals or prisons? If there are, it could mean that there are a lot of students or employees looking for accommodation close by. Are there good transport links nearby, especially if you're looking at areas just outside a city centre, some commuters can't afford or prefer not to live in the centre. If you're looking nearer the city then you might find studios or 'smart pads' are in higher demand than larger flats and houses.

2. Can you provide what the customer/ tenant wants?

There's no point investing in a three bedroom house if there's a shortage of small families looking to rent and the majority of potential tenants are after one bedroom flats... even if you are getting a good deal on the price. In the long run you'll just have to put your hand in your pocket to accommodate the void periods. The idea of investing is to generate positive monthly cash flow not the other way around! If you come across a potential property here's a great tip - place an ad in the paper advertising the rental property. If you get no calls then you know there's no demand for the property so it's not a good purchase. If you do get calls take their number and explain the property will be ready in a couple of months.

Once you have researched the market you will know whether you're making the right decision to become a Buy to Let Investor. You might have realised that there isn't a market for lettings in your area in which case you may want to look at Buy to Sell. If you find that there isn't a market for BTLs in your area then think about looking further afield. There are many good agents out there who can manage your property for you but remember you'll have to account for agent fees as well as potential void periods in your monthly outgoings. The rentals will need to really 'stack up' to enable you to generate positive cash flow.

Does it 'Stack Up'? A term you will become very familiar with if you embark on a Buy To Let investment quest. What it basically means is this - Does the rental cover the mortgage and preferably a little extra to serve as income or to cover void periods (no occupants)?

When you come to get a Buy To Let mortgage it's likely to come with Rent-to-Interest Cover of 125-130%, meaning that you will have prove the monthly rental on the property will be between 25-30% more than the monthly interest payment on the mortgage, ensuring that void periods and other unforeseen circumstances are well covered. Do your Due Diligence to ensure things 'Stack Up!'.

So can you afford to Buy To Let?

Let us say, for example, that you find a property valued at £100,000. You can only achieve an 85% LTV(Loan To Value) which requires you to put down a deposit of £15,000. For a lot of people this is big money and is a deterrent for many. After all that's a big risk - £15,000 of your own money.

There are of course, other options. It stands to reason that the less you personally invest when buying a property, then the lower the level of risk involved. So ideally any property investment that is structured as a low or 'No Money Down' deal is going to make investing more accessible for a lot of people. That of course is a whole other subject so check out my lens on 'No Money Down property investment' to find out more.

The other option is to buy 'Off Plan'. This can be one of the most profitable ways of investing in property as you'll probably get a 10-20% discount. The great thing is that this will be a discount on the current market value of the property and not the market value on completion. Often you only have to pay a reservation fee, leaving you the time it takes for the property to be completed to get the money together for the deposit.

So when you to buy a property off plan you can get the same £100,000 property with a discount of £15,000, leaving you with a mortgage of £72,750 and a deposit of just £12,750. By the time you exchange you could have already locked in some 'instant equity' if prices have risen and the rentals should stack up a lot easier. A word of warning though... prices can go down as well as up. Remember to read the 'Word of Warning' Section lower down that has been contributed to the lens by Jodie Hughes, Sales Manager of Buy To Let Investors Ltd.

"If you're a first time investor I would advise you against investing in New Build property at the moment. As you'll have seen, the property market is changing daily, steering more and more towards a property crash and already New Builds can't stand the pressure. Investors who bought New Builds over the last couple of years are finding that now, as they come out of their fixed terms, the rentals and valuations needed to refinance are just not stacking up. In some cases investors are left to cover quite substantial shortfalls. It's a sad story and one nobody had time to foresee.

There has also been quite a lot of negative press recently regarding mortgage fraud and gifted deposits given by Builders/ Developers. Investors think they're getting a really good deal on an Off Plan investment, "Yeah... a 15% discount!" but what this actually means is that the developer is selling you a property that they say has a valuation of £100,000. By getting this 15% discount you believe that on completion your 85% LTV mortgage will cover your £85,000 purchase price, after discount. However in many instances the builder's valuation is no longer viable on completion, so you will still have to put down a deposit because the valuation has actually come in at £85k and not £100k as you first thought, so the finance no longer stacks up. In the end you haven't got a discount on your property or a gifted deposit because you still have to put your own money into the deal on completion, on top of all your fees.

Another point to consider when purchasing New Builds is that the developments are often over-developed, resulting in 'Letting Ghettos'. If the development has mainly been sold to investors you'll be up against a lot of competition on the rental side of things. This in turn means you may have to reduce your rental amount in order to get a tenant, resulting in a negative monthly cash flow.

If you do decide to invest in New Builds choose the smaller scale developments with perhaps only 12 units. This way you reduce the likelyhood of going into rental wars. Also, before you make a purchase, always enquire how many of the units are being sold to investors and how many have been bought for residential purposes.

Jodie Hughes is the Sales Manager of 'Buy To Let Investors Ltd', A small yet very successful Property Investment Company that formed when a group of like-minded investors realised they could command greater discounts through their combined purchasing power." Find out more about 'Buy To Let Investors Ltd' on their website.

Everything you need to know is right here...

Please note the information in this lens is intended as general guidance only for individual readers and does NOT constitute investment or other professional advice. I have endeavoured to keep the information up-to-date and correct, but make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability of the information within this lens. Any reliance you place on such information is therefore strictly at your own risk. I therefore recommend that for investment or other professional advice you consult a suitably qualified professional adviser.