If you find yourself with a lump sum of money, then investing in a buy to let rental property is something that you may be considering.
However, even if you have successfully bought your own property and negotiated a mortgage, there are plenty of other things you need to consider before entering the rental market.
Whatever else you do, make sure that you consult suitably qualitfied professionals at all stages of your journey, to advise you on your individual circumstances.
I am certainly not an expert in this field, but here are some tips I have picked up along the way, which may give you an idea as to whether this form is investment is worth considering.
Why invest in buy to let?
As an income investment for those with enough money to put down a substantial a big deposit, buy to let looks attractive, especially compared to low savings rates and stock market swings.
Mortgage rates at record lows are helping buy to let investors make deals stack up. But beware low rates. Just recently, they have started rising again, albeit slowly, and you need to know your investment can stand that test.
On the plus side, greater demand from tenants, rents that should rise with inflation and the long horizon for interest rate rises, mean many investors are still tempted by buy-to-let.
If you are tempted by this, make sure you do your homework
Research the market on buy-to-let
If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits.
Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere.
Remember that the return from an investment in funds, shares or an investment trust through an Isa will see you escape tax on income and get capital growth tax free. You will also have the ability to sell up quickly if you want.
Investing in buy-to-let involves committing tens of thousands of pounds to a property and typically taking out a mortgage. When house prices rise, this means it is possible to make big leveraged gains above your mortgage debt, but if they fall your deposit gets hit and the mortgage stays the same.
Property investing has paid off handsomely for many people, both in terms of income and capital gains but it is essential that you go into it with your eyes wide open, acknowledging the potential advantages and disadvantages. Today’s market is not the same as the market
If you know someone who has invested in buy-to-let or let a property before, ask them about their experiences – warts and all.
Choose a promising area to invest in property
Promising does not mean the most expensive or cheapest. Promising means a place where people would like to live, and this can be for a variety of reasons. It doesn’t even need to be where you would like to live – if you are targeting a particular type of tenant consider their needs and desires.
Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
You need to match the kind of property you can afford and want to buy with locations that people who would want to live in those homes would choose.
These questions might sound overly simplistic, but they are probably the most important aspect of a successful buy-to-let investment
In most cases people tend to invest in property close to where they live. On the plus side, they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Yet it is also worth bearing in mind that if you are a homeowner then you are already exposed to property where you live – and looking for a different type of home in a different area might be a good move.
Do the maths on buy-to-let
Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.
Buy-to-let lenders typically want rent to cover 125 per cent of the mortgage repayments – often now 150 per cent – and most now demand 25 per cent deposits, or even larger, for rates considerably above residential mortgage deals.
One of the reasons you may be interested in this investment idea is because
However, before you do any of this, you need to know that you require a different type of mortgage. When you buy a home with the sole purpose of renting it – and it’s not a place you live permanently – then you have to get a buy-to-let mortgage. This is typically a more expensive mortgage with higher deposits and interest rates, but you will quickly recover this – and more – when the rent starts coming in.
Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:
- The fees and interest rates on buy-to-let mortgages are usually higher.
- The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%).
- Most BTL mortgages are interest-only. This means you don’t pay anything towards the capital each month, but at the end of the mortgage term, you repay the capital in full.
- Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy to let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment will work out?
Don’t forget to factor in maintenance costs.
What will happen if the property sits empty for a month or two?
These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise
Buy-to-let and tax
Stamp Duty Land Tax (SDLT) for buy to let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000. Find out more in Everything you need to know about Stamp Duty.
If you sell your buy-to-let property for profit, you will pay Capital Gains Tax if your gain exceeds the annual Capital Gains Tax
Also, rental income exceeding your mortgage interest payments and certain allowable expenses are liable to Income Tax.
Landlords have to follow specific rules
If you have ever rented a property yourself, you will know that tenants have certain rights, and therefore you must understand that as a landlord you have obligations to your tenants.
Being a landlord isn’t as hands-off as you may think. A lot of people get a buy-to-let property and then just assume they can make all the rules and do whatever they like. In reality, there are certain laws and regulations that every landlord must abide by.
One of the most important of these is that it’s your duty to provide a safe place for someone to live. So, if the house has safety hazards, it’s up to you to fix them, not your tenants.
It’s a pretty good idea to talk to some landlord solicitors before embarking on buy to let for the first time. They can make you aware of laws that you have to abide by and things that you might be
Think about your target tenant
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant.
Who are they and what do they want?
If they are students, it needs to be easy to clean and comfortable but not luxurious.
If they are young professionals it should be modern and stylish but not overbearing.
If it is a family they will have plenty of their own belongings and need a blank canvas.
Remember that allowing tenants to make their mark on a property, such as by decorating, or adding pictures, or you taking out unwanted furniture makes it feel more like home.
These tenants will stay for longer, which is great news for a landlord.
It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as
Consider how hands-on a landlord you want to be
Buying a property is only the first step. Will you rent it out yourself or get an agent to do so?
Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.
You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs.
If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.
Select a shortlist of agents big and small and ask them what they can offer you.
If you are considering going it alone look at where you will advertise your property and where you will get documents, such as tenancy agreements from.
It really pays to look after your tenants. Do this and they will look after you.
The biggest drag on many buy-to-let landlord’s investment returns is the void period. A time when you don’t have anyone in the property. Good tenants who want to stay help avoid this – and if they move on they may even recommend your property to someone they know.
Keep up with maintenance, make sure your property is a nice place to live and try and build a good personal relationship with your tenants.
Plan for times when there’s no rent coming in
Don’t assume your property will always have tenants.
There will almost certainly be ‘voids’ when the property is unoccupied or rent isn’t paid and you’ll need to have a financial ‘cushion’ to meet your mortgage payments.
When you do have rent coming in, use some of it to top up your savings account.
You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.
It is certainly possible to generate a substantial return from the right buy to let investment. However, there are many factors that need to be taken into consideration when looking at this type of investment, and there is a real risk of losing money, so make sure that you have considered all the possible pitfalls before you take the plunge.
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