Preparing to buy-to-let
The first question to ask is, ‘Will it be worth it for me?’ Buying-to-let can be a good way to generate income while also investing for the future – but it can involve a lot of work, it can be risky, and it isn’t easy money by any means.
It can help to contact a specialist buy-to-let mortgage adviser even before you get started. They can guide you on the kind of mortgage you’re likely to get, the kinds of properties you could afford, how much rent you could bring in each year, how much tax you’re likely to pay, and – most importantly – how much profit you could expect to make.
Your adviser can also talk you through the likely overheads, such as lettings fees, maintenance costs, furniture and white goods. These costs may affect the size of the mortgage you can obtain.
Another point to discuss is your deposit. You will need at least 25 per cent for a buy-to-let mortgage, and to get the better mortgage deals you should aim for more like 40 per cent.
When you and your adviser have gathered all this information, you should have a better idea about whether buying to let is right for you. If you’re still keen, you can set about finding a mortgage.
Finding the right mortgage
Buy-to-let mortgages are worked out differently from a normal residential mortgage because they take into account how much you’ll earn in rent. To be eligible for most loans, the rental income will need to cover 100 per cent of the mortgage plus an extra 25 percent.
A key decision to discuss with your adviser is whether to choose a repayment or interest-only mortgage. Most buy-to-let mortgages are interest-only, as this means lower monthly repayments and thus higher income. However, if your priority is a long-term investment, a repayment mortgage may be better.
Your adviser will also help you to secure the best mortgage deal. Arrangement fees and interest rates tend to be higher on this type of mortgage, so it really pays to get independent advice at this stage.
You should now be able to agree a mortgage in principle, so you know the maximum price of property you can afford.
Think about the kind of tenants you want. Do you plan to let to students, young professionals, families, or perhaps people moving house and looking for temporary accommodation? Your choice will determine the kind of property you should buy, and where to search for it.
A good rule of thumb is to know your area. Don’t buy in any location you don’t know well, even if prices are very attractive (there’s usually a reason for that). Also be wary of buying far away from where you live, even if you have a good letting agent – you’ll still want to check up on things now and again.
Furnished or unfurnished?
Again, the choice depends on what kind of tenants you want. Families tend to want to bring their own furniture, but young professionals and students usually prefer furnished places. In general, most people would like white goods to be provided. Bear these costs in mind during your mortgage application.
If this property is not your only property, you’ll have to pay at least an extra three per cent on top of your regular stamp duty. Factor this in during the budgeting stage.
Selecting a letting agent
If you don’t want to spend time on a lot of admin, letting agents will do the hard work for you. They’ll find you tenants, run the necessary credit and legal checks, take care of the maintenance and collect rent on your behalf. For a comprehensive service you’ll usually have to pay them around 15 per cent of the rental income, but you can reduce this fee by doing some of the tasks yourself. Alternatively, you can deal directly with your tenants and keep all of the income after tax.
A good letting agent should be part of a scheme or association, like the National Approved Lettings Scheme (NALS) or the Association of Residential Letting Agents (ARLA). Do some more digging into what each agent offers. Find out how they’ll prove that they’re managing the property well and read their terms and conditions thoroughly. Your solicitor can help check the contract with you.
Arranging contracts and running checks
All landlords are now legally required to check that their tenants over the age of 18 and have the right to live in the UK. These are called Right to Rent checks. Make sure you take copies of the original documents (passports etc.) from all tenants over 18. You can find out which documents you can accept and how to check them properly on the government website.
For every tenant you take on, have your solicitor draw up a contract for you both to sign. This kind of contract is also known as a tenancy agreement and should outline both your own rights and those of your tenant(s).
When you receive a tenant’s deposit, you must put it in the Deposit Protection Scheme (DPS), unless you’re a live-in landlord.
Being a landlord
Be sure to print off the How to Rent guide from the government’s website and give it to your tenants on moving day. You’ll then want to go over the contracts and sign everything together – your solicitorcan explain how to do this properly.
On moving day, you’ll want to do an inventory with your tenant. Mark down what’s included in the property, and any existing damage to these items. When the tenant moves out, you can check this against the condition they leave it in and decide if you want to deduct any money from the deposit for any additional damage.
From that day on, you just need to be on hand if anything goes wrong in the property, or ensure your letting agent is taking care of this. Always give your tenants reasonable notice if you need to carry out any repairs.
As a landlord, you must make sure your property is safe to live in. Every year, you need to get a registered Gas Safety engineer to check any gas appliances, including the boiler. Also make sure that any furniture and electrical equipment, like kettles and microwaves, meet safety standards.
Running your buy-to-let business
Even if you let only one property, buying to let is essentially a business and you should run it like one. If you own more than one rental property, it can really help to get an accountant on board to help keep things tax efficient and maintain your cash flow.
Remember that the money you receive in rent counts as income, so is exposed to income tax. You can however reduce the amount payable by offsetting profits against your expenses (e.g. maintenance and letting fees) on your self-assessment tax return.
Find out more about being a landlord.