Are you interested to invest in the buy-to-let market? The purpose of this type of investment is to buy real estate, rent it out and receive additional income. Buying to let is different from buying to live, and this affects the type of mortgage that is available. This article details the main stages of a buy-to-let investment.
A. Define your borrowing capacity
Before embarking on your research, it is important to set a budget. The calculation of your budget will depend on your borrowing capacity. Be aware that in the case of a buy-to-let investment project this calculation is more complicated to work out: the borrowing capacity depends on the amount of rental income, which in turn depends on the price of the property and the geographical area.
You must, therefore, first define the cities in which you want to invest in order to know the purchase price per m² and the rental price. Using this data, you can use a real estate mortgage simulator like Pretto to calculate your borrowing capacity.
Be careful, unlike professional income, rental income is not fully taken into account by banks. They consider a margin of safety. This varies depending of the organisation but usually represents about 30 percent of your income. If you want to calculate your debt ratio, the lender will only take into account 70 percent of your rental income. It should also be noted that there are two methods for charging these fees. The simplest method is to seek advice from an online broker like Pretto to help you calculate your debt ratio and financing capacity.
B. Research the local real estate market
You buy a property to earn rental income, so be sure to choose a property ideally located so you can let it easily and at for a price ensuring good profitability. You have to study the market in order to select your geographical area. Housing always has a subjective value, it is influenced by neighbourhood life and nearby infrastructure. Aim for popular shopping streets, well served by public transport, with schools nearby and in the city centre.
It's also wise to invest in cities with a vibrant housing market or high population growth as there will be a higher rate of interest. Also take the time to study the evolution of rents, municipal bylaws or the net migration to find out if the location is attractive or not.
C. Think about taxation
It is important not only to focus on profitability but to take into account tax exemption. The interest on your loan is, for example, deductible from your rental income.
Since the Pinel law, you can benefit from tax deductions of 12, 18 or 21 percent of the amount of your investment. This right is given to you according to:
- The number of years you agree to rent your property (from 5 to 12 years)
- The required standards (heating, renovations ...)
- The location of your home
- The amount of rental income
Whether you offer furnished or empty housing, you can enjoy tax benefits.
For an empty home, the amount of work can be deducted from the rents you collect which will reduce your taxes.
For a furnished apartment, you will have the choice between two tax systems: the flat rate scheme for which you will be taxed on half of the rents collected and the real scheme where the expenses and depreciation are deductible.
A. Contribution and duration to maximise profitability
In general, banks ask borrowers to pay a deposit of at least 10 percent of the price of the property to pay the notary fees and guarantee. In the case of a rental investment, you have the possibility to borrow without contribution. But it's not automatic. To be able to borrow at 110 percent, you will have to convince your bank of your repayment capacity. It is preferable that you own your principal residence if you wish to take out a loan of 110 percent so that your borrowing capacity is not fully utilised. Otherwise, you risk being blocked in the future purchase of a principal residence if you have more debt liability.
The amount of your rental income must largely cover the amount of your monthly payments: so opt for a long-term loan. You must be ready to face the unexpected (unpaid rents or sudden changes) by maintaining a sufficiently large cash flow. It is for this reason that it is advisable to subscribe to a loan over 20 to 25 years, lower monthly payments will leave you with a greater margin on your available resources.
In addition, borrowing over 25 years allows you to deduct interest from your rental income for a longer time.
Not all banks may grant loans of such a long term, it is advisable to use a broker who will advise you on banks that offer this kind of loan.
B. Higher borrowing rates
Banks do not always offer the same rates for rental investment and are less conciliatory towards these projects. They consider these projects risky, which affects the rates.
Get help from an online broker, such as Pretto to quickly check out the banks and find the most advantageous loan terms. You will be helped by a credit expert who will help you to negotiate the best rate, you will only have to focus on finding the most profitable investment.
C. The wariness of banks
As mentioned above, banks generally find the nature of rental investment to be risky. Here are their main concerns:
First, it is difficult to engage in rental investment without being a homeowner. Banks prefer not to use all your borrowing capacity to avoid having to prevent you from making a future project of purchase of a principal residence. Many young people still decide to embark on the adventure in order to begin to build a real estate portfolio as soon as possible.
If you are already a homeowner, you will have a good chance that your mortgage application will be successful as long as your debt ratio is below 33 percent and credit rating is strong.
Second, banks benefit from fewer counterparties in the case of a rental investment. You do not need to domicile your professional income in a current account of the lending bank, the domiciliation of rental income is enough. Fewer counterparts are often associated with higher rates. The more you want to negotiate the terms, the more effort you have to make on your side.
The rental investment may seem complicated but by preparing well and with the help of a broker, you will have all the tools you need to get started. Even if you have the funds, the credit has advantages and you will benefit from the famous leverage effect. Here are three more reasons to convince you:
- Current rates are very low (between 1 and 2 percent), you can buy a property that will easily bring you triple.
- As discussed above, this investment gives you many tax benefits.
- You are insured and protected, the bank will pay the rest of the monthly payments - in case of death, for example, and the heirs will recover the fully paid property.
It will, therefore, cost you less and protect you from the unexpected.
