In recent years it seemed that everyone and their dog could make money from investing in buy to let property without knowing a thing about it. Many of them have lost everything. And in almost every case it is because they broke one or more of the three cardinal rules of buy to let investing. I can’t promise you that if you follow the rules you are destined to make money. But I can tell you with confidence that if you break the rules you stand a much higher chance of losing all your money.
The first rule of buy to let property investing: Don’t assume house prices will keep rising forever
During the boom property years running up to 2007 many people made this fundamental mistake. They figured that property prices would only ever keep going up so it didn’t matter if their net rental yield was less than the costs of covering their mortgage. They thought they could just top it up every month for a year or two and sell the property for bumper profits later. The lucky ones of these are now stuck with properties that they are having to subsidise every month that are worth less than what they paid for them. There is no easy way out for these people. Still, they are in a luckier position than many who couldn’t afford to keep subsidising properties and have now lost them and their own homes too. That is because they didn’t follow the second rule of buy to let property investing.
The second rule of buy to let property investing: Have a backup plan
Every year thousands of investors in buy to let properties end up losing everything. In the third quarter of 2009 alone some 1,600 buy to let properties were repossessed by banks. In the preceding three months 1,400 were taken back by banks. Many of these failed because their landlords had no way of covering their buy to let mortgage if rents fell or they encountered an unexpected vacancy. Before investing make sure you have a contingency plan. Do you have enough money in the bank to keep covering your mortgage for a couple of months if your tenants stop paying rent? Do you have rental insurance and legal insurance in case you have to evict tenants? Do you have enough income from other sources to keep covering the mortgage should rents fall by 10-15% or even more.
If you can’t say yes to all or most of those questions then you must be aware that you will be putting yourself at risk of losing everything if you invest in a buy to let property.
The third rule of buy to let property investing: have patience
Making money from buy to let properties is not a quick game. You need the patience to invest for the long term. You also need patience to wait for the right moment to invest. Many investors who bought at the top of the market in 2007 rushed into buying thinking they would miss their chance. The only chance many of them missed in the end was the chance to make some money. Markets always go in cycles. Don’t be rushed into buying when properties are expensive. If you have bought cheaply, don’t be stampeded into selling too soon. What you want to find are good properties at attractive valuations that will deliver a reasonable rental yield for many years that more than covers your mortgage and other costs. If you can find a property such as that it will make you money for a lifetime.
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