What is “Buy to Let”?
Arguably the most common real estate investment strategy is to purchase a property and then hold on to it for the longer term, usually three to five years, while extracting value by renting it out to tenants. Property investors also earn a return on the capital appreciation when the property is eventually sold.
On the other hand, is buy to let a good investment strategy? The mere fact that it is common does not mean that it is always profitable. There are a number of factors that need to be considered and this strategy can sometimes go terribly wrong.
Is Buy to Let a Good Investment?
A buy to let strategy may be good news for an investor, but it can also leave a lot of room for error. Take a look at a few of the factors that must be considered for this approach to be a success.
- Cost of this Strategy - Under a buy to let strategy the cost must be taken into account. Unlike other real estate investment methods, the purchase must be completed so this requires a certain amount of capital and it may limit your flexibility depending on how much financial resources you have at your disposal. To keep costs down, you could try to get bargain properties that need work to bring them up to rental standards, however, this is also a cost because it means that you will need to carry the cost of the property while it is under repair.
- The Maintenance Required - In addition to the work it takes to transform the property initially, tenants also expect their problems to be attended to by their landlord. This means you either have to be available to get problems fixed or pay someone to handle this for you. Either way there is a cost involved with maintaining the property, especially since the holding period is expected to be several years.
- The State of the Real Estate Market - There is always a risk that a medium term strategy may turn into a longer term strategy because of the state of the real estate market. For instance, if the original plan was to hold the property for three years and then put it up for sale to capitalize on increased real estate prices, but instead prices fell, possibly because of a glut of new construction on the market, you may need to extend your rental plan for another term before considering selling. This can negatively affect your future profit because the older a property gets, generally speaking, the more maintenance is usually required.
- Taxation and Other Holding Costs Must Be Considered - Another factor to keep in mind is the effect of taxation. Every country has different taxation laws so the impact of taxes on your real estate investment will vary from place to place. Other holding costs include mortgage interest, insurance and homeowner association dues. However, you must remember to deduct these expenses from your calculation of profit so you will not overestimate your potential earnings. If you do attempt a buy to let purchase, don’t sign a net-net lease. This ensures the property owner is responsible for all property taxes until the sale is complete.
So is buy to let a good investment strategy? The answer to that question depends largely on your timeline as well as the state of the real estate market at the time you are about to invest. It also helps if you are well-prepared for becoming a landlord and can handle the responsibilities involved as well as keep the profit motive in mind when making your maintenance decisions.
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