As a result, there has never been a better time to become a landlord. It pays to bear in mind when taking the plunge into buy-to-let that it can be a lot easier said than done, and the clued up investors are the ones who cleverly side-step the common pitfalls to reap the full rewards.
Getting to know the market
The first hurdle to clear is to work out where you are looking to invest. The chosen area needs to be close to local transport links and amenities, with the type of tenant you are looking to attract determining what your exact priorities should be.
Speaking to a number of letting agents in the area will allow you to figure out whether there is a substantial demand for rental properties, what the most popular style of property is (i.e. 1-bed studio flat or 3-bed house) and the type of tenant you can plan for, as well as the typical rental values.
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Tenant demand should be your highest priority and is the single most important factor when investing. If you get it wrong, your property may lie vacant for months and you will suffer when it comes to your mortgage repayments.
With this in mind, when addressing the possible sticking point of rent later down the line, it might be worth considering that what might seem like a substantial rental reduction of £15 per week, could actually ensure a shorter vacant period and at the same time attract more prospective tenants.
Assess possible risks
House prices are currently stable, but another rise in interest rates could bring about a drop in the market. You need to take this into account, calculating the cost of such an eventuality and planning around it. You also need to have a financial cushion in the bank in case you need to make any substantial repairs to the property, or to cover a buffer period between tenants.
Investigating mortgage options
When you have done the preliminary sums, spoken to a letting agent and can be confident of the approximate monthly rental income, you can start scouring the market for the best mortgage. Today there are over 2,000 buy-to-let mortgages available, with all the options in the owner-occupier market translating across to this lucrative side of the housing market.
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Toby Nelson, a spokesperson from mortgage lenders, Platform advises that, Most lenders now offer borrowers the flexibility of rental calculation from between 100 to 130 per cent enabling them to maximise the potential of their portfolios and make their investments work harder for them.
Having said this, borrowers should be wary that a lower rental yield often means larger arrangement fees or higher rates. Many lenders also now offer non-conforming buy-to-let options and the flexibility of 90 per cent Loan to Value (LTV), further helping borrowers to maximise their investments.
When choosing your mortgage you need to take into account that, depending on the trends for house price inflation and interest rate fluctuations, your rental income may not see the dramatic annual rises you might expect. There may be various attractive special offers available, but it is important to make sure you can meet the repayments after the initial discounted period has ended be wary of defaulting onto a lenders Standard Variable Rate (SVR).
Hunt for the ideal place
Now youve identified your spending limits, the time is ripe to look for a suitable place. Layout and fittings aside, the house at the top of the checklist should be cheap to buy and structurally sound both inside and out so that it will be easily maintainable.
When viewing properties, remember that youre not buying the house for yourself. Put yourself in the shoes of your target tenant and consider what would be attractive to them; students will typically be looking for something fairly basic but clean and comfortable, while young professionals will probably plump for a modern and stylish but not overbearing property. In addition, a family let will need something that ticks all the boxes with spacious living spaces and a garden, as they will have plenty of their own belongings to accommodate.
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Test the water
If you find a property which you like and think meets all of your initial requirements, then it might be an idea to run an advert in your local paper to try it out and see if it could be a viable investment. If the phone rings off the hook then youre onto a winner, but if it doesnt you can walk away and keep on looking just dont hang about too long and end up losing your dream property.
Haggle over price
Buy-to-let investors have the same advantages as first-time buyers when it comes to knocking money off the asking price. Unless youre relying on selling one property in order to invest in another, you are not part of a chain and thus you can complete the whole process far quicker and there is less risk of the sale falling through something which can weight the odds heavily in your favour when making an offer.
Make your application
Once youve agonised over the property that best suits your needs and the vendor has accepted your offer, you need to get the ball rolling with regards to your mortgage. Youll ideally have already done your research so it should be easy going.
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The process itself will be almost identical to an application for a standard mortgage. The only differences with a buy-to-let application are that you may be asked to provide an additional letter from a letting agent outlining the kind of rental income you can expect to receive to support the size of your application, and you may be required to agree to use an agent to manage the property.
