Buy To Rent Tips
Massive demand for rental properties has led to a rise in rents, making buy-to-let one of the most profitable market investments.
In its simplest form, buy-to-let is a property explicitly bought to be rented out to tenants than for purchaser to live in it. Investors can make money this way by generating an income via the rent charged, making a capital gain when they come to sell or, in many cases, both.
The world of buy-to-let is one that many of us dream about. Buy a property, rent it out, and watch the cash roll in. Then buy a couple more houses and boom! But is it that easy?
Stepping onto the buy-to-let ladder can be a daunting prospect. There are all sorts of other things you need to think about around legalities and finance and of course your tenants. There are also some distinct differences between buying a property for yourself and buying an investment property you intend to rent out. So, before you pour your life savings into that gorgeous property that you set your eyes on, here are some things you need to know.
It can be stressful and time-consuming
Investing in buy-to-let can carry significant risks and is only suitable for people who have a financial cushion to soak up unforeseen costs. It can be nerve-racking and take up a lot of time. Stock market funds that you buy easily online and are expertly managed are simpler to deal with than buy to let where you’ll have to apply for a mortgage, buy the property and deal with tenants and everything that property brings.
On the other hand, there is still money to be made in buy-to-let, and being your own boss in terms of how you manage the properties can be very exciting.
There are new tax rules to learn
The government imposed a 3% stamp duty surcharge on second homes and buy-to-let properties in England, Wales and Northern Ireland. So, buy a rental flat worth £400,000, and you’ll be paying the 3% stamp duty surcharge, which works out as £12,000. In contrast, someone buying the flat as their main home wouldn’t pay a penny in tax.
Buy-to-let investors have also been hit with more tax changes. From April 2020 buy-to-let landlords have had to pay income tax on the entire rental income, regardless of how much is swallowed by a mortgage interest.
Landlords will be able to take advantage of a new 20% tax credit on the interest, a rule that will make the change neutral for most of those in the basic tax bracket. Landlords who pay income tax at 40% or 45% will be paying far more than before the shake-up.
First-time buyers might not qualify
In theory, first-time buyers can get a buy-to-let mortgage, but in reality, it’s challenging, as lenders often consider this group too risky.
While it requires a minimum deposit of 30%, the applicant only needs a minimum income of £20,000. The lender looks carefully at the applicant’s circumstances and reasons why they want to purchase a buy-to-let property without owning their own home at the time.
It is also good to know that if you are looking to buy a property through Help to Buy scheme, you cannot rent that property.
Purchasing a buy-to-let property is still worth considering if you’re aware that it’s a long-term investment. If you are tempted to go with it, this buy-to-let guide might help you.
Do the math
Before you think about looking around, properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get. It’s not going to be a good investment if your expenses are more than your rental yield. Work out your budget carefully. Make sure you also factor in insurance, agency fees, the prices of buying, and have a financial buffer so should your property be empty for a couple of months, so you have some slack.
These are all things to consider. Ensure you know how much the mortgage repayments will be and if it is a tracker for rates to rise.
Rental yield
All of this is important, so make sure you do your homework. Some online resources can give you an idea of what the market is doing. You can also look at what similar properties are renting at in the areas you’re looking in. Look at the quality and style too and notice which are snapped up first. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.
If you can get a rental return substantially over the mortgage payments, you can start saving or investing any extra cash once you have built up a good emergency fund.
Where to buy
Part of your research must include looking for the best areas to rent out properties which might not be in the area where you currently live. Buy in an attractive area to tenants and where there are sufficient people who will want to rent.
Remember that this is not somewhere you are planning to live. It’s not about what you’d like but what your prospective tenants will want. Promising does not mean the most expensive or cheapest. It means a place where people would like to live, which can be for various reasons. Properties within walking distance of major employers, shops and transport links are ideal.
Know your tenant
Who is it you would like to rent to? Students, young professionals, families? Then think about what kind of property it is they might like. You also need to check with your mortgage company as there might be restrictive criteria on occupants and property type. Just as a business must know their target market, you must identify your prospective tenants to ensure that your property is attractive to them, making prospective tenants want to rent from you.
If you are purchasing a property that already has tenants, you will need to carefully check what their existing tenancy agreement includes and when it expires. Taking on a property with existing tenants might be an advantage, but you will want to create your agreement with them to ensure each side knows the other’s expectations.
Letting agents
If you decide that you need one, a letting agent can add many benefits including marketing the property, arranging the tenancy, collecting rent and dealing with tenants’ queries, maintenance and repairs. If you don’t have a lot of spare time or feel like you need some professional help with your first buy-to-let property, then a letting agent is probably the way to go. Letting agents are also useful if you don’t live near your rental property and you don’t have a network of reliable professionals such as plumbers or electricians you can call upon.
Sale-ability
You might be buying this as a Buy-To-Let, but there could come the point when you want to sell your investment. Will you be able to sell it if you need to? It is good to have an exit strategy just in case.
Check the condition of the property
This is maybe even more important than when you buy your own home. If you rent a sub-standard property where the electrics are not safe, you could be liable. You should also make any repairs straight after buying rather than find halfway through a rental contract that there is a problem. Tenants don’t appreciate being inconvenienced and it is likely to lose you rent if not the tenants.
Obligations and legal
Be aware of your obligations. This is where having a right letting agent will help as they can advise. Make sure you also have a good Tenancy agreement adequately drawn up and don’t forget to check out your tax situation. So, make sure not to neglect your record keeping. Keep records of everything. A good paper trail will also be a lifesaver if you ever get into a dispute with your tenants so make sure you start with an inventory when the tenant moves in and keep copies of receipts, manuals, warranties and any other legally required certificates.
Buy to let home isn’t a get rich quick scheme, but it can be something that benefits you financially and isn’t stressful, so choose wisely and enjoy.
Well, I hope this article was helpful.
And remember if you’re looking for a different kind of property experience,
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