Advice
Buy-to-Let: The Investment Risks to Consider
07/05/2015 17:08 | Source: Money Facts
Buy-to-let is enjoying a bit of renaissance: more mortgages available, higher rental yields and high demand. But have you considered the investment risks?

While the potential for returns on a buy-to-let property are big, so are the risks.

Buy-to-let investing

With any investment, the return you will get is uncertain. You could even make a loss. With a buy-to-let investment, you can earn money in two ways: income (from rent)  or capital growth (through the value of the property going up). On the flipside, you can also lose money if:

- Your outgoings exceed the rent you make, or if the property sits empty

- Property prices go down

So, if the possibility of losing money doesn't sit comfortably with you, then maybe a savings account would be more appropriate.

Capital growth on a buy-to-let property

If you bought a buy-to-let property at the height of the housing boom (or bubble), you may not have seen any capital growth on your investment yet. In fact, you're probably recording a loss. 

The nature of buy-to-let, as with most investments, is that you have to be prepared to invest your money for the long term to give your investment the best chance to grow.

We are living through unprecedented times and, although the past performance of property has been stellar, past performance is no guide to future performance – there's just no way to know how a particular investment will turn out.

Before becoming a buy-to-let investor you need to be comfortable with this risk. Property is not necessarily a one-way bet.

Income from a buy-to-let property

You receive buy-to-let income in the form of a monthly rental payment from your tenants. The rent you can expect to receive from a buy-to-let depends on your property, its location and a variety of other factors. It goes without saying as well that your property also needs to be tenanted!

For a buy-to-let investment, income is particularly important as you will have regular costs to cover. Aside from the costs of buying your property – Stamp Duty, valuation/survey fees, legal fees, mortgage arrangement fees, re-decorating, etc. – you'll have numerous day-to-day maintenance and management costs:

- Brokerage agent's fees

- Mortgage interest (and capital if you opt for a full repayment mortgage)

- Landlord's insurance

- Annual safety checks (on the boiler, etc.)

- Rent insurance (designed to protect you for untenanted periods or against having tenants in arrears)

- General building maintenance

- Stamp Duty

- Income Tax

- Inheritance Tax

You should also consider putting aside a little each month in a contingency fund. This could cover costs such as redecorating your property in order to attract new tenants and to cover your costs during any untenanted periods.