House-buying rules: the basics of buy-to-let

Broadly speaking, there are two kinds of people who choose to buy a house. There are those that buy with the intention of living in it, and then there are those that buy with the intention of renting it out.

And whilst those who are simply seeking a roof over their heads undoubtedly make up the majority of the buyer’s market, the buy-to-let market is gradually increasing its share of the market too, due in part to credit conditions remaining more consistent in recent years compared with the normal ‘buy-to-live’ market, which has seen tighter restrictions being implemented by lenders.

But, whilst many of the processes involved in both markets are similar, there are some key differences which are probably worth considering when deciding whether to invest in that second home or not.

The location of a house is always important regardless of the reason for buying. But with a buy-to-let mortgage, this is perhaps even more important as there has to be a demand in that area for rental property, otherwise it could end up sitting empty.

It’s also important to consider the intended target group too. If it’s going to be aimed at students, then it should probably be easy to maintain and not be too expensively decorated. And if it’s going to be rented to families, then it will probably need to be unfurnished as they will more than likely have a lot of their own belongings.

But finding an affordable house in an up-and-coming area is possibly the best way forward, even though there are never any guarantees the area will live up to expectations. However, if there is new construction work in a specific area or evidence of renovation work such as scaffoldings, then this is normally a sign that the area is ‘on the up’. Similarly, evidence that money is coming into the area, such as new shops, is a good sign.

Also, the last thing any investor wants is for their ‘investment’ to decrease in value, so it’s important to consider whether the property in a certain area will hold its value. Things to look out for include whether the transport links are good; and if there are schools nearby then this is a sign that the area is likely to remain a popular place to live.

Furthermore, buy-to-let mortgages have traditionally always required a bigger deposit, typically at least 15% of the value of the house. But the projected income from the rent from the property is often used by the lender in conjunction with all the other income when calculating how much they will lend, and this can significantly improve a borrower’s financial position.

So, there are clear differences between buying a house to live in and buying a house to rent out. Not only must the intended ‘target’ tenant be taken into consideration, but serious thought must be given to the location as well, as it’s crucial that adequate demand exists for another rental property, as an empty house means an empty wallet.

Disclaimer: Matthew Pressman writes for a wide variety of commercial clients. This article is intended for information purposes only and readers should seek additional information before taking any actions based on its content.