Buy to let guide
Getting started in buy-to-let
Buy-to-let literally means buying a property and letting it out in return for a sum of money. Historically, property has performed well as an investment opportunity. Every 10-15 years, property prices in the UK have doubled, suggesting this trend is likely to continue despite the current economic conditions.
So whether in a rising or falling market, there is the prospect for an investor to achieve gains. For instance, in a rising market, the investor will realise that first-time home buyers would be priced out of their affordability range, indicating that rental demand will be high. With the market in decline, a landlord would look at long-term prospects, realising that if they pick up a cheap bargain it should at some point rise in price based on past trends.
What does it take to be a successful buy-to-let investor?
Buy-to-let needs to be considered as a long-term investment, and the type of portfolio you have will depend on whether you are in it for future appreciation (that you will get a good profit in the long-term) or passive income (that you can supplement your earned income). For some, buy-to-lets can generate a full-time income, and the task of managing more than one or two properties can become a job in itself.
Although the outlook for housing prices may continue to change this year, generally speaking it has been harder to achieve higher rental yields while the market was at its peak. The high cost of mortgages has in many cases required some contribution from the landlord towards covering the mortgage. However, if you are in it for the long term and have picked out a prime location with good rental demand, you will benefit in the long run.
Some basics to help you get started
Firstly, you need to find a buy-to-let mortgage. Typically the rates are higher than for a residential mortgage and due to the credit crunch, loan to value rates may be lower than in previous years. This means you'll probably need to put down a 20% deposit, as most lenders limit the loan amount or loan to value (LTV) at 80%.
Many lenders will offer mortgages based on the anticipated rental income, so you may not need to be earning a large salary to jump on to the property wagon. Once you're in motion, some lender schemes will allow you to release equity from one rental property to raise money for your next project.
The key to maximising your rent potential is to research the area you wish to buy in, focusing on the fact that rental demand is high and the property you purchase matches the type of tenant you are looking for. It's important to keep a close eye on the market and liaise closely with the local letting agents to gauge how the market is performing in that area.
One of the first things you should do after buying a property is obtain landlord insurance. There are specialist landlord policies available which cover almost every conceivable eventuality; from the building itself, the contents, emergency legal costs, loss of rent if tenant doesn't pay and public and occupier liabilities. Always shop around for the best deals - sites that offer comparative quotes to buy instantly can be the easiest and quickest.
Once you have the keys to your property investment, you must make sure it is decorated to a good standard, using hard-wearing carpets, paint and furniture, and that you have considered the needs of your intended tenants, whether students, young professionals or a family.
If you are considering managing the property yourself, run adverts online and in the local newspaper. Examine prospective tenants carefully and check references before contracts are given and signed. If taking a deposit from the tenant, landlords are legally obliged to place it in one of the three government-authorised tenancy deposit schemes which help resolve any potential disputes when the tenancy comes to an end.
When considering on-going maintenance of the property, it's a good idea to create a separate pot of cash to deal with potential costs of repairs and necessary checks. This will help you keep track of your outgoings for tax purposes. A yearly maintenance requirement is that you have a Corgi registered gas or electricity engineer provide you with a safety certificate on all gas and electricity appliances.
You could create an annual plan and budget which will help you organize maintenance works effectively, allowing you to inform tenants about any upcoming work.
By joining the Landlords Association you can get lots of advice on many issues including, legislation.
If you don't have the time to manage the property yourself, hire a letting agent. Letting agents offer different levels of service, from managing every aspect of the property to simply finding a tenant. It's an option worth considering if your investment is far away from you or your job is quite demanding. They can ease the pressure created from letting and managing a property, taking on tasks such as drawing up the tenancy agreement, maintenance and dealing with the tenants for a fee of around 10 - 15% of the rental yield.
And finally, if you have taken care of all of the above, the key to gaining the maximum rent potential for your property is to look after your tenants. If they are happy they will respect your property, stick around for longer and may refer other potential tenants upon checking out.
This article was first published by Simply Business.
How to tell whether buy-to-let right for you?
You may think that once you’ve found a property, been offered a mortgage and found some tenants, being a buy-to-let landlord is relatively straightforward way to make money. But buy-to-let is a big commitment and should be viewed as a long-term prospect. If you change your mind you may not be able to get your money back in a hurry, or get back everything you have spent.
Owning an investment property is not like owning your own home - you are running a small business and will have various responsibilities to your tenants, your mortgage lender, your accountant, your local council and the taxman.
So before you get carried away with the idea, think about the hard work involved in buy-to-let.
Before you commit to the mortgage, review your current and longer-term position and ask yourself:
- Will I be able to cover my mortgage repayments and insure the property if I have no money coming in from rent, perhaps for several months?
- Can I afford to take a loss if the housing market slumps?
- Will taking out a mortgage on this property affect my chances of getting a mortgage if I decide to move house at a later date?
Making a fast buck is not an option, given fluctuation in the property and rental markets and the relatively large amount of time, effort and expense involved in buying and letting property.
In addition to your mortgage, there will be other costs you must cover. These may include insurance, ground rent, service charges and letting management fees.
You will also need to make sure the property is in a good state of repair and well-decorated so that you can attract and keep tenants.
Ongoing maintenance could involve anything from a lick of paint to replacing the central heating system.
If you intend to rent the property furnished then make sure your budget can stand it. Ensuring the safety of gas and electrical appliance and that all furniture and furnishings meet fire safety codes is also down to you.
Legal costs must also be considered. It is good practice to have an Assured Shorthold Tenancy agreement with your tenants and you may want the help of a solicitor to draw this up.
Legal bills may also be an issue if you have to pursue tenants for rent or get them evicted.
If you are not sure, you may benefit from professional help from an independent financial adviser.