Understanding yields
While property values might rise, rental yields – the returns a property investor gets from their tenants – often fall short of expectation.
According to NatWest, average rental yields in the UK hover at around 5 to 8 per cent.
Still, once you factor in maintenance costs, management fees and occasional unexpected expenses, your net yield might be significantly lower than this.
The biggest factor on top of all this is tax.
Income tax is payable on the gross rental income earned, which leaves the income in hand to be substantially low.
A lot of people are shocked when I show them the calculations and they realise they are not earning what they thought they were.
Other investment options might be more suitable depending on the circumstances.
The FTSE 100, for example, has delivered an average annualised return of 8.6 per cent, with dividends and exchange rates adjusted for, according to Raconteur. Other global equity indices have delivered similar returns.
A popular justification for the lower year-on-year yield is that property appreciates over time, so a sell-off several years away could yield a massive return. This is true, but it also applies to other forms of investing.
When you buy a property, you do not evaluate its market rate every couple of months, like one might do with stocks and shares. You buy, and you hold. Applying the same principle to stock-based investing can yield similar gains.
How to make BTL work for you
All this said, I have seen many grow off the back of BTL, and they can undoubtedly be profitable investments. However, it requires prior research, due diligence and a considerable margin for error.
The first step is to understand the true cost of getting into BTL – not just the cost of the property. This includes the time commitment, insurance, taxes and the potential for void periods when a property stands empty.
On the mortgage side, you should know how much you can borrow and how much you have to pay back.
"If a mortgage is required, lenders typically stress test the interest rate to assess affordability under less favourable conditions, such as a higher interest rate," Lay says.
"This can mean that an arrangement you consider profitable is not viable by the lender as they try to mitigate risk and prepare for possible market fluctuations. It's important to check the borrowing levels in advance to avoid disappointment."
Location is critical to any successful BTL investment. An in-demand area differs between a property sitting empty or delivering steading income.
According to Lay, two guiding principles can help you find the correct location.
First, look for areas with consistent tenant demand, such as areas near universities, hospitals or large employers.
Then, consider whether the location has good public transport links, planned infrastructure improvements and easy access to amenities.
