Buy to let guide
Buy to Let - The Basics
"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, becoming a Landlord in the process.
The attraction of "Buy to Let" to investors over recent years has been that property values have risen sharply providing excellent returns with continuing confidence in ‘bricks and mortar’ when compared with traditional forms of investment such as stocks and shares where markets have been volatile and the outlook uncertain.
The investor buys a property to rent to tenants and where there is a mortgage the expectation is that the rent received should cover this cost, hopefully with a profit margin which at least provides for maintenance and to cover periods where the property is empty, sometimes known as ‘voids’. In addition, over time, the hope is that the property will grow in value.
However, as with all investments there are risks to go with the potential rewards and anyone considering investing in property must consider that property values may fall, as they did in the late 1980’s, as well as rise.
Our guide is not intended as a detailed guide, and people thinking of purchasing a Buy to Let should seriously consider taking expert advice about legal, tax, financial and property management matters.
Choosing a property
Buy to Let properties generally fall into 2 categories, the first being property suitable for a single tenant or family and the second being shared property which may be rented to multiple and unrelated tenants such as students and professionals but still usually on a single joint tenancy agreement.
There is a third category being properties with self contained bedsits or with multiple tenants each with their own individual tenancy agreement. These are generally considered to be of a more commercial basis and while many of the issues covered in this guide will still apply, aspects such as mortgage lending will most likely fall outside normal Buy to Let criteria and need to be on a fully commercial basis. Our guide is concerned with the first two categories.
The first category is generally considered the easiest to manage in terms of both regulations and potential difficulties with tenants however the rent chargeable might well be less than may be achieved with a multiple occupancy in the same property where rent may be charged on a per room basis although all the tenants would be together on one tenancy agreement. An example of this would be a 3 bedroom terrace property which may achieve a market rent of £600 per month to a family but £900 per month (£300 per room) when done on a multiple occupancy basis.
However there may be more issues with the quality of tenants on a multiple occupancy basis meaning more time spent in the management of the investment and repairs.
Where there are more than 2 stories in a property or the tenants come from more than 3 households the property may be considered a House in Multiple Occupation (HMO) and require wired fire alarms and other services which may incur the Landlord with additional expenses.
A House in Multiple Occupation is covered by The Housing Act on which more information can be found at the Residential Landlords Association website.
Finding the right property and tenants
Having decided on which type of tenant you want you should carefully research the market where you want to buy your property.
You can do this yourself or employ a specialist letting agent to help you find the area and property you are looking for.
Bear in mind demand for and supply of rented housing in the area, location of local employers or if a student let, Universities and College together with the requirements of the type of tenant you are aiming for such as shops and services, schools for families and in the property itself features that are attractive to would-be tenants, rather than would-be purchasers i.e. families may want a garden while young professionals may not.
Managing Your Property
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 -
• Finding tenants
• Checking tenants references
• Collecting the rent and maintaining the property
• Dealing with problems
Your legal responsibilities
You will also need to be aware of your legal responsibilities as a landlord such as -
• Carrying out repairs
• Ensuring the safety of gas and electrical appliances
• Ensuring that the furniture and furnishings meet fire safety requirements
• Taking of deposits under the Tenants Deposit Scheme
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.
Many Landlords use the services of a managing agent to look after their property for them, find tenants and deal with problems. This will cost approximately 10% - 15% of the monthly rental income.
Buy to Let Mortgages
Unlike residential mortgages Buy to Let mortgages are not covered by the Financial Services Authority. This means Buy To Let lenders do not have follow such strict rules on how they sell, promote and advertise their deal so before choosing your mortgage, you should consider taking advice from your lender or a mortgage intermediary.
Typically lenders allow Landlords to borrow up to 85% of the property’s value and sometimes more. However the size of the loan available is usually linked to the anticipated expected rental income.
As a guide, a lender will normally require the monthly rental income to exceed the mortgage payment due, calculated on an interest only basis, by 25%.
Taxes
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 -
• Income tax
• Stamp Duty when you buy your property
• Capital Gains Tax when the property is sold
However while there is no direct tax relief on buy-to-let mortgages, you can offset interest payments on your mortgage against tax on rental income, along with other expenses such as agents' fees and maintenance costs.
You can find out more about the tax treatment of income from rented property in Taxation of Rents: A guide to Property Income. IR150.