Making buy-to-let work for you

Entering the world of being a landlord is a journey filled with anticipation and responsibilities. It’s about adding a property to your portfolio and managing finances, understanding tax implications and maintaining your property. But let’s remember the exciting part, the potential for a steady stream of passive income, a diversified investment portfolio and greater financial independence.

Before diving into the buy-to-let market, familiarising yourself with every aspect of the process is essential. From the initial investment to ongoing maintenance, there’s much to consider.

STAYING CURRENT WITH BUY-TO-LET REGULATIONS

As a landlord, adherence to numerous legal requirements is a must. These laws, particularly those related to tenants’ rights, have seen significant changes in recent years. Staying current with these changes can make you a more effective landlord and your properties more appealing to potential tenants.

Electrical Safety Standards: New regulations enacted in April 2021 mandate that landlords ensure all fixed electrical installations and wiring are inspected and tested by a certified electrician.

Right to Rent: Landlords must verify if a potential tenant is legally allowed to rent a property in England. This typically involves checking passports and other identification documents to confirm a tenant’s immigration status.

Eviction Rights: s2(a) of the Renters Reform Bill removes Section 21 from the Housing Act 1988 as part of abolishing Assured Shorthold Tenancies and deleting Chapter 2, Part I of the 1988 Act, including Section 21 along with it. It’s crucial to familiarise yourself with the latest legislation before drafting a tenancy agreement.

MAKING YOUR BUY-TO-LET MORTGAGE DEAL WORK FOR YOU

Choosing the right buy-to-let mortgage can significantly impact your success as a landlord. Whether you’re a seasoned property investor or a first-time landlord, finding a deal that fits your current and future needs is crucial. A buy-to-let mortgage carries its own distinct set of rules and requirements, vastly different from the mortgage you may have on your personal residence.

One of the key differences lies in how the borrowing amount is determined. Unlike a traditional home mortgage, the amount you can borrow with a buy-to-let mortgage is significantly influenced by the projected rental income from the property. This expected income becomes crucial in deciding the loan amount, although other income you receive may also be considered under certain conditions. To give you an idea, many lenders require that your rental income surpasses your mortgage payment by 25% to 45%.

This ensures a sufficient buffer to manage unexpected expenses or vacancies without defaulting on mortgage payments. Furthermore, the eligibility criteria for a buy-tolet mortgage can differ from those of a standard mortgage. Professional mortgage advice will provide a comprehensive illustration outlining repayment costs, charges and terms. This guidance can help you make an informed decision.

CHOOSING A LETTABLE PROPERTY

When investing in rental property, understanding tenant demand is key. The property size should match what renters in the area are looking for. Are smaller residences in high demand, or are larger homes lacking supply? Answering these questions will help you choose a property that will be easier to let.

LOCATION MATTERS

The property’s location is also a vital factor. Researching the local area’s popularity among prospective tenants can inform your buying decision. You can conduct this research independently or enlist a specialist letting agent’s help. Local estate agents, employers and local authorities can provide valuable insights about the rental market in the area. Local newspapers can also present a wealth of information about rental housing demand and supply.

OPT FOR LOW-MAINTENANCE PROPERTIES

A well-maintained property is more attractive to tenants and easier to manage. If you’re short on time or not interested in DIY, a newer property may fit you better. These properties often require less maintenance and repairs, reducing your overall responsibilities as a landlord.

CONSIDER PROFESSIONAL PROPERTY MANAGEMENT

Managing a rental property involves dealing with maintenance issues, tenant disputes, etc. If you’re not up for the challenge, consider hiring a letting agent who will offer various lettings packages to suit your needs.

Full Management: Taking care of every aspect of the letting experience.

Rent Protection: This typically includes advertising, conducting viewings, performing reference checks on tenants, preparing tenancy agreements, managing any rental arrears and providing monthly and annual statements.

Let Only: Handling advertising, viewings, reference checks and tenancy paperwork, leaving you to deal with rent arrears, disputes and maintenance issues.

By considering these factors, you can ensure your buy-to-let mortgage deal is fit for purpose and leads to a sustainable and profitable rental business.

UNDERSTANDING TOTAL INSURANCE-ASSOCIATED COSTS

As a landlord, it’s crucial to account for all potential costs associated with your property beyond just your mortgage payments.

Here are some expenses you should factor into your budget:

Buildings insurance: This insurance covers the structure of your property against damages.

Contents insurance: If your property is furnished, consider this type of insurance, which protects the items inside your property.

Maintenance costs: These are the costs associated with the upkeep and repair of your property.

Vacancy periods or non-payment: There may be periods when your property is vacant or tenants fail to pay rent, leading to a loss of income.

Interest rate increases: A rise in interest rates could lead to higher mortgage repayments, which you may not be able to offset with rental yield increases or rent hikes immediately. Knowing these costs can help you plan your budget more effectively, ensuring your property investment remains profitable and sustainable.

UNDERSTANDING TAX RESPONSIBILITIES

Owning and renting out property can be profitable, but it’s important to understand that these earnings are subject to taxation. However, some of the expenses you accrue as a landlord can be deducted from your tax liability. Here are the primary taxes you’ll need to be aware of: Income Tax:

This is levied on the income you generate from your rental property. Stamp Duty: This tax is applicable when you purchase your property. Capital Gains Tax: Upon selling your property, you may have to pay this tax on any profit you make.

GRASPING THE CONCEPT OF RENTAL YIELD

Your rental yield is critical in assessing if your buy-to-let property venture is financially viable. Divide the annual rental income by the amount of the property cost plus any renovation or refurbishment costs multiplied by 100. The resulting percentage is your rental yield. A good benchmark to aim for is a rental yield of 7%.

This should provide sufficient cash flow to cover mortgage and maintenance expenses while generating a reasonable profit. Understanding your rental yield can guide your investment decisions and help ensure the sustainability of your property investment.

Don’t forget, our professional friendly advisors are on hand to support you and can help you explore all of your options.