Buy To Let

If you are thinking of buying a property to let, there are many things you will need to consider first. Although it can be very beneficial to become a private landlord, a steady stream of income and the long term accumulation of capital growth being the primary objectives, there are also many pitfalls that can occur. This section will guide you through the process of buy to let mortgages.

Buy to let mortgages have three main differences to normal mortgages:

 First to consider is the Rent Potential. As well as looking at your income, lenders will often make the decision as to whether or not to offer a mortgage based on the rent you will earn from the property you want to buy. You may find that some lenders will not even consider your income.

Another is Interest Rate. A buy to let mortgage will have slightly higher interest rates.

Lastly, a Larger Deposit of a minimum of 20-25% of the property will usually be required.

Although becoming a private landlord can seem like an easy way of making money, it is not something to be taken lightly. It can be complicated, time consuming and very risky. There are no guarantees that the house prices will continue to rise, so what can start as a potential goldmine, could leave you seriously out of pocket. That warning aside, having a second property to let out could reap great financial rewards over time.

One of the first things you should weigh up before making a decision, is whether your reasons for wanting a buy to let mortgage are for income or capital growth. If your reasons are income, you are looking to make profit month on month. If your reasons are for capital growth, you are looking to make profit through increased equity from the second home as it increases in value over time. This decision will affect the type of property you buy and the location it’s in.

When managing a property, you will find there are many more costs involved than just the monthly mortgage repayments. Some of these costs are outlined below:

• Letting Agents Fees. Letting agents charge roughly 10% of the monthly rent for finding and vetting tenants. There may also be an additional cost for a full management service. Although you don’t necessarily have to use a lettings agency, it is recommended.
• Legal Insurance is very important should you need to evict non-paying tenants, which can be very costly to you.
• Building/Contents Insurance is a must to cover you against damage to the building, furnishings and any appliances inside. This will have to be a part of the rental agreement.
• Property Upkeep. You will be expected to provide maintenance costs towards the upkeep of the property.
• Ground Rent/Service Charges are applicable to leasehold properties.
• Decorating. You may have to decorate the property before it is suitable to let out. This can range from painting, laying carpet or providing a new bathroom suite.
• Furnishings. If you are letting the property furnished, you must make sure you are covered by home insurance (listed above).
• Gas/Electrical Appliances can be costly to maintain. You must also ensure that any appliances comply with regulations like safety tests.

The gross rent you should be aiming to achieve is about 135% of the property’s interest only mortgage repayments. This is just a guide and should cover your costs should anything go wrong.

The Association of Residential Letting Agents (ARLA) state that the property you choose should be in the right area, close to public transport and other facilities and should be in a good condition. So, it is a good idea to speak to local letting agents to get advice on what sort of properties are in demand and in which parts of the town would be best to buy to let. There may be a university in the area, and the letting agents will be able to tell you if there are students looking for accommodation.

It is good practice to choose a letting agent that is a member of the ARLA. The reason we say this is because all members of the ARLA must join in a bonding scheme to protect deposits made by you and your tenant. The bond can provide total compensation of up to £2 million a year.

Finally, there are a number of tax issues to look at in order to maximise your tax position.  Like being able to offset your letting agents fees and maintenance costs as well as any interest paid on a buy to let mortgage against your tax.