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What kind of a property investor do you want to be?

According to Jussi Pajala, most people buy their own home first and move on to buy-to-let properties after that. Sometimes, people keep their first home and rent it out when they move to their next home. Property investing often requires a long-term approach.

Suvi Kinnunen’s investment strategy has varied over the years, and she doesn’t believe in having just one strategy. 

Originally, she was interested in flipping, which means buying a property that needs to be renovated, renovating it and selling it for a profit. “When I was renovating my first property, I realised that I wasn’t excited about the renovation and didn’t even want to sell the apartment. So eventually I furnished it and rented it out on a short-term basis,” says Suvi Kinnunen.

She explains that she has gradually bought more properties and ended up using multiple strategies. According to Suvi, it’s essential to understand the different strategies and choose one that allows you to build on your strengths and benefit from the market situation.

Currently, she owns six properties: five of them are located in Helsinki and one in Kuopio.

What is the idea with buying to let?

When you buy a property to let, you aim at being able to cover its costs with the rent you charge. These costs include the charges for common expenses and financial costs, water charges and other costs plus loan repayments, if any.

The return you earn consists of the rental income deducted with the costs and of the potential rise in the property value.

Mimmit sijoittaa asuntoihin – a podcast for property investors

Nordea’s experts are joining the latest season of the ‘Mimmit sijoittaa asuntoihin’ podcast. This time around, they give advice on how to start investing in properties. The podcast is hosted by Suvi Kinnunen, who is a property investor and an entrepreneur.

The topics in this season include:

  • how to start investing in properties
  • different property investment strategies
  • risks and opportunities.

Tips for budding buy-to-let investors

When you start considering becoming a property investor, Jussi Pajala lists a systematic approach and thorough investigations as the most important things. Suvi Kinnunen also got started by listening to and reading as much about the topic as possible.

She contacted her bank a couple of months after she had bought her first property to map out her financing options. “I qualified for a buy-to-let home loan because I had had a side business in addition to my regular job and had a good income,” Suvi Kinnunen remembers.

  1. Work out the potential rental income and costs, including any unexpected costs and planned renovation works in the building.
  2. Assess the impact of property investment on your personal finances – make sure you can afford the self-financing share and have a savings buffer in place.
  3. Fully understand the risks related to property investment, including how you will be able to cope financially if the rent is not paid or the property sits empty.
  4. Before committing to buying to let, you need to have a realistic view of the property prices and the rental market. Seek out data and look into the properties and amenities available in the area as well as how prices have evolved.
  5. When you’re thinking about taking out an investment loan, contact us and we’ll plan your loan together.

Property investors commonly use leverage – know the risks and opportunities involved

In property investments, leverage means that you finance the purchase price or a part of it with a loan. “Leverage enables property investments with a relatively small capital and increases the return, as long as the return exceeds the loan costs,” says Jussi Pajala.

He points out, however, that leverage involves risks. For example, the risk of losing your capital increases if your rental income or the property value decreases. In addition, the profitability may decrease if the apartment sits empty, the rent is not paid or interest rates rise.

Suvi Kinnunen says that it’s important to review your finances before you buy your first investment property. In her case, the first property didn’t yield a return for the first three months, as it was under renovation.

“Leverage works the best when your return exceeds your loan costs and you manage your risks carefully,” Jussi Pajala says.

Did you know that you can deduct the interest on a buy-to-let home loan in taxation?

In deviation from a loan you take out to buy a home, you can deduct the interest on a loan you take out for buying an apartment to let from your capital income. To do this, report the loan as a loan for the production of income in your tax return. These two loan types also differ in terms of collateral, for instance.

Read more about our buy-to-let home loan

Learn to manage risks involved in buying to let

Buying an apartment to let involves many risks, but you can prepare for them in different ways. According to Jussi Pajala, some typical buy-to-let risks include market risk, interest rate risk and tenant risk.

“You can hedge against market risk by investing in areas with a stable demand and a positive outlook. You should also invest with a long horizon, as this will level out short-term price fluctuations,” Jussi Pajala says.

To reduce the interest rate risk, you can fix the interest rate of a certain part of the loan or buy an interest rate hedge. It’s also important to prepare for rising interest rates when you calculate the profitability of an apartment and keep a financial buffer for the loan servicing costs.

“When you buy to let, you have to keep your costs under control. That’s why a fixed rate or an interest rate hedge suits really well for property investors,” Jussi Pajala continues.

By tenant risk Jussi Pajala refers to the tenant not paying the rent or damaging the apartment. Void periods may also erode your return. “You can mitigate these risks by selecting your tenants carefully, by using a security deposit and a clear tenancy agreement and by having a financial buffer,” Jussi Pajala concludes.

Suvi Kinnunen has also prepared for risks by buying her properties in good locations, by owning some properties through her limited liability company and keeping some under her personal ownership, by taking out insurance and by having a sufficient cash buffer. “I aim to having a buffer that covers about 2% of each apartment’s value.”

Read more about interest rate hedging options

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