Buy to Let
For many, buy-to-let looks an attractive income investment in a time of low rates and stock market volatility.
Buy-to-let: Is it worth it?
But while buy-to-let may no longer be the hot property it once was, as an income investment for those with enough money to raise a big deposit it looks attractive, especially compared to low savings rates and stock market volatility.
But beware, many investors who bought in the boom struggled as mortgage rates rose before the base rate was slashed to 0.5 per cent - and one day interest rates must rise again. Lower house prices, rising rents and improving mortgage deals are tempting investors once more.
If you are planning on investing, or just want to know more, we tell you the essential things to consider for a successful buy-to-let investment. Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares Here it is.
Research the market
If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits. Read up as much as you can for latest news. If you know someone who has entered the buy-to-let market, ask them about their experiences.
Choosing a Location
Location does not mean most expensive or cheapest. Location means are there facilities nearby, such as transport links, shops, gyms and cinemas? Is there a teaching hospital, a university campus or a really good school down the road? All of these will attract people for different reasons - many of whom will need to rent.
Do the maths
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.
Traditionally buy-to-let lenders wanted rent to cover 125% of the mortgage repayments, although many had relaxed this in the tail-end of the boom years. Most are still looking for a 15% deposit, which protects against falling prices.
After the financial crisis, many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees.
Once you have the mortgage rate sorted - and remember to allow yourself leeway for rate rises in years to come, be clinical in deciding will your investment work out?
What will happen if the property sits empty for a month or two? These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.
Can you still get into buy-to-let?
Existing investors should now be benefiting from lower rates, many will have fallen on to their lender's standard variable rate and the slashing of base rate down to 0.5% has done them a favour. This is especially true for many as a lot of buy-to-let deals do not have typical SVRs but a revert rate that tracks the bank rate. However, new mortgage deals remain expensive in comparison to residential deals You will need a big deposit though and should not expect instant riches.
If investors are willing to accept that the value of their property may slide in the short term, and can ensure their property meets the criteria of at least 75% to 85% loan-to-value and returning 125% of monthly mortgage payments then it can be a good long-term investment.
Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make billions in profit.
Look on the web for the latest buy-to-let mortgage deals highlighted and check lenders' websites, for example Skipton BS, BM Solutions, NatWest, Woolwich and Coventry Building Society have consistently offered competitive rates in recent years, while Platform (part of Co-op Bank) and Accord (part of Yorkshire Building Society) are also offering good deals If you are looking for advice consider using a specialist buy-to-let mortgage broker. Remember asking them for information means you are under no obligation to use them.
Think about your target tenant
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are young professionals it should be modern and stylish but not overbearing.
If it is a family they will have plenty of their own belongings and need a blank canvas. Remember that allowing tenants to make their mark on a property, such as painting, or adding pictures or taking out unwanted furniture makes it feel more like home - these tenants will stay for longer, which is great news for a landlord.
It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance policy, available from Letting Agents
Should You Renovate To Let?
If you are approaching a renovation with a mind to letting the property out afterwards, there are lots of factors to consider.
First, you need to think about what your future tenants will need in terms of facilities. Then you need to check that your plans will be passed by building regulations with letting in mind. Once that's done, you can weigh up whether the finances work.
Bear in mind that while it's worthwhile investing in very solid basics - a broken roof should be mended, an old boiler replaced, double glazing fitted if windows need replacing there's really no point in over-doing the interior details. So, approach your renovation practically - put down washable flooring wherever you can, don't spend a fortune on light fittings and curtains, and buy a good-looking but inexpensive kitchen. Keep things low maintenance, too. Plant shrubs that need no more than a couple of trims a year and replace a lawn with decking in a small space to keep the garden looking neat.
What Are Your Responsibilities?
As a Landlord you also have responsibilities, such as carrying out repairs, ensuring the safety of gas and electrical appliances, and ensuring that the furniture and furnishings meet fire safety requirements. From 1 October 2008 landlords have been required to provide an Energy Performance Certificate any new tenancy.
Certificates produced are valid for 10 years. A landlord does not need to commission a new Energy Performance Certificate each time a new tenancy starts, but is required to give a copy of the latest version to tenants.
Those wishing to improve their property's Energy Performance Certificate (EPC) rating can receive tax benefits. The Landlords Energy Saving Allowance enables landlords to claim up to £1,500 per dwelling for certain energy efficiency improvements. This includes cavity wall and loft insulation, draught-proofing, hot water insulation and dry-lining.
For more information, go to: http://www.hmrc.gov.uk/manuals/pimmanual/pim2072.htm
and for the Green Deal please look at http://decc.gov.uk/en/content/cms/tackling/green_deal/green_deal.aspx
Don’t Be too over ambitious
We have all read the stories about buy-to-let millionaires and their huge portfolios. But the days of double-digit house price rises are gone, so experts say invest for income not short-term capital growth. To compare different property's values use their yield: that is annual rent received as a percentage of the purchase price. For example, a property delivering £20,000 worth of rent that costs £400,000 has a 5% yield.
Return on investment
Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get. To work out your annual return on investment subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down. For a £400,000 property that could rent for £2000 per month: £300k mortgage at 5% = £1250.00 per month £2000 rent x 12 = £24,000 Difference Yearly rent by Yearly mortgage payments = £9,000 Deposit + buying costs = £120k Annual return Difference with deposit/buy costs = 7.5%
Don't forget tax, maintenance costs and other landlord expenses when working out your costs.
Rent should be the key return for buy-to-let. 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, then once you have built up a good emergency fund, you can start saving or investing any extra cash.
Remember though, people rarely buy a home outright and they come with running costs, so mortgage costs, agents fees must be worked out. Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term.
This means you will have benefited from the income from rent, paid off the mortgage and hold the property's full capital value.
Know the pitfalls
Before you make any investment you should always investigate the negative aspects as well as the positive. House prices are falling and if this continues, will you be able to continue holding your investment? What will happen if you can't remortgage?
Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year - this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.
Consider how hands-on you want to be
Buying a property is only the first step. Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong. You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs. Lastly have an exit strategy
There are a number of tax implications to consider when buying and selling a second property. Rental income generated from the property will be added to your other income and taxed as the profits of a business.
You should consider getting advice and planning on capital gains tax (CGT) and inheritance tax (IHT) when you come to selling or transferring your property. Any profit you have made above the individual annual allowance of £10,000 will be subject to CGT of up to 40 per cent. Owning a second property could also make you liable for IHT or increase your tax bill. There are a number ways to mitigate your tax liability and it's worth speaking to an independent financial adviser for advice.