Planning for the long term, Buy to Let

Right, this one is a significant risk but can also bring significant returns. Currently it is only available to those who have capital. The property market has always been the place where you can make big money and of course big loses. The buy to let market was until the credit crunch a growth area, but is not the easy entry it was before.

What you will need: Money for a deposit, just like when you buy your first home, this may need to be significant, if you are a home owner you can use the equity in your home to raise the deposit.

Market 1: The classic buy to let markets of students. Having a daughter at University I can confirm the cost of renting a student flat, of a high quality, equates to just shy of £350 a month. She is one of four people in her flat so £1400 income.

First find a property: Lets assume you are buying in an area that equates to the average house price, for a semi detached 3 bedroom house this is around £200,000.

Next find your mortgage: Lets assume a deposit of £60,000 (bear in mind you will also need to cover the costs of the purchase, which can be another £20000.) You would need to find £140,000 mortgage. Currently mortgage rates are low, for this exercise we will assume a fixed rate of 4.99%. Here's the maths.

Your mortgage (interest only) will cost you: £8000 a year.
In addition the cost of the deposit (assuming the same rate): £3000 a year.
Assuming a 3 bedroom property (you will actually let 4 rooms).
You may earn £75 per room.
This equates to £1200 a month, times 10 months is £12,000. A profit of £1000.
If you can let for a whole year (depends upon the area) you can add another £2400 profit.

In addition there may be capital growth over time. Remember though you will have to pay tax on any profit or capital gains tax, but you can offset costs against this.

Market 2: The holiday home market. My good friend Lee is a classic example of someone who knows a good thing when he sees one. He bought his property Shoebox Cottage on a thriving holiday park in Devon. Partly it was for an ideal place to take his family for holiday, but also he saw a way of earning some extra cash, renting it out. The cost of a holiday home varies so widely it is difficult to do a comparison, but remember that for holiday lets prices vary through the year and the season is shorter than the whole year, usually 8 months, so you will not be able to make a year round income.