Commercial property investment Buy-to-let property
Many private investors already own their own home, so the process of buying another property may seem a more familiar and straight-forward proposition than investing in the stock market. However, a buy-to-let property investment is not without risks.
Most investors in residential property will need to borrow in order to get their foot on the buy-to-let ladder. Here are some key points that you need to keep in mind about buy-to-let mortgages:
- You'll need a much higher deposit – generally between 20% and 40% of the value of the property – to get a buy-to-let mortgage
- Expect to pay higher interest. This is because there's more risk for the lender – your tenants may not pay their rent or you may have periods when the property is empty, meaning no rental income.
- Your mortgage charges will be higher, as you often have to pay set-up fees.
Lenders not only take into consideration the size of the deposit you have, but also how much rental income the property will generate. Typically, lenders accept rental income of 125% - that’s 25% over your monthly mortgage repayments.
Find out more: Buy-to-let mortgage calculator - work out how much mortgage you can afford
Buy-to-let property and rental yield
This is an important figure to have in your mind if you're thinking of buying a property as an investment. The rental yield gives you an indication of what kind of return you'll be getting from the property.
The rental yield is quite simple to calculate but you need to be fully aware of all of the costs you may encounter when you become a landlord. By far the biggest cost to you will be your mortgage but there are others fees to consider including (but not limited to):
- Buildings insurance;
- Maintenance costs;
- Ground rent and charges;
- Letting agency fees.
Once you have deducted all of the costs from the amount of rent you receive, the figure you end up with is known as the 'net rental income'. The rental yield is calculated by dividing the net rental income by the value of your property.
So if you own a property worth £250,000 and the net rental income is £12,500, your rental yield is:
- £12,500 / £250,000 = 0.05 or 5% per year
Find out more: Which? investment portfolios - we have created a unique set of investment portfolios that can help you decide on the right mix of assets for you
Need mortgage advice?
The Which? Group offers an independent mortgage advice service, Which? Mortgage Advisers, that looks at every mortgage from every available lender. You can call the service on 0808 252 7987. You can also find an independent mortgage adviser using Unbiased.co.uk.
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