Getting an agent on board
Even if employing a letting agent to manage the property isnt a stipulation in your mortgage agreement, it may be something that you would like to do anyway.
The fees charged by most agents are anything up to about 15 per cent of the gross annual income you will receive from the property. They will then undertake duties on your behalf such as advertising for tenants, sorting out the paperwork and checking references, acting as a middleman to sort out any issues, and collecting the rent.
When looking for the right agency to manage your property you have to be happy that the staff will give you the agreed level of care for your money, and that the company is reputable and well-established, with the ability to manage it well.
Ultimately, you can make more money by renting the property out yourself but be prepared to give up weekends and evenings to deal with viewings and advertising, as well as sitting down with your tenants on a regular basis and dealing with repairs.
Tackle your insurance
As a landlord you will need buildings insurance to cover the structure of the property. The main thing to remember with this, and all specific insurance policies that you take out, is to check that it covers buy-to-let investments.
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If you are providing furniture or appliances for your tenants, you may also want to purchase contents cover so you know you are safe should anything happen. One other practical consideration when letting a property out is getting legal expenses cover. As you are renting to strangers and thus entering into a potentially uncertain situation, your legal costs will be covered should you need to take a tenant to court for any reason.
Dont get caught out by the taxman
One of the biggest danger zones for a landlord to overcome is tax as there are a lot of specifications to conform to. You should obtain professional tax advice to make sure
that you are fully aware of all the requirements you need to meet, as well as minimising your tax liability at the purchase, management and exit stages of ownership.
Be aware of Inheritance Tax (IHT) and Capital Gains Tax (CGT) when you buy so as not to be scuppered further down the line, and make sure that you claim for the tax breaks permitted against CGT when you sell the property which take into account inflation, living in and taper relief.
Rental income is taxable and it is a legal requirement to declare it to the Inland Revenue. It will be totalled up with your other earnings and assessed for income tax, which could take you into the higher tax bracket if you are currently sitting below the threshold.
A number of expenses can however be offset against the rent you receive in order to reduce your tax bill. These include expenses like letting agency fees, mortgage interest costs, water rates, council tax and a 10 per cent allowance for wear and tear if you are letting the property out as furnished. However, make sure you always keep accurate records of the ongoing, allowable expenses for tax purposes.
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You will also need to make sure that the dwelling is fully compliant with the House of Multiple Occupancy (HMO) licensing laws. A house of multiple occupancy is one inhabited by ‘persons who do not form a single household’; i.e. not a recognised family unit so it will apply more to sharers and students. The number of people needed for this definition varies from one local authority to another, and as the landlord you need to apply for the necessary license from the council in order to begin renting it out.
Additional information
If you are letting the property out to students, it is probably a good idea to have a chat to the local student letting officers in the University Housing Department. Building a rapport with the staff means that you can take advantage of the sound advice they can give on the current rental situation amongst the student population, as well as going some way to help fill the property as they will hopefully promote it before the others.
Open a separate bank account for your buy-to-let finances, whether this is one into which you can deposit money as a maintenance fund, one for your rental income to go into, or one that covers both. This way you keep the revenue separate from your everyday finances, but you can syphon off cash whenever its needed.
Keeping a tight rein over your outgoing costs will mean that you can really maximise the profitability of the business – whether this is going solo rather than in partnership with a letting agency, or undertaking repairs and maintenance yourself. However if the latter option is not for you, it is wise to build up a list of reliable tradesmen who will react quickly when needed and give you a good value for money service.
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With landlords benefiting from both rental income and the uplift in the capital value of their properties, total returns are very attractive, comments Nigel Terrington, chief executive of the Paragon Group of Companies, there are not many forms of investment that combine long term stability with that level of return.
Ultimately, the cardinal rule when buying property to let out is not to be over-ambitious. There may be constant press about buy-to-let millionaires, but this does not mean that the bigger your initial expenditure, the bigger the return.
Instead, a clever investment which holds a lot of potential in an up and coming area can give the returns which, when re-invested, will go towards generating a higher annual income. In the vast majority of areas, the days of double-figure house price rises are gone, so experts advise budding landlords and developers to invest primarily for income and not short-term capital growth.
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