BUY TO LET (Frequently Asked Questions)
This is not intended as a detailed guide, and if you are thinking of purchasing a Buy to Let property you should seriously consider taking expert advice about - legal, tax, financial and property management matters. This page is for people who are thinking of buying a property to rent with a "Buy to Let" mortgage and who may have little or no previous experience of investing in the private rented sector. The page describes "Buy to Let", and some of the things you need to bear in mind when -
What is Buy to Let? "Buy-to-Let" is a form of residential investment where you buy a property, usually with the aid of a mortgage, and rent it out. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties and there has been a modest recovery in the private rented sector since then. The increased availability of loans at attractive rates of interest for Buy to Let purchasers, has also increased the appeal of owning rental property.
When you buy a property to let out, you are becoming a landlord. Owning investment property is not like owning your own home. Instead you are effectively running a small business.
Before you choose a property and arrange the finance to purchase it, there are a number of factors you should look into, which are described below.
Choosing a Property - Researching your market: You should carefully research the market where you want to buy your property. You can either do this yourself or employ a specialist letting agent to help you find the area and property you are looking for. If you research the market yourself, you will need to gather information from estate agents, local papers, local employers and even the local authority, about the demand for and supply of, rented housing.
Finding your tenants: You will also want to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements from the home that they choose to rent? It is important to remember your property should have features that are attractive to would-be tenants, rather than would-be purchasers.
Choosing your location: You should also look at how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school-age children, how close the nearest schools are, will be an important influence on where they choose to rent.
Choosing your property's size and condition: Equally, you should think carefully about buying a property whose size is attractive to households looking for rented accommodation in that location.
As well as the size, type and location of your property, what about its condition? Have you assessed whether the property will require expensive maintenance. Generally speaking, older homes require more attention.
Choosing a property you can afford: Obviously, the size of mortgage you can afford will have a major influence on the size and location of your property. Choosing a mortgage is described in more detail in the section below. And finally, in considering how much to spend on a property you should bear in mind that as well as increasing in value, your property can also fall in value.
MANAGING YOUR PROPERTY
Your responsibilities: When you have chosen a property, you will need to decide who will manage it for you. If you manage it yourself, you will be responsible for -
Your legal responsibilities: You will also need to be aware of your legal responsibilities as a landlord such as -
You should also consider familiarising yourself with landlord and tenant law, to understand your responsibilities as a landlord, and the rights your tenants enjoy. This is an area you may wish to take legal advice about. The Department of the Environment, Transport and the Regions (DETR) have published a useful guide for landlords in England and Wales called "Assured and assured shorthold tenancies" which is free from the Department of the Environment Transport and the Regions and can be obtained on 0870 1226 236.
When your property is empty: You should remember there may be periods when you are unable to find tenants for your property and it will be empty, with no rental income coming in. Obviously you will still be expected to continue repaying your mortgage so you will need to think about how you will meet your mortgage repayments in these circumstances. This could particularly apply if you choose a property in an area where the supply of rental property exceeds demand from tenants.
Maintaining your property: As well as managing your property, you will be responsible for maintaining it. Besides repairs and regular maintenance, properties can benefit from routine improvements, which maintain their attractiveness with would-be tenants. You may find that your property is in need of an overhaul after a tenancy finishes. Naturally, you will have to finance this yourself. What is more, your property is likely to be empty and you will not receive a rental income, while your property is being improved.
Using a managing or letting agent: Given the number of different responsibilities you face as a landlord and the limitations on your own time, you may wish to use a managing agent to look after your property for you. This will cost you approximately 10% - 15% of your monthly rental income.
CHOOSING A BUY TO LET MORTGAGE
Paying for your property: Obviously, when you choose a property, you will need to ask yourself how much you can afford to pay, and how you will pay for it? If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow. Typically lenders allow people to borrow up to 85% of the property's value. The size of the loan is usually linked to the expected rental income. As a guide, your lender will expect your monthly rental income to be 25%-50% greater than your monthly mortgage payments.
Your choice of mortgage: When you choose a mortgage, your choice will be between a repayment mortgage or an interest-only loan. With an interest only mortgage, some lenders may require you have a suitable investment product. If you have a repayment mortgage, some lenders may also advise you to arrange life insurance alongside your loan. You may be able to choose between fixed rate and variable rate mortgages. Fixed rate loans will give you some certainty about your mortgage repayments whilst variable rate loans could move up or down. You should also remember that your mortgage payments could rise if interest rates rise, depending on the type of mortgage you have.
But before choosing your mortgage, you should consider taking advice from your lender or a mortgage intermediary.
WHAT WILL YOUR COSTS BE?
As well as your mortgage payments, you will need to pay for -
consider contents cover, if your property is furnished
periods when you are receiving no rental income because the property is empty or the tenants have fallen behind with their payments
mortgage repayment increases because of interest rate rises, which you may not be able to recover immediately from rent increases
Your tax liability: Before you can calculate what your income from your property will be after taking into account all necessary expenditure, you should recognise that the profits from renting property are taxable. However, you will be able to offset some of the costs you incur as a landlord against tax.
You will have to pay the following taxes -
You can find out more about the tax treatment of income from rented property in the Inland Revenue Leaflet, Taxation of Rents: A guide to Property Income. IR150.
The accompanying checklist is designed to help you when you consider purchasing a buy to let or residential investment property. It is for information only. The responsibility for purchasing a buy to let property rests with you the investor.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
* Buy to Let and Unsecured Loans are unregulated products and as such are not subject to Financial Conduct Authority regulations and no protection is given under the Financial Services Compensation Scheme.
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