A record number of people are buying residential property to rent out to private tenants. Your Mortgage magazine reveals the steps buy-to-let investors can take to ensure success.
Buying a property to let is still increasing in popularity. As other investments continue to look shaky in comparison, the rude health of the property market continues to convince us that bricks and mortar is the best investment we can make. In fact, 43 per cent of homes put up for rent between February and April this year belonged to new landlords, according to the Royal Institution of Chartered Surveyors – up from an already high 41 per cent in late 2003. But while buying an investment property has never been easier – and the choice of lenders who will help finance your purchase has never been as wide – there are still a few things to consider if you want to make your investment pay off.
Choose the right property
Above all else location, location, location is key when it comes to buy-to-let so make sure that your property is in an area that is well suited to letting. Always consult local estate agents to determine the supply and demand of rental properties in the area first. The Association of Residential Letting Agents (ARLA) will give you details of ARLA-registered agents in your area and can also offer help and advice on regulations and rent levels. Contact ARLA on 01923 896555.
Choose the right mortgage
With more than 40 lenders offering hundreds of buy-to-let mortgage deals choosing the right one can appear daunting, but it needn’t be. Check with your lender to see how much you can borrow. As a rule most will only allow you to borrow around 80 per cent of the value of the property. Almost all lenders will take the expected rental income from the property into account when deciding how much to lend. As a guide your rental income should, at the very least, cover 125 per cent of your monthly mortgage payment.
Work out costs and income
Work out how much your monthly mortgage repayment will be and whether the expected rental income will exceed this. By checking out the rental prices of similar types and sizes of property advertised in your area you will get an indication of whether this is a possibility. Also look at whether you could afford your mortgage if interest rates shot up and the property is unoccupied for, say, three months.
Consider the ‘hidden’ costs
You’ll have to pay for solicitor’s fees (approximately £900 for a £100,000 property), estate agent’s fees, buildings insurance, mortgage arrangement fees, stamp duty and possibly service charges and ground rent.
Budget for ongoing costs
You are responsible for the cost of repairing or replacing fixtures and fittings and ensuring that the property meets necessary health and safety standards. Local authorities require that you comply with fire regulations, which could mean you have to put in fire doors and smoke detectors. The Department of Trade and Industry publishes a useful guide, Furniture and Furnishings Fire & Safety Regulations. Telephone 0870 150 2500 to receive a copy.
Choose a professional letting agent
You might consider using a professional letting agent. They will find tenants, collect the deposit and rent and arrange the inventory and tenancy agreements. But they don’t come cheap. Expect to be charged anything between ten and 17.5 per cent of the gross rental income that you receive.
Ensure you have the right insurance
As the owner you are responsible for insuring the structure o your property, which includes any permanent fixtures and fittings. It is vital that you check your policy as many buildings insurance policies exclude buy-to-let.
Sort out your tax position
You have to pay income tax on any rental income you receive, although you can deduct some expenses, and you will be liable for capital gains tax when you sell. Always consult an accountant before entering the market.
Get a fully flexible mortgage
This type of mortgage can be ideal for buy-to-let as you can fluctuate your payments in line with rental income.
View buy-to-let as a long-term investment
Don’t expect to make a quick profit on rental income and equity gain the property. The forecast should be for medium- to long-term returns – five to ten years at least.