There are many ways to make money with property. Some of these strategies require a lot of time as well as a large amount of capital. Converting a property to increase its value could be one of these ways. 

But many investors are looking for a simple investment that nevertheless yields a good return. Buy-to-let properties can make this possible. 

What is buy-to-let? 

Buy-to-let describes an investment strategy in which the investor buys a property and then rents it directly to another person. In doing so, major work on the property is avoided and only defects are repaired so that the complexity of the project is kept to a minimum. 

How does buy-to-let work? 

The goal of a buy-to-let property is, of course, to generate a return on the purchase of the property. The calculation for a property that is only intended to be rented out is quite easy. 

As long as you have higher rental income than interest payments and maintenance costs, you will make a profit. This does not seem difficult at first glance, but in fact there are some hurdles and pitfalls that could make a buy-to-let investment fail. 

What are the possible hurdles of a buy-to-let investment? 

There are two main factors that influence the success of a buy-to-let investment. One is the risk of vacancy and the other is interest rate increases. 

The source of return on a rental property is, of course, the rental income generated by the property. As long as these are higher than the maintenance costs and the interest to be paid, you will generate a positive return. 

But should the rental income cease, you are still left with the costs. This means that if the property is vacant, you have to pay the full costs and have no income.  

For this reason, they should only use properties for a buy-to-let strategy that are located in sought-after locations. These properties may be more expensive, but the risk of vacancy is significantly lower in these regions and thus reduces the risk. Another way to minimise the risk is to take out insurance that compensates for rental losses. 

Furthermore, a possible increase in interest rates poses problems for buy-to-let investors. A property is a long-term investment and is therefore also affected by long-term fluctuating interest rates. If you have not agreed to a very long fixed interest rate, you may face significantly higher interest rates in the future.  

This can cause you to make losses on your rented property after refinancing. This can happen if interest rates rise so high that rental income can no longer cover them. For this reason, it is particularly important that you never take on too much debt.  

Success factors for a buy-to-let strategy 

The most important success factor for a buy-to-let strategy is definitely research before buying the property. As with any other investment, you should know exactly what you are getting into before you decide on a property.  

All the risks already mentioned are results of insufficient research. For example, vacancy is very unlikely if you invest in appropriately busy and growing regions. Similarly, you should work out the expected cash flow to know exactly how much will be left over for you in the end. Once you know the exact figures, you can make sure that you include an appropriate cushion in your surplus to negate any interest rate increases. 

As long as you do decent research and come up with realistic figures, a buy-to-let property is just the thing for you to invest capital in for the long term. 

What is a buy-to-let mortgage?  

Last but not least, you must remember that only a buy-to-let mortgage can be used for a property to rent. In the vast majority of cases, with a buy-to-let mortgage you only pay interest and no repayment. This means that your monthly costs are lower, but your credit with the bank is not reduced. 

For this reason, many buy-to-let investors choose to sell their property rather than refinance and pay off the loan. If property prices fall during the time you have owned the property, this could also put you at risk of having to raise additional capital to pay off your loan.  

You should also note that such a mortgage requires a higher equity ratio, which is usually around 25%. The bank sees a buy-to-let property as a higher risk, which is why it requires more equity from the investor and thus protects itself from a potential risk. Experience shows, however, that the property market would have to be in a very exceptional situation in order to really achieve a 25% loss in value. In a normal market correction, one speaks on average of approx. 15 – 20%.