The five things you must check before buying an investment property - The Telegraph

With all the doom and gloom around the market and new rules being imposed on landlords it may seem crazy to talk of investing in property.

But this is an asset class that won’t be going away anytime soon, so let’s get down to the bricks and brass of the matter.

Here's what you need to check before buying a flat or house with the aiming of generating a healthy profit from rent and capital gains.

Get hold of the EPC certificate

Unless you’ve been living under a rock, you’ll know the Government has a target to get the UK to net zero by 2050.

Residential properties account for over a quarter of greenhouse gases and pending legislation will see landlords bear the brunt of expected improvements. By 2028 all rental properties will need to achieve a “C” grade.

For Victorian properties, this can be very expensive – especially if you need internal or external wall insulation to make the grade.

Analysing the EPC will show you what improvements will be required to increase the rating. In some properties it may be as simple as changing the lights to LEDs or increasing the loft insulation to 270mm.

For others, you may need to obtain quotes for new boilers and double glazing. It’s important to be mindful of how much the cost of materials and labour have shot up in the last couple of years, so always get at least two current quotes.

Look at house price growth in the area over the past 10 years

In the stock market there’s a popular saying: past performance is not an indicator of future performance.

When it comes to property, especially the last decade where we’ve had ultra-low interest rates, I would also advise caution when it comes to using these figures to calculate future capital growth.

Studying historic house price growth in an area, however, can give you insight into how the market moves and indicates that it is going in the right direction.

Even in this day and age you can find areas where prices have stagnated, or have even started a downward trajectory, so it’s good to be informed. Be aware of policy changes, council plans and potential developments which may affect an area.

Work out the potential yield

You should always aim to choose a property which has plenty of demand. Places close to transport links, offices, shops, bars and facilities will usually fare very well and continue to be desired by tenants.

In the current climate rents are way higher than usual, so to be conservative on a new purchase, it’s worth building in a 10pc slack to allow for any downwards market movement.

Rightmove and Zoopla are great starting points for checking the current rents in a market, but to be sure, it’s always best to get a letting agent to attend and have a proper rental valuation.

This can be arranged ahead of signing on the dotted line, and will also be a figure that any lender would want to be certain of achieving before they approve a loan.

Now read: How to become a landlord: What you need to know before taking on tenants

Does the mortgage maths stack up?

If you’re buying an investment property with a mortgage, the lender will usually require you to have a minimum 25pc deposit.

They will also use what is known as Interest Coverage Ratios to check the affordability of the buy-to-let mortgage. This is a ratio of the gross rental income to mortgage payments.

For basic-rate tax payers and limited companies the ICR is set at 125pc, for higher-rate taxpayers the rate is set at 145pc. It is imperative a borrower can meet these criteria to be able to secure a deal.

It is also worth remembering, following the introduction of Section 24, landlords (unless they are registered as a company) cannot claim full mortgage interest relief which may have an impact on your tax position.

If you’re currently a basic-rate tax payer, this could potentially nudge you into a higher bracket.

Be sure you can make a profit

Investing in property is a long game. The costs of entering and exiting with all the stamp duty and capital gains tax charges make it a very expensive asset.

Owning a rental property can also be financially draining. Things will always break and so you need to have a satisfactory contingency for when things go wrong… or the tenant doesn’t pay the rent.

Make friends with an Excel spreadsheet and be brutally honest about every cost you think you will incur (there are plenty of books out there to help you on what to include).

Also factor in that you will need to save at least 10-15pc of your monthly rent to cover voids and everyday maintenance, plus always have access to another rainy day pot for upgrades and larger bills – such as a new boiler or roof.

And don’t forget to save for your annual tax bill.

Lastly, making money from property is not an overnight road to riches. Be sure you have deep enough pockets to be able to weather any potential storms that come your way.

Now read: Easy ways to pay less tax that every landlord should know

Email your property investment questions to: secretlandlord@telegraph.co.uk

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