Buying a property in order to let it out to tenants can be a big step for new landlords. There are many different things to consider, but the recent recovery of the UK housing market, especially in London, may mean that buying to let could be a great investment. According to Property Data Company IPD, over the last decade to the end of 2012 property has provided landlords with an annualised return of 11.2% compared to 5.1% from equities and 7.6% for bonds.
This article will consider the risks and benefits of Buy to Let for new investors entering the market for the first time.
Do Your Research
When considering buying a property to let make sure you are sure that this is right for you in your individual situation. Consider the fact that your money may perform better elsewhere, for example you may receive a 3% return on a high-rate savings account or 5% return from an income-based investment fund. Investing in property means accepting an element of risk: the value of your property may go down as well as up.
There are tax advantages of investing your money in funds in shares or an investment trust through an ISA. You will pay just 10% tax on your income from the investment and will be exempt from capital growth tax. You will also have the ability to liquidate your assets quickly and easily if you need to, knowing the amount that you will receive.
With a Buy to Let mortgage any rental income that you receive will be subject to income tax (at 20% or 40% depending on other income, although you can offset mortgage interest and maintenance costs against tax) and you will be liable to pay capital gains tax on any increase in value when you sell your property. In addition, if you need to sell your property in order to access your capital, you cannot guarantee the price the property will sell for, or how long it will take to sell.
If you are serious about buying to let, talk to anyone you know about their experience of being a landlord; this may help you decide if this kind of investment is right for you.
Study the Property Market
According to the Communities and Local Government English Housing Report, the number of privately rented properties has risen from 3.4m in 2009-10 to 3.8m in 2012-13. The Royal Institute of Chartered Surveyors (RICS) predicts a rise of 2% in UK property market in 2015 (and increases of up to 10% in London), but remember that property rises have only recently begun to beat inflation, and that demand in the residential market could falter if there were to be another economic downturn.
In the case of Buy to Let mortgages, rental yield (and not property value) is the main source of income. In the present climate, the best chances for a good return lie in long term investments. Contrary to expectations, Buy to Let landlords have seen better rental yields outside of London and the South East, with the best yields in Wales (6.7%), the North (6.5%) and the Midlands (6.5%) on one and two-bedroom properties.
Whatever part of the country you decide to invest in, the location of your property is one of the most important factors in buying to let. To maximise the rental yield you should aim to find a property in an area of high demand. Consider areas that benefit from good transport links, properties in the commuter belt, properties in the catchment areas for good schools, properties near university campuses or properties that enjoy access to a lot of amenities.
The Differences between Buy to Let and Residential Mortgages
There are quite a few differences between Buy to Let and residential mortgages, and overall Buy to Let mortgages cost more for the borrower. The interest rates for these mortgages are higher than for residential mortgages and there is a minimum deposit of 20% of the property’s value. In keeping with residential mortgages, a deposit of 30-40% will enable borrowers to access the best rates of interest. In addition to this, Buy to Let mortgages have higher arrangement fees, with costs ranging from £1000 to £3500 for a £100,000 mortgage. Bear in mind that mortgages with lower interest rates but high arrangement fees may turn out more expensive in the long run.
Buy to Let mortgages are assessed primarily on the rent that you will charge tenants, which is typically 125% of the mortgage repayments. So for mortgage repayments of £800 per month, you will be expected to charge £1000 in rent. Some lenders also have a minimum income requirement, to give the assurance that you could pay the mortgage during untenanted periods. It is worth shopping around different providers and getting advice from a specialist Buy to Let mortgage advisor.
Currently (January 2015) the best Buy to Let mortgage deals include:
|Principality BS||2.20%||4.6%||Fixed for 2 years||60%|
|The Post Office||2.44%||4.7%||Fixed for 2 years||60%|
|NatWest||2.45%||4.3%||Fixed for 2 years||60%|
|Virgin Money||2.45%||4.7%||Fixed for 2 years||60%|
|Skipton BS||2.49%||4.9%||Fixed for 2 years||60%|
|Platform||2.49%||4.7%||Fixed for 2 years||60%|
Remember that if you buy a property with a Buy to Let mortgage, the rent to property price will not be the return you get for your investment. To work out your annual return, subtract the annual mortgage cost from the annual rent and then work out the sum as a percentage of the deposit you put down.
For example: For a £100,000 property, you would need a deposit of roughly £25,000 and you would receive a rental income of £500 per month. This means that you would have a mortgage of £75,000 at a rate of around 5%. To calculate your annual income:
|£500 monthly rent x12||£6000|
|£75,000 mortgage at 5% interest||£3750|
|Deposit + buying costs||£27,000|
Remember that tax, maintenance costs and other landlord expenses (such as letting agent fees) will eat into that return. You should also consider whether your financial position depends on the property being let at all times. It is recommended that landlords allow for two months per year where the property is untenanted.
Remember that Buy to Let investments work best on a long term basis and that taking out a Buy to Let mortgage means that you are exposed to losses greater than your investment. Many Buy to Let mortgages are taken out on an interest-only basis, and this can be extremely risky as you are liable to repay the whole mortgage value at the end of the repayment period. If property pries have risen, or you have saved enough of your rental income you should be able to pay back the money, but if the value of your property has fallen, you may lose your deposit plus any additional shortfall when repaying the bank. This could leave you thousands of pounds in debt.
First Time Landlords
Becoming a landlord for the first time can involve a lot of different considerations. To find out more, see our article ‘Becoming a Landlord.’