How Does Buy to Let Property Work?
Let us guide you through how to purchase property with the goal of letting it out.
The benchmarks for buying property to let are quite different from those required if you are planning on living in a property. Having a buy-to-let portfolio can be a great way to have a dependable income, whilst bringing in a potentially considerable return on your investment.
Tips for Building a Buy to Let Portfolio
Find out the best way to bring in a reliable income, whilst making a long term investment with our tips:
1. Research
Researching and understanding the buy-to-let market is crucial before you make any decisions. This means that you need to spend time learning about what you could potentially earn, and the risks involved. It's also beneficial to investigate the different kinds of property that can be rented out.
Look into the best locations for people wanting to rent and speak to letting agents in the local area, finding out which parts are popular, and why. Often potential renters are looking for properties with good employment, or areas with good travel links to commute to local cities. Equally, looking for property to let out near universities, that would be suitable for students, is generally an easy option for renting.
2. The Ideal Property
When you have researched the right location, you need to look for the right property to invest in. It's always a good idea to purchase the best property within your price range, in the best area that your budget allows.
You should think about:
- The property type
- The location
- Potential rental income
Speak to your local letting agents to find out which types of property are popular with renters. It's also worth finding out if there is a lack of a certain kind of rental property, so you can look to invest in one of that type.
It's also possible to purchase properties that already have a tenant in them. Additionally, it's worth keeping an eye on local building developments because they may create a number of additional rental properties, which means there's an excess on the market and that could impact your future rentals.
3. Obtain a Buy-to-Let Mortgage
If you're buying a property to let, it's likely that you'll need a mortgage (unless you're buying with cash). Applying for specialist buy-to-let mortgages can be confusing, and more challenging because many lenders believe that buy-to-let mortgages are higher risk. Interest rates can also be higher on buy-to-let mortgages and the minimum deposit is generally 25% of the property's value (though it can be anywhere between 20-40%). Generally buy-to-let mortgages are interest only, which means you will only pay the interest each month and at the end of the mortgage term, you will repay the amount in full.
4. Letting Agents
If you haven't had experience in letting properties before, it may be worth using a letting agent. An experienced letting agent can help you manage the property, find tenants and then handle any issues that come up. Your letting agents can also make sure that you meet the legal responsibilities that you have to your tenants. It is also worth remembering that legal responsibility is down to you as the landlord, even if a mistake happens on the side of the letting agent. That being said, a good letting agent should help simplify your life as a landlord.
When you are trying to find a letting agent, it's worth checking that they belong to an accredited professional body, like the National Association of Estate Agents(NAEA), the Association of Residential Letting Agents (ARLA) or the UK Association of Letting Agents (UKALA). This means that they will have to adhere to set regulations, which will provide you with additional peace of mind.
5. Void Periods
When you own a buy-to-let property, you need to be ready for the fact that there will be times when your property is empty. This is called a 'void period' and it's a key point to think about when you are planning your finances.
Most rental property investments are profitable but it's equally vital to be cautious when you are working out your potential income and choosing how much you can spend on your investment. It might also take longer than planned to get a tenant, so the rental amount might be less than you planned. These issues can lower the return on your investment and impact your cash flow.
6. Rental Yield
If you are purchasing a property to bring in income from the rent, the rate of return is called the 'yield' This is worked out by dividing the yearly rent by the capital value of the property (this is what you paid for it).
For example, if you bought a flat which was on sale for £180,000 and then received £900 a month rent, the yearly rental income would be £10,800 (if you had tenants for the full year). This means you would have a rental yield of 6% (£10,800/£180,000 = 0.06). It is important to include other costs that you might incur during the year, including repairs because this will reduce your income.
7. Energy Efficiency
In the UK, current regulations state that you must have an Energy Performance Certificate (EPC) at grade 'E' to be able to legally let private rental property. Though it is currently being suggested that this is increased to a minimum 'C' rating by 2025.
If your current property (or one you are looking at) is currently rated at a 'D' or 'E', it's worth taking the time now to look at ways that you can improve the energy efficiency, in advance of the new laws coming in. The price to do so is currently limited to £3,500 including VAT but it is also being proposed that this limit is increased to £10,000 including vat. It is worth noting that in certain scenarios, you may be able to obtain an exemption.
8. Assured Shorthold Tenancy Agreement
The most common kind of tenancy agreement is known as the Assured Shorthold Tenancy Agreement (AST). This is a contract between the landlord and tenant, which lays out the terms and conditions of the tenancy.
AST agreements are generally set for a term of 6 to 12 months and the tenant will usually have the right to stay in the property for the duration of the term, unless they break the terms of that agreement.
9. Rental Inventory and Schedule of Condition
At the start of a new tenancy, the rental inventory will provide comprehensive details of the condition of the property and the contents within. Essentially, this is a catalogue of the property and its contents. The schedule of condition simply records the condition of the property.
Both the inventory and schedule of condition have a few purposes:
- As a catalogue of the property
- As a record of the condition of the property and items within it
- As an element of the legally binding contract that is set out in the tenancy agreement
10. Deposit Protection
Generally tenancies tend to be an AST. The tenant will pay you a deposit and will need to be registered with a government approved Tenancy Deposit Scheme (TDS). If the deposit isn't protected, than you can be liable to a fine and it can also be challenging to end the tenancy. When the tenancy ends, the deposit will be used to pay for any damage caused to the property by the tenant, outside of the standard 'fair wear and tear'. It will also cover any unpaid rent.
The TDS has created a 'Code of Recommended Practice' This states the suggested requirements that landlords and letting agents should achieve as members.
11. Get Insurance
Buy-to-let insurance for landlords means that you are covered for liability and damage to the building and contents for things like flood, fire, burst pipes and storms. However there isn't a legal requirement to have a dedicated insurance. That being said, standard home insurance won't keep you covered for rental activities and if you do have a mortgage, it is common for your lender to need you to take out insurance before you have tenants.
You are likely to need written permission from your mortgage provider before being able to let your property. If you don't get the permission, it could mean that you are breaking the terms of your mortgage.
12. Tax
Any rent, non refundable deposits, or additional funds that you get from your tenants need to be declared for tax purposes. This also relates to any money that is kept from a refundable deposit when the tenancy ends.
Income from rental is taxed at the same rate as income you would get from additional employment, depending upon the tax band that you come under. If your rental income is combined to any extra income you already earn, you might also go into a higher tax bracket.
You need to declare the rental income you receive for whichever tax year that it's due, even if you aren't paid until the end of the tax year. However, you can deduct any permitted expenses, which relate to the specified tax year, whether you have paid the bill before or following the end of the tax year.
Are you Looking for a Buy-to-Let Mortgage?
If you are looking for the best buy-to-let mortgage for your needs, we can provide you with the professional advice and services which will help you find the right option for you. Contact our experienced team today by email on info@tms-fs.co.uk or by phone on 01424 444 597. We can investigate the whole of the UK mortgage market, to find you the very best rates.
