Good Times to Expand a Property Portfolio
In simplistic terms, the best time to add to a property investment portfolio is just before house prices start to rocket. The worst time, of course, is just before house prices start to plummet. Unfortunately, without the aid of a crystal ball, it is impossible to predict exactly when either of these events will occur.
Rather perversely, a housing crisis can provide ideal market conditions for those searching for buy-to-let properties. Asking prices will drop and interest rates will often follow suit in a bid to kick-start the mortgage market again. This can save investors a small fortune.
For example, if a property is worth £200,000 in a buoyant market, an investor will typically need a deposit of around 30 per cent or, in this case, £60,000. If the interest rate is at 5.5 per cent, an interest-only, buy to-let mortgage taken over 25 years would cost £641 per month to cover the remaining £140,000.
Sweeter DealHowever, if the asking price drops 20 per cent and interest rates drop one per cent in a depressed market, the deal becomes a lot sweeter. The purchase cost is now £160,000 and so the 30 per cent deposit needed falls to £48,000. In addition, if the interest rate is now 4.5 per cent, an interest-only, buy to-let mortgage taken over 25 years would cost £420 per month to cover the remaining £112,000. Incredibly, that means a saving of over £106,000 when both the purchase price and mortgage repayments are taken into account.
Of course, a housing market in freefall can be a double-edged sword for those who already have investment properties. On the one hand, it can be a good time to add to a portfolio, but on the other hand properties that are already part of the portfolio will be losing value. If prices fall far enough, investors can be left with negative equity.
However, as long as buy-to-lets are viewed as long-term investments, even negative equity is not too disastrous. Investors just need to sit tight during the slump and wait for the housing market to pick up again. History shows that housing prices always bounce back in the UK, so patient investors will come out on top in the long run.
Buoyant MarketWhen the market is booming there is likely to be more properties for an investor to choose from, but he may have to pay over the odds to get one. The golden rule is to ensure the rental income the property brings in is enough to cover the mortgage repayments. That way the property will, in effect, pay for itself.
Of course, there will still be the initial outlay of the deposit plus any funds required to renovate the property and pay fees to surveyors and solicitors. An investor should have sufficient capital in place to cover these costs before adding to a property investment portfolio.
Remember too that when prices are high a larger deposit may be required in order to get mortgage repayments down to a manageable level. For instance, the £200,000 property in the above example may bring in only £600 per month in rent – not enough to cover the interest-only mortgage repayments of £641 per month. To reduce the mortgage repayments to £600 a month, the investor would need to increase the deposit from £60,000 to £69,000.