Buy-to-let or buy to sell?
An important thing to consider before investing in a property is what you want to do with it after the purchase. Your two main options are doing it up and selling it on or letting it out to generate a regular income.
If you choose to go down the buy to let route then any income that you receive will be taxable. This is because any income is perceived as a salary by HMRC. People who buy a home to rent it out often do so with the aim of eventually replacing their current job with their property development business.
Buying a house to sell is more of a shorter term strategy. It is also a riskier option as it is very dependent on the market conditions. However, there is the potential to make more profit in a shorter space of time.
Any profit you make on the sale of the property will be subject to Capital Gains Tax. The exact amount of tax that you need to pay will depend on the profit that is made and your income.
Buy To Let Mortgages
Most mortgage companies will have an option for a buy to let mortgage that they can offer their customers. However, there are certain conditions for obtaining this type of mortgage that you will have to prove that you meet and some of these are listed below.
- If you already have a mortgage on your own property then you are going to have to prove that you can afford to take on another mortgage.
- Some lenders may require you to earn a certain amount of income per year before they will consider you for a buy to let mortgage.
- There is also likely to be an upper age limit for the age that you should be by the time the mortgage finishes.
There are also certain differences between a buy to let mortgage and a normal mortgage that you will need to be aware of.
- The interest rate on this type of mortgage will usually be higher and you will probably also have to pay more in fees.
- They may be an interest only mortgage which means that your monthly payment does not include an amount towards the capital that you have borrowed. This will need to be paid as a lump sum at the end of the term.
- The maximum amount that you can borrow will depend on how much rental income you can generate from the property and most companies will expect you to earn at least 25% more than the mortgage payment each month.
Buy To Sell
The key to making money with a buy to sell property is to purchase it for the right price. If you pay too much for a property then you may find that the margins are too slim for you to make a substantial profit.
If an application for planning permission has been made on the property then you could try and arrange a sale that is subject to this permission being granted. This means that you will get the benefit when the permission is approved.
There are certain situations where people may be looking to sell their house quickly. They may be going through a divorce, emigrating or their home may be due to being repossessed. This information will be available from the estate agent so it is always worth checking with them. You may also want to look for newspaper adverts and online as if people are in a hurry to sell they may try and advertise the property themselves.
The idea of being a property developer appeals to a lot of people because it sounds like an easy way to make money. However, there is much more involved than people think and more people ending up losing money than making it.
The key to making money is to buy the property for the best possible price and research is crucial if you want to achieve this. You will also need to spend money on increasing the value of the property and so you will need to have these funds available.
Buy To Let Vs. Buy To Sell
The final decision about what to do with the property that you have purchased will depend on your personal circumstances. There are things that you should bear in mind about selling and letting that can help you reach this decision.
When fixing a property up to sell on you are going to need a lot of patience. It is possible to make money but this is not going to happen overnight.
You will also need to make sure you have enough money available to finish the project. If not you could find that all of your money is tied up in the house with no possibility of selling for a profit.
Before you even buy the property you will need to do a lot of research. It is a good idea to look at what similar properties in the area sold for so you know what price you could achieve. You will also need to work out how much the renovations will cost and you will need to have local tradesmen that you can trust.
Another aspect to be aware of is the current market conditions as you will want the property to sell as quickly as possible and for the best price.
When it comes to buy to let properties, recent tax changes have meant that it is not as profitable as it once was. However, this does not mean it is not worth the investment.
Despite initiatives from the government to try and encourage people to buy houses, it is still unaffordable for many people. This means that the rental market is very strong and there is a lot of demand for rental properties.