Mortgages Property

Rental Properties: Complete Guide for Buy to Let Landlords in the UK

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Buy to Let Landlords: Read our Complete Guide

Buy to let mortgages are an attractive option for many investors, particularly due to persistent low interest rates. While returns on traditional savings strategies are commensurately low, the reassurance and certainty provided by property is still enticing many investors into the market.

What many first-time investors don’t know is that the golden age of 100% tax credits are gone, replaced by higher stamp duty fees and changes that see reduced overall profits for property owners. Although the rising fees and charges are making a dent in profits, buy to let remains a viable choice.

This complete guide for buy to let landlords outlines the research that should be conducted before committing to a purchase. Time spent understanding the processes and costs involved can be the difference between a successful venture and a real estate nightmare.

Compare the buy to let market against other investment vehicles

The buy to let market is not the right choice for everyone. There are many uncertainties and financial influences can radically change the outcome of a buy to let investment. When first-time investors are looking to enter the market, they may find that high yield savings accounts, investment accounts and lSAs are attractive options. These types of accounts also help investors to avoid capital growth and income tax and can be liquidated relatively quickly. Buy to let is a far more long-term investment strategy and it is subject to more tax complications, but the potential to realise impressive returns is undeniable in the right circumstances. While liquidity is difficult to realise quickly, returns can be maximised by choosing simple cosmetic renovations that can easily improve both the sale price and rental yield.

Reach out to your networks and speak to people who currently use buy to let as an investment strategy. Real life experience can help to clarify the potential benefits and pitfalls, and how the process can work.

Remortgage Guide

Read: Remortgage Guide for Homeowners in the UK

Investigate various locations for investment opportunities

It’s common for new investors to purchase a buy to let property in the area they live in. Familiarity with the location and the market can reduce uncertainty, but it may not always be the best option financially. Many investors choose to dilute their exposure to localised market price falls by investing in diverse locations. If property values fall in one area, your overall position may be offset or protected by stability in another.

Selecting a location to invest in property should be done with due diligence. A buy to let property should be well situated according to the needs of its likely renters. There may be increased demand for basic, multi-room homes in areas near to universities or colleges, for example. Family homes may be more attractive if they are situated within sought-after school zones. The typical demographics of the area along with current rental data should give you an indication of the most sought-after property types.

Essentially, aim to purchase a property that is comfortably within your budget, and consider the desirability of the type of home in the area that you’re looking in. Properties near to your location may be easier to manage or check on but may expose you to concentrated market risk.

Understand the true up-front costs of securing a buy to let mortgage

While buy to let can be profitable it is wise to understand your current financial position to see if property investing is the right move for you. There are significant outlays associated with securing a buy to let mortgage, including arrangement fees. Lenders will often require a minimum 25% deposit and want to see evidence that rental income will meet at least 125%-150% of the mortgage repayments.

In addition to these upfront costs associated with establishing a buy to let mortgage, allowances must be made for maintenance costs and changes in interest rates on the loan. Your budget must also be able to accommodate loan repayments if the property is empty for a period of time.

Research various lenders or engage a broker to find the best deal

Many first-time investors approach their current bank or lender to provide them with a buy to let mortgage. It may be convenient to seek out a loan with a known vendor, but it can end up being very costly. Do some research about loan products different banks are offering and about the value of the property you’re considering. Don’t hesitate to shop around for a good deal on interest rates and fees. If doing the research yourself doesn’t fit into your expertise or time limits, seek out a fee-free mortgage broker. They will be able to find a suitable product for you and may even help you with the application process.

Make your property attractive to your desired tenants

When you considered the location of your future investment property, you factored in the needs of likely tenants regarding the type of house to offer. Taking this a step further, you should consider the interior style of the property as further encouragement for your target tenants to sign a contract with you. Student accommodations should be furnished in a basic fashion, while a family home may have little furnishings in order to make way for their own goods. A buy to let property that is intended for a professional commuter couple may be well appointed and low maintenance. While you will be motivated to maintain the condition of your property, consider allowing tenants some flexibility regarding decorating or swapping or removing furniture. The flexibility may encourage them to stay on for longer periods, which helps provide confidence to both yourself and your lender about mortgage repayments.

Compare the right figures to gain a clear comparison of properties

When you are comparing properties to purchase examine their list price but also the projected rental yield. This way, you can compare the properties fairly. Yield is calculated as a percentage of the purchase price and we can give you an illustration on how this is figured out. For example, if a property earns £15, 400 per year in rent and it cost £220 000 to buy, the yield is 7%. It’s a good idea to invest based on a good rental yield income rather than projected capital growth from increases in house prices in the short- or long-term future.

