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Buy to let Investment Property

Buy to let Investment Property

Buy to Let Investment Property

Buying to let is an investment.

Like any other investment you need to consider the risk and the return

It is best viewed as a long term investment. This is because house prices can go down as well as up and if you had to sell in the short term you might lose money.

There is no fixed term to this sort of investment. You can sell the property at any time. Alternatively you could clear the mortgage and retain the property as a source of income.

Buying property to let can be used as an alternative pension income.
If you buy or own a property outright then the net rental income would be the return on your investment.

Net rate of return % = (rental income less operating expenses / purchase price) x 100%

Nationally the figure for rate of return is about 7%. This compares favourably with interest bearing accounts however there is a low risk to your capital with interest bearing accounts.

If we now enter your mortgage interest payments as an operating expense into the above formula. The net rate of return reduces considerably. The above formula does not take into account any increase in the capital value of your property over time.

The rates of return in your selected area may differ and you should make your own calculation.

Few people will have the resources to buy outright. Most people will opt to borrow the majority of the purchase price.

This introduces the term 'capital gearing'.

If you buy a property for 100,000 with a 25,000 deposit, and the capital value increases to 110,000 after 2 years, you could sell up and redeem your mortgage of 75,000 leaving you with 35,000.

Your initial investment of 25,000 has increased to 35,000; an increase of 40% over 2 years or 20% p.a. (ignoring the costs of buying and selling).

The above example demonstrates capital gearing how your deposit investment of 25,000 benefits from price rises in the full value of the property.

next...Deposit for buy to let