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What every freelance contractor should know about buy to let mortgages

freelancesupermarket.com newsroom

RSS 13 October 2009
Many contractors see property as a valuable part of their retirement plans and a profitable long term opportunity. This year is providing contractors with some great opportunities to purchase profitable property investments. John Yerou from Freelancer Financials explains all.

The key to a successful buy to let property investment is research - and lots of it. No matter whether you search through an estate agent, in your local newspaper, at an auction or online - be prepared to put in plenty of time to find the right location.

Don't be afraid to look further afield, most first time buy-to-let investors look for properties near where they live. But your town may not be the best investment. The advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you.

Cast your net wider and look at towns with good commuting links, which are popular with families or have a sizeable university or hospital.

If you are a first time property investor, you need to work closely with the right estate agents, letting agents, solicitors and financial advisors. A good financial advisor will ensure that you have a sound investment model that insulates your investment against potential downsides. If you know someone that has entered the buy-to-let market, ask them about their experiences.

Don't just look at high yield, high capital growth areas that are likely to already attract competition from other landlords, but at local infrastructure - schools, colleges, university, shops, public transport, roads, hospitals - planned developments and regeneration schemes. Keep an eye on your exit strategy as well. Although you may want to purchase a buy to let property now, you will need to consider selling the property again at some point.

Think about your target tenant. Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious.

If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and need a blank canvas. It is also possible to take out an insurance policy against your tenant failing to pay the rent.

Most importantly, have you done the maths? Before you start looking at properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get. Most buy-to-let lenders want rent to cover 125% of the mortgage interest-only repayments.

In the past lenders looked for a 15% deposit, but in the wake of the problems in the mortgage market many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. If you are looking for financial advice consider using a specialist buy-to-let mortgage broker.

Before you make any investment you should always investigate the negative aspects as well as the positive. Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year - this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.

Watch-out for those unethical,  so-called 'industry professionals' trying to convince aspiring investors that 'no money down' deals can still be done and offering them a supposedly easy route to buying property 'below market value'.  All of these propositions, when you look into them, are either illegal or so borderline it is not worth taking the risk. At the time of writing, if a purchaser's deposit funds are not their own, and the lender is not informed, they are highly likely to be committing mortgage fraud.

You need to consider how hands-on you want to be Buying a property is only the first step. Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong. You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.

And remember that property is not a get rich quick scheme; it's a get very rich, steadily business, which can deliver significant rewards in the medium to long term.

Author: John Yerou from mortgage specialists Freelancer Financials

If you wish to be contacted about contractor buy to let mortgages, please request a call back from one of our financial advisors.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: Welcome in my house by Mirko Macaro

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