Many buy to let mortgages are set up so that the interest is paid but the principal remains untouched. That is, there is no effort made to pay off the property. Mortgages are often established this way because the interest-only payments can be offset against your tax bill, theoretically lowering your overall tax burden. Be aware that this situation is changing and by 2020, you will only be entitled to a maximum 20% tax credit on your mortgage repayments. Speak to your tax agent to determine the most appropriate way to manage your taxation obligations regarding buy to let mortgages.

Costs can quickly add up and must be factored in before committing to a buy to let investment. If your rental payments exceed the mortgage repayments you will be able to save the difference as a buffer fund to draw on when the property needs repairs or other issues arise. If you choose to hire an agent there will be regular fees drawn from your rental income.

In some cases, it may be more beneficial to investigate other investment vehicles rather than buy to let property. You will need to examine the costs very carefully and ensure you will be able to profit from the venture once everything else has been accounted for.

Simple renovations can improve property value

While seeking out potential buy to let properties, consider homes that are tired and run down but otherwise structurally sound. Often homes with dated décor or an aging appearance can be bought cheaply and renovated for a reasonable price. Cosmetic renovations are surface level and often achievable without hiring professionals but can add significant value to both the property itself and for potential renters. Replacing old furnishings and appliances can also influence the rental price.

Seek out the best price on your desired buy to let property

Never take a property list price as non-negotiable. It’s possible to haggle over the price of a property, particularly if you have done some research about the story behind the sale. Find out how long the property has been on the market and why it’s being sold.  Sellers have different motivations and they can influence both the speed of sale and the final purchase price.

For example, families that are looking to move into a larger home often must secure a minimum price on their old property in order to purchase the new one. It may be difficult to negotiate a better price if they are not in a rush to sell. Alternately, investors may be happy to sell a property quickly and at a reasonable price if they are interested in lowering their capital gains position. Each situation is unique. Abide by the principle that it never hurts to ask.

Be aware of the unpredictable risks involved

Investing in a buy to let property is not a guaranteed investment, nor can you rely on stable costs or profits. There are many variables and many of them are negative. Have you considered what would happen to your investment if house prices fell? Can you afford repayments if interest rates rise? If you are on a fixed rate now, are you prepared for a renegotiation when the loan reverts to a variable rate?

There are often unpredictable costs associated with owning a buy to let property. You must have easy access to funds to repair damage such as broken windows or replacing a worn out boiler.

Buy to let is often an attractive investment choice but the tax implications are not well understood by casual investors. Stamp duty surcharges have recently increased and rules around interest fees and income offsets are changing. If you choose to sell your property there are further taxes that may be payable.

Consider your role: hands on landlord or hire an agent

You have a choice about how you want to manage your property. You can either rent it privately or hire an agent to manage the property for you. Each option has positives and negatives. If you rent the house out privately you will save money on agent fees, but you will be responsible for advertising and vetting applicants, along with organising any repairs, maintenance or other issues. Private rental will also require you to manage the legal paperwork which may be daunting if you’re unfamiliar with your obligations and requirements. If you choose to hire an agent they will charge fees, but everything will be taken care of for you, including the search for and vetting of tenants. They will also use their network of trusted maintenance teams to address any repair work that needs doing at the property.

In either case, looking after a reliable tenant can be a good long-term financial strategy. When properties sit empty (the ‘void period’) the mortgage must still be paid. Encourage tenants to stay for longer leases but if they are looking to move on they may be able to recommend a new tenant to you.

Finding the right tenant is a key to success

As mentioned above, if you decide to rent privately, choosing the right tenant will be your responsibility. If you choose to engage an agent, they can undertake the vetting process on your behalf. Finding the right tenant for your property can be influenced by a number of different factors. The price, style and location of the property will have different types of tenants inclined to inspect. You may like to furnish the property or refresh the furnishings to attract a different type of tenant. Maintaining a good relationship with tenants can be achieved by promptly addressing maintenance issues and reducing contact with them unless warranted via inspection or other important matters. If there are any changes to the leasing agreement expected such as at the time of renewal, give the tenants the legal maximum length of time to make informed decisions.

Kane Pepi

Kane holds a Bachelor's Degree in Accounting and Finance, a Master's Degree in Financial Investigation and he is currently engaged in a Doctorate - researching financial crime in the virtual economy. With a keen passion for research, he currently writes for a variety of publications within the Financial and Cryptocurrency industries.