Buy to Let - all you need know
Buying a property to let may seem a tantalising prospect, step one on the property tycoon ladder, but these days it's not quite so straightforward. Avoid the pitfalls waiting to catch out the unsuspecting magnate-to-be with our five top tips.
1. Do the maths
Unless you are in the enviable position of buying a property outright, chances are you're going to need a buy to let mortgage - and given the strict regulations on this sector since the credit crunch, this may not be as simple as it sounds.
Buy to let mortgages are predominantly based on rental yield. Your (independently verified) projected rental income needs to cover anything upwards of 130% of your minimum monthly mortgage repayment, returning annually around 7-8% of the mortgage value.
You will also need a hefty deposit: currently rates start from around 20% of the total price and climb from there. Don't forget stamp duty, legal fees, survey costs and all the other usual house-buying costs, plus a few extras such as insurance and agency rental fees, and the important issue of covering costs if your property is empty for any length of time.
If you are buying a flat, be aware of ground rent, insurance and maintenance costs on top of purchase price as they cannot necessarily be passed on to tenants.
Finally, don't assume interest rates will stay low forever - remember, if rates suddenly soar, you still need to keep up your payments, so your rental income needs to be enough to cover changing financial circumstances. Speak to an independent financial advisor, use online yield and mortgage calculators and above all, be very honest with yourself about what you can afford.
2. Be a legal eagle
As the owner of a property in which others will be living, you have a responsibility - and legal liability - to ensure healthy and safety standards are up to scratch and meet all current regulations. Make sure you get the right insurance and do your homework on liability in case of personal injury or property damage.
If you are planning to rent your property to multiple occupants, such as students, there are particularly strict regulations in place, as well as wildly differing local authority licence fees, so make sure you know exactly what is involved, and what it will cost you.
Tax may not need to be taxing, but it usually is, so consult a tax expert to ensure you know exactly what you will need to pay on your rental income, and subtract this from your potential yield. Rental income is added to any other income you may have, so work out your tax band and likely payments before you commit. Finally, don't forget about Capital Gains Tax. This can be quite a sting in the tail so make sure you know your stuff.
Remember, you can offset some of your costs against your taxable rental income, such as mortgage interest payments, maintenance and letting agency costs, so keep accurate records.
3. Target your tenants
You are buying a property for other people to live in, so put yourself in their shoes when choosing it. Who do you want to rent to? Families, couples, students or house-share professionals are all distinct markets with very different requirements. Take this into account not just in terms of area and local amenities but also for decoration and utilities. It also affects the health and safety regulations: designated 'Houses of Multiple Occupancy' (students, or house-sharing professionals for example) have very strict health and safety regulations affecting everything from power supply to fire safety and compliance can cost you. You may also need a local authority licence for some rental purposes, so make sure you have done your homework.
4. Location, location, location
Just because you won't be living there, it doesn't mean you can afford to neglect this all-important factor. You need to know the area to understand where people will want to rent. Bear in mind transport links, local amenities and council tax bands, and consider these in relation to your target tenants. Check the rental value of similar properties online, or speak to a local independent lettings agent to get accurate estimates of rental value without the bias of trying to sell you a house. They also know the best local areas for renting, so go and talk to them before you make a decision.
5. Find the right agent
You need to decide what sort of landlord you want to be: will you manage your rental property yourself, including all maintenance and legal issues? Will you advertise independently and find your own tenants? Chances are an agent will come into it somewhere along the line, even if only to find your tenants, so make sure you are aware of all the fees and commission payments each agent offers. They should offer all services from inventory creation and rate negotiation to maintenance management and rent collection - for a price. Don't be afraid to negotiate with your agent. You are in a strong position as a chain-free buyer and potential landlord, and it doesn't hurt to ask for a better deal.