Buy to let: property as an investment product
Buying a house to let is a common property option that has been around for a long time. This is what we mean by buying property as an investment product (i.e. with the objective of making money from rent or sale). This usually involves applying for a second home mortgage.
This is a riskier option for the credit institution, as it is more likely we will stop making our monthly payments if we run into difficulties when do not live in the house. The bank may, however, offer us a specific type of loan. In general, this will have characteristics such as: financing of up to a maximum of 60% to 75% of the appraisal value. This means we will need more savings to cover the rest of the loan and the costs involved in applying for it; repayment over up to 25 years, which is considerably less than for a first home; and higher interest.
When should we apply for a second mortgage?
As we have mentioned, the requirements for second home mortgages are more demanding:
- First, we will need more savings, as the bank will not lend us as much. We also have to cover the part of the home not covered by the mortgage, and the costs of the new mortgage.
- Second, we will need higher income, as we will have to repay the loan over a shorter period, and at a higher interest rate.
- And finally, we will need to provide other additional security (such as guarantees, other property, etc.).
- If we are going to buy a house or flat to let, we can use our primary residence as a guarantee, if it is free of charges.
The bank will give us better conditions as a result, but non-payment could lead to us losing both properties.
And if we have two mortgages, we will have to repay two loans. Alternatively, we could increase our original mortgage, meaning we only have one monthly payment. Or we could apply for a new mortgage with a twin guarantee, paying off the original one.
Is it worth buying a house or flat to let?
Like everything, this has its pros and cons.
- First, letting is easier than selling: logically, people are likely to pay rent before buying a house.
- This is faster and easier, and the commitment is much smaller. And as owners, letting is a way of obtaining a regular stream of income, giving us monthly liquidity.
- But it takes longer to recover the investment, meaning it is years before you start to receive the benefits). And we can never be sure that we are will be able to rent it out. If there is any delay in doing so, we will lose our income from it and still have to continue paying for it.
- But job insecurity means that people prefer renting to buying. And there is a trend not to want to tie yourself to a mortgage.
- And the government provides a lot of aid for renting through the 2018-2021 National Housing Plan.
- Finally, rents have been on a downwards trend since 2019. In short, the option of renting is becoming ever more popular. This has resulted in the returns on investing in rental property increasing by 6.1% (0.6% year-on-year). But as landlords, we have to recognise that letting has its risks.
For example, we can lose liquidity if the situation worsens. You need to know the market and be well informed before deciding to buy.
Here are some recommendations to think about before taking the plunge.
- First, study the market before you decide to buy.
- It's good to get an idea of what your buyer will look like and what they are looking for.
- Analyse rental demand by area to see which are the most popular (even if they are more expensive).
- Don't believe that you will make more profit by buying something cheaper: there may be areas where houses are cheap but renting is difficult, or where rents are very low.
- This brings us back to our earlier advice: focus on where you want to buy. And focus on what people want (size, number of rooms, etc.).
- We might think that smaller homes are easier to rent, but some analysis suggests that the most profitable homes are between 150 square metres to 250 square metres.
- Third, be realistic when setting the rent. Analyse average prices in your area, considering the size and characteristics of the property. The key is to avoid extremes.
- Finally, analyse your costs as the homeowner. These will obviously influence the analysis of the return on your investment.
- Although everything depends on the stipulations of the lease agreement, the owners usually have to pay property tax (IBI), local taxes, communal costs, home insurance and breakage and repair costs.
- And second homes are included in your tax return.