How to... choose an investment property

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Four top tips for choosing an investment property

1. LOCATION, LOCATION, LOCATION

This established property adage is as true today as it was half a century ago. Once you have decided on a budget, do keep focused on the fact that the poorest property in the best neighbourhood will always make a better investment than the best property in the poorest neighbourhood.

2. CASH IS KING

If you have the available funds then it is normally better to buy with cash than through a mortgage. There are two reasons for this. Firstly, interest rates are at a politically-driven record low; they can only go up and the cost of servicing a buy-to-let loan is likely to rise (perhaps significantly) sooner or later. Secondly, a seller is more likely to negotiate on price with a cash buyer on the basis that a sale that does not involve a mortgage is likely to go through quickly and seamlessly.

3. AVOID NEGATIVE EQUITY

Those who do purchase through a mortgage should be prepared to be required to pay a deposit of at least 20 per cent; in real terms this means that the down payment on a £175,000 flat or house will be £35,000 – plus there may also be “arrangement” and other fees to pay. Investors should avoid exposing themselves to a high LTV (loan-to-value) rate. Many analysts fear that house prices will fall further before starting to rise again so a low LTV rate (which is secured through a substantial deposit) is a guard against falling into negative equity at some future date.

4. ANCILLARY COSTS.

Do budget for all the additional expenses for which a landlord is now responsible. This will include annual premiums for buildings insurance and home contents insurance for furniture, carpets and similar items and an allowance should be made for maintenance and repairs. There are now several statutory payments which are levied on landlords, including for registering as a landlord and for obtaining energy-efficiency certificates. The landlord also has to pay for annual checks to gas installations, electrical wiring and electrical appliances. Anyone seeking to let out to students or other groups of flat-sharers (i.e. to more than two unrelated people) will have to pay for an HMO (houses in multiple occupancy) licence, which is renewable every year. On a more positive note, landlords can claim expenses for “wear and tear” to furniture and fittings from HMRC, equivalent to 10 per cent of annual rental income.

• David Alexander is managing director of the Edinburgh- and Glasgow-based letting and estate agency, DJ Alexander.

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