|
|
|
Buy to Let - Risks As with any investment or business decision, there are risks. Doing nothing also carries risks, in that you lose the benefit you could have got or find your savings devalued over time. Technically the higher the gearing the higher the risk, the reasons for this are:-
However as long as you can pay the mortgage, and therefore have tenants paying you the rents so this can happen, what happens to the price cannot give you real problems, as in the case of other investments over time. The mortgage is paid off and you have whatever equity value left in the property. Even if the property fell to half its value due to developments nearby, buying unwisely etc, then you would still end up with half the original price, which is considerably more than you put in. In the example we had on another page we show £15,000 being used to buy a £100,000 house, so even with this worst case example you have £50,000 back against £15,000 in and this will outperform most other investments. If you had a number of houses this would not of course happen on many unless you were extremely incompetent. If you buy wisely, and at a discount against valuation, or can, immediately having got the property, increase the value, then even if property in the area should drop back you have a property that is worth more than you paid for it. Don't however get too upset about the threat of negative equity, it won't effect you seriously unless you sell and if you are in for the long term you have no plan to sell at any point anyway. If some drop back and some go forward, you can still raise extra on the ones that have gone up, each is a separate venture. You should perhaps watch for one other trap, we have seen some people entering. This is with the low start mortgages. The concept of these is to pay less now and more later, and that as property prices and rents rise in the real term the increase in the mortgage does not hit you. If used with low mortgage percentages to maximize income, this is fine, but if used as a part of the formula, in order to allow expensive property to be purchased, and rented out, at in effect a discounted rate, then you have entered a risk area, in that if rents did not rise, you would not be able to pay the increased mortgage later. So what can you do to reduce risks?
If you understand what you are doing and are on top of things, well lets just say your investments will be as safe as houses. There is no investment that you could make that would be safer. There are currently many many people making money from property, not only letting but also doing up houses and moving on to another. Even the least competent of these with no understanding of budgets, what adds to the value, and allowing time scales to float, have still been making money. Clearly in the future some will lose out, particularly those who bought unwisely, but even in this situation it just highlights another opportunity for someone else. |
|