Buy-to-let Guide
What is buy-to-let?
Buy-to-let is where a property is bought specifically to be rented out to tenants, rather than lived in by the purchaser. It is a good way of either generating an income by the rent charged or making a capital gain when the property is sold or, in many cases, both.
What makes a good buy-to-let property?
Finding the right property in the right location is important when searching for a buy-to-let property.
Ultimately, you will be look for capital growth (medium to long-term increase in the value of the property) or solid rental returns (income generated from the property expressed as a percentage of the property value). You’ll need to work out which of these has the bigger advantage to you but, either way, the property yield will need to be considered if the investment is going to be financially viable.
The property ‘yield’ is the annual return your investment is expected to make. The yield is calculated as a percentage figure by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property (purchase price and costs). Take that figure and multiply it by 100 to get
A buy to let property that can be rented out at £500 per
month will give a yearly rental income of £6,000. If the property was bought for £100,000 and needed a further £5,000 spent on refurbishments, the yield would be 5.7%.
A good rental yield is generally believed to be 6-8%. Anything under that and you might not have cash-flow in the property to cover running costs, mortgage payments and any unforeseen issues.
Location
Deprived areas that are being developed may contribute to a property’s future value. If you are just starting out in buy-to-let, buying a property close to home could be a good idea. In addition to being familiar with the area, you can also be close by if anything goes wrong. Certain areas generally provide better yields i.e. bustling cities home to big universities.
Type of tenant
Think about the type of tenant you want and that your property will attract whether a city worker (good transport links to the city), students (cheap property close to the university and nightlife), a family (proximity of good schools, plenty of storage space and a garden).
Condition
Whilst improving a property’s condition might increase its value, any time spent refurbishing the property will be a time that you are not receiving rental payments but will still be obliged to pay your monthly mortgage repayments. Furthermore,
Costs to consider
Mortgage
If you can’t buy your investment property outright, you’ll need to apply for a specific buy-to-let mortgage. Buy-to-let mortgages generally cost more, both to arrange and on a monthly basis than residential mortgages. Instead of looking at your salary, the lender will view the potential rental income of the property as your primary income source. Most lenders will then also take your personal income into account. Anticipated rental income should meet at least 125% of the monthly interest payments on the loan. Most buy-to-let lenders expect a downpayment of at least 25% or even 30% with the very cheapest deals usually requiring 40% or more. Also consider that it could be less expensive to remortgage your own property and purchase the investment property in cash, rather than take a buy-to-let mortgage.
Maintenance
The property will require maintenance, which will incur additional costs.
Tenancy void periods
There may be a short period between tenancies where you will not earn a rental income but still need to finance mortgage repayments from your own funds. This can be counteracted, however, with short-term/holiday lettings.
Tax on rental income
The rent you receive from your property will be taxed at your relevant tax band. You can deduct some costs against the amount of tax you pay which include letting agent fees, buildings and contents insurance, council tax and utility bills (if you pay them on behalf of the tenant) and essential maintenance such as a roof repair or new boiler. Relief on mortgage interest is capped for all landlords at the basic rate of 20%.
Capital Gains Tax
Buy-to-let property is not exempt from Capital Gains Tax (CGT). This tax is paid when you come to sell the property on any increase it’s undergone in value; in other words, on your profit. It’s paid at 18% or 28% depending on your tax bracket. You do have allowances though so please speak with our team or your tax advisor should you need any more information.
Stamp Duty
Landlords are required to pay a 3% loading onto every Stamp Duty band for when buying ‘additional properties’ which includes buy-to-let homes (applying to all investment property costing over £40,000).
Agent’s fees
Depending on your budget and planned level of involvement with the property, you may want to use a letting agent. Letting agents’ services include anything from sourcing and carrying out credit checks on a potential tenant, drawing up a contract and compiling an inventory, to arranging for a broken boiler to be fixed and chasing up late rent. There are also mandatory health and safety gas and fire inspections and precautions to be taken, which an agent can handle for you. At Roding Estates, we charge 12% of the rental income a month to manage the property on your behalf.
Responsibilities as a landlord
Landlords must ensure that:
- tenant’s deposits are kept safe (it is a legal requirement to operate a deposit protection scheme)
- a tenancy contract should also be in place between the landlord and tenant (usually an assured shorthold tenancy (AST) which give tenants a legal right to live in the property for a fixed duration or on a rolling term, such as 6 or 12 months)
- Ensuring their tenants have the right to rent in the UK
- Dealing with repairs to the property’s structure and exterior
- Maintaining heating and water systems
- Ensure the building is insured (usually required to secure a mortgage). Also consider contents and landlord liability insurance.
- Making sure furniture meets fire safety regulations
- Ensuring that the gas and electrics are safe
Should you choose Roding Estates as your agent, we will help you every step of the way – from arranging a free, no obligation consultation with our in-house mortgage broker to offering property management service to take care of every little thing before and after your property is let.
