How to buy to let

How to buy to let

Practical tips for aspiring landlords

What to consider before you buy a buy-to-let property or expand your portfolio – from property types and location to getting the right mortgage.

Your buy-to-let property may be repossessed or a receiver of rent appointed if you do not keep up payments on your mortgage.

  • Choosing the right property

    Your success with buying to let depends on choosing the right property. It may sound obvious but many aspiring landlords don’t take the time to think about what property will best suit their buy-to-let plans. The 3 most important things to consider are who you want to rent to, the location of the property and the realistic rental income you can expect to get from it.

    Your potential tenants

    Who are your ideal tenants? Students? Families? Young professionals? They all have different requirements for a property, and different considerations for its location. If you have the wrong property or location for your target tenants, you could struggle to rent it out successfully. And every day the property is empty, you’re losing income.

    Location

    How are you going to manage your property? If you’re doing it yourself, then ideally you’ll need the property to be close by. But if you’re planning on using a letting agent then you can look further afield to areas that might have a higher demand for rental property.

    You might consider talking to some agents too, as they’ll know what’s in demand and could even help you spot a gap in the market. Just make sure you speak to more than one to get a rounded view of the local market.

    Your rental income

    You’ll need to set a rate of rent that at least covers your costs. Consider how much you’ll spend on buy-to-let mortgage payments and other costs, like insurance, repairs and agent’s fees. It’s really important to work out what you’ll need to spend each year – and estimate the effect of any periods when the property is vacant. Seeing what other landlords and agents are charging for various property types could be helpful, too.

    Your rental income will also determine how much you can borrow through a buy-to-let mortgage, making it all the more important that you have a good understanding of what this will be.

  • Choosing the right mortgage

    A buy-to-let mortgage is very different than the mortgage you took out for your own home. For starters, the amount you can borrow depends largely on the rental income you expect to get from the property, although we may consider other income you receive in some circumstances. As a guide, many mortgage lenders specify that your rental income needs to be 25% to 45% higher than your mortgage payment.

    The eligibility terms can be different, too. For example, to get a buy-to-let mortgage with us you need to be at least 21 years old.

    You’ll also need to provide a higher deposit on a buy-to-let property – typically at least 25% – and you’ll find that the interest rates on buy-to-let mortgages are higher than they are for residential mortgages.

    Fixed rate or variable?

    Just like buying a home, you can choose a fixed-rate or variable buy-to-let mortgage. A fixed-rate mortgage guarantees that your mortgage payments remain the same during the fixed term, even if interest rates rise. However, the initial rates tend to be higher than those of variable mortgages.

    With a variable rate mortgage, you may have a lower initial interest rate but it can move up or down, depending on your lender and changes to the Bank of England base rate. So you could see your mortgage payments go up or down over time.

    Interest-only, repayment or both?

    You’ll have to decide how you want to pay for your buy-to-let mortgage – interest-only, repayment or a mix of both.

    With interest-only, you only pay the mortgage interest each month. This means at the end of the mortgage term you’ll still owe the amount you initially borrowed – and you’ll be charged interest on the full balance each month.

    Some buy-to-let investors choose this option because the lower monthly payments make it easier to meet the rental income criteria for buy-to-let mortgages, although there are extra conditions you’ll need to meet for an interest-only deal. Many plan to sell the property to cover the mortgage balance.

    The risk here is if the housing market changes and your property decreases in value. You’ll face a serious loss, as you’ll still need to pay back the original amount you borrowed.

    With a repayment mortgage your monthly payments will be higher because you’ll be paying both the interest and part of the amount you borrowed. At the end of the mortgage term, your debt will be clear.

    If you’re uncertain about any aspect of choosing a mortgage, you can get help from mortgage advisers in branch, online or over the phone or from a mortgage broker. The Financial Conduct Authority has a register of regulated brokers that you can search.

  • Consider all the costs

    A buy-to-let property can provide an income but you need to consider all the costs involved – both upfront and ongoing – to ensure it’ll be worthwhile for you. Some costs can be claimed against your income as a landlord, which is why you should get independent financial and legal advice before purchasing a buy-to-let property.

    Mortgage costs

    In addition to the 25% deposit you’ll need to put down for a buy-to-let mortgage, you’ll usually need to pay an arrangement fee, which can be higher than those for residential mortgages.

    Of course, there’s also your monthly mortgage payments. You’ll need to have a plan in place for how you’ll meet these if you go through periods when your property’s not rented out.

    As with your residential mortgage, there will be other costs associated with a buy-to-let mortgage – legal fees, valuations, surveys and Stamp Duty, which is considerably higher on buy-to-let properties than it is for residential ones.

    Insurance

    You’ll need to have buildings insurance on a property in order to get a mortgage. If you plan on renting out the property furnished, you should also consider taking out contents insurance.

    It could also be a good idea to consider covering yourself against the additional risks associated with letting a property, such as landlord’s liability, rental guarantee and emergency repair assistance.

    Letting agent fees

    If you’re thinking of using a letting agent to manage your property for you, you’ll need to factor in these costs as well. Depending on the level of service you take up, this could range from 5% to 15% of your monthly rental income. You can also use an agent simply to advertise the property and vet potential tenants.

    Tax

    As soon as you start renting out property, you need to let HM Revenue and Customs know and report your rental income to them each year. You may have to pay tax on the profit you make from renting property after deducting any allowable expenses. Tax laws can change, which is why you should take specialist tax advice.

    Ongoing maintenance and repair

    You’re legally responsible to keep your property in a good condition, so you should budget for ongoing maintenance and repair to avoid costly surprises.

  • Your landlord responsibilities

    It’s your responsibility to know and meet your legal and financial obligations as a landlord. There are a wide range of things you’ll need to consider, including:

    • Handling ongoing maintenance and repair
    • Following the regulations and inspections for electrical, gas and fire safety
    • Insuring the property, and yourself
    • Finding and vetting tenants
    • Drawing up tenancy agreements
    • Protecting your tenant’s deposit in a government-approved scheme
    • Collecting rent
    • Ensuring your tax obligations are met and paid

    This is why a number of buy-to-let investors appoint letting agents to manage their properties for them. The costs can be considerable, however – as much as 15% of the monthly rental income – so you should carefully weigh up the pros and cons of using their services.

     

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