3 Principles of Buy-to-Let Property

Buy to let property is a concept that originated in the United Kingdom (U.K.). Understanding the principles behind buy to let is important if you intend to purchase property overseas and plan to use this process to make money. The three basic principles behind buy to let include borrowing money to property owners to make available rents for tenants of the property, using the rents to cover the mortgage and lowering the required capital needed to purchase a building. The concept of buy to let has been around the U.K. since the 1990s and has grown in popularity as housing prices have spiked. They do cause some concern among lenders since the borrower does not own the property and sometimes a higher down payment may be required to secure the property under this type of arrangement.

How the Buy-to-Let Works

A borrower locates a lender willing to make a loan for the property. The amount that the borrower needs to come up with may be a percentage of the rental income derived from the property or a percentage of the borrower’s salary. The lender seeks assurance that the borrower will be able to maintain their payment schedule with the rents or other income needed to pay back the loan. Under this arrangement upfront costs are lower since the lender ultimately maintains control of the property.

As the loan is paid off by the rents as collected the borrower gains a greater share of the property’s equity. At some point the loan is paid off and the borrower owns the property outright as landlord.

Using Rents to Service the Mortgage

The use of rents is a large part of the formula that the lender uses to determine the viability and feasibility of the making the loan. Clearly a loan will not be made under a buy to let arrangement for a rental property that is empty or does not have a tenant base sufficient to service the mortgage. The amount that the lender may demand in the form of loan repayment can run as high as 125 or 150 percent of the rental income derived from the property.

The Purpose for Buy-to-Let

The purpose behind buy to let is to provide a way for first time landlords or so-called amateurs get involved in the rental real estate market. This provides an opportunity to increase incomes and create economies for additional loan products by cultivating a borrower’s revenue opportunities. The requirements for the loan can be more favorable for the borrower but it should be noted that such transactions are not without risks.

There are criticism and concerns regarding the ability of certain borrowers to maintain a buy to let arrangement but the successes of this type of lending program appears to outpace these concerns.

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