There are essentially two halves to financing an investment or buy to let property:
- the capital investment in the acquisition of the premises; and
- the ongoing finance required to ensure a steady and reliable income stream from rents.
Buying your investment property
Although the funding for your purchase of buy to let property might come from a number of different sources, probably the most usual is from borrowing of one kind or another, and the most common form of such borrowing is a mortgage.
For the purchase of an investment property, however, you need to ensure that the mortgage is specifically identified for that purpose. In order to raise the mortgage advance, the lender is going to be interested in just how much rental income the property is likely to realise, in the assessment of your ability to repay the loan.
Your stated purpose for your mortgage loan is particularly important, since mortgage lenders are apparently tightening up their scrutiny of the use to which lent funds are put, according to a story in the Telegraph newspaper in August 2014.
One of the reasons for this closer scrutiny reflects the way in which applications for buy to let mortgages are assessed – and the misuse of those arrangements by some first-time home owners pretending that they are buying to let, whereas they intend to live in the property themselves.
This is mortgage fraud and helps to underline the fact that you need to be as honest in making your mortgage application as you do when arranging your insurance for landlords.
Investing in property to let is a business proposition. Therefore, prospective mortgage lenders look not only at the market value of the property itself, but also the steady rental income it is likely to generate.
According to the Telegraph article, for example, mortgage lenders typically look for a rental income that is some one and a quarter times the monthly mortgage repayment. A buy to let mortgage also requires a larger than usual deposit, in the general range of 20% to 25% according to the Telegraph.
You may also find helpful a number of tips about securing your buy to let mortgage at the website This is Money.
Financing your business
The purchase of the premises you intend to let is not the end of your concerns about finance – in many ways it may be just the beginning.
The success of your business as a landlord is likely to rest on your maximising rental income and managing the inevitable and necessary expenses that enable your enterprise to continue in being.
With respect to your income, of course, this relies on your selecting and retaining suitable tenants. This is likely to entail your having conducted a careful market analysis of private rented accommodation in your area, so that your tenancies are pitched at a rate that attracts tenants but also provides the income you need. In other words, you may want to target a specific market.
Overhead expenses may need careful monitoring, too. You may want to shop around for services such as landlord insurance, any management or lettings agency you may wish to instruct, and the maintenance contracts that may be required to keep your let property in peak condition for attracting the tenants you target. Careful choices may ensure that your profits from rental income are not unduly diminished.