A buy-to-let mortgage is a mortgage given specifically to people who buy property as an investment, rather than as a place to live.
Realtors explained under what conditions this type of mortgage is beneficial, what kind of housing you need to choose and what the loan terms should be.
Mortgages are a serious burden on the family budget. However, if the housing purchased on credit is not the only one, then mortgage payments can be completely covered by rental payments, if you rent an apartment to someone.
Calculations show that this is not a myth but a reality. But in order to meet expectations, you need to prepare well in advance and think through everything.
This method of paying a mortgage is far from new. People actively apply for loans and pay them out by renting out mortgage apartments if they themselves do not need to improve their living conditions, that is, have at least one own housing or do not have adult children who need to be relocated soon.
Banks do not prohibit renting an apartment purchased on a mortgage, there are no penalties for the borrower. But the mortgage agreement should contain the obligatory condition – that the borrower is obliged to inform the bank about the rental of the apartment.
The number of buyers planning to receive passive rental income has risen sharply in the recent years.
The condition for the loan you want to pay off by rent is one thing – the rental rate should not be lower than the monthly payment. And it’s better to exceed it. The down payment and the ability to repay the loan ahead of schedule will play a very important role – this will help to reduce the monthly payment and thereby bring it closer to the rental rate.
Here is an example. A couple using a mortgage loan purchased a one-room apartment for $83,000. The down payment amounted to 50%, the loan rate – 10.7%, the loan term – 30 years. The initial minimum payment amount is about $400. However, the couple did not begin to live in this apartment and, having made a small redecoration there, rented it for $420 per month. Regular early payments reduced the amount of the minimum payment, while the rental rate remained the same. After six years, the minimum payment amount was already $70, while the rental rate has not changed.
Type of an apartment
First, you need to decide on the market: primary or secondary. A new building involves some waiting period until the apartment can be rented out. This period can last six months to four years. Even if you get the keys a month after the purchase, you will do repairs about half a year, and if it’s a completely new building – much more. Most likely, it will take some time to find a tenant. All this time you will have to pay the mortgage out of your own funds.
It is recommended to choose a resale with repair and furniture. A new building with decoration will also do. The ideal option is apartments with finished decoration and furnishings from the developer and the management company, which will be engaged in leasing under the contract.
And of course, experts agree that the apartment should be liquid, in demand for rent. That is, it should be near the metro or a large business hub: a business or technology park, airport, etc.
What you need to pay attention to?
First of all, you need to try to objectively assess your financial capabilities and compare the average mortgage payment with the average rental rate of a similar apartment in the district. A mortgage calculator on the website of any bank can help with this. Yes, the calculations are approximate, but the essence will be clear.
Besides, it is necessary to form a reserve fund for covering mortgages. It should be equal to approximately three to four monthly loan payments. In the event of a tenant’s sudden eviction, these funds will be used to pay off the mortgage until the investor finds a new tenant.
In which case you should NOT take a buy-to-let mortgage?
Leasing is a profitable way to repay a loan, but only if the apartment is purchased for yourself, and not in order to lease it constantly. For many, this is the most favorable way to resolve the issue. The housing that you buy for rent will require a lot of investments – financial, temporary and emotional: pre-rental preparation, rent and housing and communal services, finding tenants, downtime risk, interacting with tenants, paying taxes and, finally, paying off a mortgage.
If there is no need to solve the housing problem, and there is a large amount of money available but still insufficient for buying an apartment, it is more profitable to put it in the bank at interest than to take a mortgage and buy a house for rent.
For example, you have $100,000. They are in the bank at 8% per annum: you get $8,000 a year without putting any effort into it. An apartment purchased for $100,000 can be rented at a rate of a maximum of $500 per month. Profit for 12 months will be $6,000.