How to become a buy-to-let landlord
Are you tempted to become a landlord? Perhaps you want to put your tax-free pension lump sum to good use or you've just discovered how much your child will be paying in rent at university.
If you are considering letting out a property, you're far from alone. There are estimated to be two million landlords across the UK and together they own nearly a fifth of all housing.
Bricks and mortar makes a compelling investment case. Since 1996, landlords have made returns of nearly 1,400%, according to property loan provider Landbay.
Over roughly the same time period, data from Nationwide shows that between January 1996 and May 2015, the average UK house price rose in value by 286%. And in the three months to April 2015, HomeLet reported that UK rents were 7% higher than they were the previous year, at £730 per calendar month on average.
But before you jump in and start house hunting, remember there's far more to it than picking a suitable location and type of property for the tenants you want to attract. You'll be running a business and what you really need to do first is arm yourself with as much knowledge as possible about buying a rental property and the associated costs.
How to buy
Unless you are fortunate enough to have inherited a property, or already have a spare one, there are two main options for purchasing a rental property. Either you pay with cold, hard cash or you'll need to find a buy-to-let mortgage.
The former is self-explanatory and Nationwide reports that as many as four out of 10 UK property transactions are paid for in cash. The latter, however, is a bit more complicated - specifically when compared to buying a residential property (that is, one you plan to live in yourself).
The first thing to be aware of is that you'll need to find a bigger deposit than you would for a residential loan. Buy-to-let mortgage lenders (whether a high street bank or specialist provider) typically require a deposit of at least 25% of the property's value for security. With the average UK house price at £195,166 at the time of writing, that equates to a deposit of just under £49,000.
That's a significant amount of money for anyone. If you planned to use your tax-free cash from your pension, you'd need to have a total fund of around £200,000, unless you were prepared to dip into more of your pot, in which case you'd need to pay tax on your marginal rate on the additional funds.
Buy-to-let mortgage lenders will also want to see evidence that the rental income will cover the mortgage interest by a certain margin, typically 125% of the total.You don't have to have a tenant lined up before you submit your mortgage application as proof of this but the lender will expect to see correspondence from a letting agent that the level of rent you will require is achievable in the local area.
It will also want you to confirm your intent to put in place an assured shorthold tenancy agreement with a minimum six-month let.
While buy-to-let mortgages aren't subject to tough new lending criteria that have been introduced for residential home loans following the Mortgage Market Review, or MMR, you still need to demonstrate to the lender that you can comfortably afford your loan.
The provider will want to make sure you can afford to pay the mortgage during times when the property may be empty - between tenancies for example, while refurbishments are taking place, or when a tenant may be unable to pay the rent.
So it's still a good idea to put together a thorough snapshot of your finances to show how you could cover such void periods (as they're known in the trade) ahead of making your application, just so you have plenty of information to hand and avoid delays in getting a decision.
The advantages of buying with a mortgage
Applying for a mortgage always involves hassle but there are several good reasons why a mortgage may be a better option for purchasing a rental property than paying cash.
The first is that it helps to spread risk because you can put any other cash you have over and above the mortgage deposit into different investments. And for those people buying more than one property (making cash purchases unlikely), mortgages help spread risk even further because all your money isn't dependent on the fortunes of just one tenant, or series of tenants.
"If one property has a void in tenancy, there could still be rental income coming from the other properties," explains David Hollingworth at London & Country Mortgages in Bath.
Another reason that some landlords will take a mortgage against a buy- to-let property is that they can set the mortgage interest against the rental income for tax purposes.
You must report income from rental property of more than £2,500 a year on a self-assessment tax return but mortgage interest counts as what the taxman deems 'allowable expenses'.
These also include letting agents' fees, buildings and contents insurance, maintenance and repairs (but not improvements) and other direct costs of letting the property, such as phone calls, stationery and advertising.Through the tax return, you will be asked to declare
your profit from your letting and will have to pay tax at your usual rate of income tax.
If you don't pay cash, of course, the downside is that there is a mortgage payment that must be paid, whether the property is let or not.
"Remember that mortgage rates can rise, which would eat into your returns," warns Hollingworth.
If you have decided that you are ready to become a landlord, always focus on purchasing the right property that will have ongoing appeal and strong tenant demand. Buy to let should always be approached as a medium- to long-term investment, given the costs to buy and sell property. And above all else, approach it as going into business. Becoming a landlord is not a hobby.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.