Ask the Landlord column

[Trenners]

Ask the Landlord

With Mark Trenfield (mark@mlettings.com)

Rising property prices and the ever increasing age of the first time buyer have contributed towards a healthy buy-to-let market over the last few years and many investors are turning into part-time landlords as they decide to invest in property and purchase their first buy-to-let investments.

Now that interest rates are on the rise again we are offering some handy tips and tricks on how to maximize your investment return from the property as well as providing a level of financial protection if house prices start to fall.

TRICK: Focus on Growth

Landlords often ask whether they should use personal savings to fund their buy-to-let investment or whether it would be more prudent to take a capital repayment or interest only mortgage.

Property is a unique asset class because it not only enables the landlord to benefit from a regular monthly income (the rent) but it can also provide very attractive long-term capital growth if property prices rise. For example, house prices need to increase by just 3% per annum and your investment property will double in value over 20 years.

Landlords that can minimise their monthly outgoings and maximise their exposure to capital growth will achieve the best financial return from their buy-to-let investments over the longer term.

Inexperienced landlords tend to purchase property using their personal savings and quickly find that they are only achieving a return of 4% or less (after running costs). Although paying cash does minimise monthly outgoings (as all the rent becomes income), it also minimises capital growth because the landlord only owns a single investment property.

More astute landlords invest in multiple properties using a repayment mortgage. This strategy increases the exposure to capital growth (as the landlord can use their personal savings to purchase multiple properties with a 15% deposit) but also radically increases the monthly outgoings as both the mortgage interest and capital repayments need to be funded from the rental income.

Professional landlords invest in multiple properties using interest only mortgages as this provides the best of both worlds. Monthly outgoings are kept to a minimum (with the mortgage interest offset against the rental income for tax purposes) and long-term capital growth is maximized due to the investment in multiple properties. In addition, the landlord has the flexibility to use surplus rental income towards the deposit on their next investment property.

If you would like to discuss this article further – please contact Mark on 01793 752157 or visit http://www.mlettings.com.