As an investor, you’ve likely encountered advice urging you to select the appropriate mortgage option and property type. But what exactly do these entail?
Navigating the realm of Buy-to-Let properties can seem daunting, especially for those in the early stages of research. With Buy-to-Let properties gaining recognition as a reliable and resilient asset, it’s crucial to grasp the available financing options and property types to effectively pursue your objectives in a competitive market.
While every investment involves various financial considerations, Buy-to-Let properties offer a range of mortgage options and property types, each with its own advantages and disadvantages depending on your investment goals.
As detailed in SevenCapital’s Investment Finance Guide, these considerations might include:
Finance Options
When contemplating your finance options, it’s crucial to have a clear understanding of your financial standing and investment objectives. This is pivotal because the three prevalent methods of property investment hinge on several factors:
The duration you plan to remain in the market.
The returns you aspire to achieve within that timeframe.
Your tolerance for risk.
Your cash flow status.
Once these aspects are identified, they will naturally guide you towards the appropriate finance option to align with your goals, which will probably encompass one of these avenues:
Capital and Interest Repayment Mortgage
What is it?
Essentially, this mortgage type involves repaying both the principal amount borrowed for the property and the accrued interest over the mortgage term. What often distinguishes this option from others is that upon completion of the repayment period, you will have full ownership of the property.
Is it suitable for me?
Given that this mortgage option entails repaying both the principal and interest, it is typically more common among individuals with higher incomes. While other finance options often rely on rental income to cover mortgage payments, the larger payments associated with this option make this less feasible.
Investors frequently utilise rental income to cover property expenses like maintenance and management fees. However, since this finance option typically does not offer this benefit, investors opting for a repayment mortgage will need a steady income to address any issues or void periods that may arise.
What else should I consider?
With this finance option, initial returns are relatively modest. Due to the nature of repayments, you’re simultaneously building equity while paying off your loan and interest over the mortgage term, resulting in a potentially less robust return on invested capital.
Nevertheless, this finance option arguably offers greater benefits for long-term investments. Upon completion of the mortgage term, you’ll own the property outright, eliminating any outstanding mortgage balance if you decide to sell the property.
Interest-Only Mortgage
What is it?
An interest-only mortgage is frequently chosen for its perceived flexibility compared to other financing options. Under this arrangement, investors pay only the interest on their loan each month, without reducing the principal amount. Instead, at the end of the loan term, the entire principal must be repaid.
Is it suitable for me?
This finance option is often preferred by investors lacking a significant financial safety net. By focusing solely on interest payments, investors may generate higher profits, which are often earmarked for bolstering savings.
For individuals without the financial cushion necessary for a repayment mortgage, an interest-only mortgage may offer greater advantages. The lower monthly payments, consisting solely of interest, are typically more manageable, and rental income often covers them comfortably.
What else should I consider?
While touted for its flexibility, an interest-only mortgage comes with considerations. Since only interest is paid monthly, the entire principal must be repaid at the end of the mortgage term, whether through property sale or alternative means.
Consequently, this mortgage option may not match the long-term potential of alternatives.
100% Cash Purchase
What is it?
As the name suggests, a cash investment involves upfront payment for the property. This means no mortgage is required, and consequently, the monthly rental income becomes entirely yours to utilise or save.
Is it suitable for me?
Given the substantial expense of property, this finance option is typically pursued by individuals with a significant positive net cash flow. However, it’s also a viable choice for retirees seeking to invest their pension funds or individuals who have received a lump sum inheritance.
What else should I consider?
By eliminating the need for a mortgage, this finance option is often less complicated than others and provides an immediate passive income stream.
While these investment avenues represent some of the common options available to investors, each individual’s circumstances vary. This guide is intended to offer direction, but thorough research into all available options and seeking advice from a financial advisor are essential steps before finalising any decisions.
Property Types
As another piece of the puzzle, you might be contemplating, “what types of properties are available to me?” Both apartments and houses offer various advantages that can contribute to a successful property portfolio, including:
Houses
What should I consider?
Apart from generally offering more space than apartments, investing in a house provides the opportunity to attract a broader range of tenants. Houses typically come with amenities like gardens, parking spaces, and garages, making them appealing to families, a demographic that apartments may not always cater to.
Moreover, investing in a house opens up the possibility of converting it into a “house in multiple occupation” (HMO). This route is popular among investors seeking maximum returns, as renting out individual rooms generates multiple streams of monthly income.
Depending on the property’s location, houses also offer the option of renting to students. Student accommodation provided by institutions tends to be expensive, leading many students to seek alternative housing options. This not only drives demand but also often allows landlords to command higher rents.
While these factors may also apply to apartments, house prices have consistently appreciated over the past two decades. Property prices have maintained an upward trend, with the UK average now standing at £309,103. Consequently, in the long term, houses are likely to accrue more value compared to apartments.
Apartments
What should I consider?
When envisioning a city centre, whether it’s London or Manchester, do you picture houses or apartments? One significant advantage of investing in apartments is their typically central locations, making them highly desirable among young professionals and yielding higher rental incomes.
Compared to houses, apartments generally have a lower initial purchase cost. However, when factoring in their high rental yields, Buy-to-Let apartments often offer greater potential for substantial capital gains. For instance, while a one-bedroom house in Bracknell commands an average monthly rent of £554, a one-bedroom apartment can fetch up to £815.
Studios and one-bedroom apartments are particularly popular among the younger demographic, including graduates and young professionals. This is advantageous for investors, as these compact units tend to offer upfront affordability without compromising rental yields and potential for capital appreciation.
But what about two-bedroom units? During the peak of the Coronavirus pandemic, there was a surge in demand for two-bedroom apartments, driven by couples and single occupants seeking more living space. This presents opportunities for home offices or hobby rooms, amenities often lacking in studios and one-bedroom units.
Whether you opt for a studio, one-bedroom, or two-bedroom apartment, strong returns on investment can be anticipated. While two-bedroom apartments boast the highest average rental yield at 5.16%, one-bedroom apartments still average around 4.94%.
Some apartment complexes offer exclusive tenant amenities, potentially leading to higher rental rates. These buildings are equipped with eco-friendly features and may include resident-only spas, communal workspaces, and fitness centres. These Buy-to-Let properties are reshaping rental market standards and are likely to continue gaining popularity among tenants.
From finance options to property types, there’s plenty to consider, but selecting the right combination aligned with your investment objectives is paramount.
How Olivia Rose Estates Can Help Tiring Landlords
Are you a tiring or retiring landlord and looking to sell a property? We can offer a guaranteed cash purchase for your property in a timescale that suits you. It could be a couple of weeks, or even just a few days. For landlords looking to sell off entire portfolios, large capital gains tax bills could await you. We are happy to work with you to structure the purchase of your properties in the most tax efficient manner.
