1. Consider the type of tenant you want to attract
Think about the target tenant you are looking for. The needs of different types of tenants will vary considerably, for example students versus families or young professionals. Students will need bedrooms large enough to include a study area and large shared facilities (such as kitchens), whereas families might need more storage space and a garden. You’ll need to get this right or you could struggle to rent it out... and a vacant property provides no income.
2. Get the location right
This is integral to attracting your target tenant. Think about facilities around the property – students may need to be close to a bus route, families near to good local schools, and young professionals may want to be in a busy central location. Are you purchasing a property without parking? It may not prove to be a problem if there are good transport links and shops nearby. Also, think about whether you are planning to manage the property yourself or use a letting agent. If you are managing the property yourself, is it near enough to be feasible?.
3. Calculate your rental income
You’ll need to ensure the potential rent will be sufficient to cover your outgoings, such as your mortgage payments, insurance, repairs and agent fees. You’ll also need to consider any potential rental voids too, as this could be a real possibility between tenants. See what other landlords and agents are charging to get a good idea of what could be achievable. A simple three step way to calculate your potential rental yield is below:
- Calculate the potential annual rent and subtract your costs
- Divide the result by the property value
- Multiply by 100 to give you your rental yield as a percentage
Once you have your rental yield you can use it to work out the potential profitability of the property you’re looking to buy, and how you fare against your competition.
4. Choose the right mortgage
Buy-to-let mortgages are specialist products designed to help anyone looking to buy a property with the intention of renting it to others. The amount you can borrow will typically depend on the rent you expect to earn from the property. Normally, you would be required to put down a larger deposit to secure a buy-to-let mortgage.
These mortgages are very different to residential mortgages. They are assessed in a different way, sometimes using just the rental income to support the mortgage application. Interest rates are typically higher, as are the charges to set up the mortgage such as arrangement fees and survey fees. As a guide, lenders typically need to see a rental income up to 45% higher than the mortgage payment. Eligibility for this type of lending is different too.
You can choose whether to have the mortgage on an interest only or repayment basis. Both have advantages and disadvantages:
Interest only – you will only be paying the interest on the mortgage. You will still owe the same amount you initially borrowed at the end of the mortgage term, and interest will be charged on the full balance until the balance has been fully repaid.
Most borrowers choose interest only mortgages as it keeps the monthly cost down, helping to meet buy-to-let lending criteria. Selling the property at the end of the mortgage term then clears the outstanding debt. This does come with risks, however, as the housing market could be very different at the time of selling and you could find the property has lost value.
Repayment – you will be paying both capital and interest on the mortgage. At the end of the term, you will have the guarantee that (providing you have paid your mortgage on time) the mortgage will be fully repaid. Lenders may be more cautious with the amount you can borrow, as the mortgage payments may be higher, and therefore they need to be comfortable that the property is truly self-funding and not reliant on your personal income to support it.
Choosing from these two options will depend on what type of investor you are – do you want to generate a larger income now by keeping the monthly mortgage payment low, or do you want to pay off the mortgage, with a view to a larger income in the future? It will depend on what your investment goals are as to which way you choose, but either way, you must keep a close rein on your costs.
5. Don’t forget tax
Stamp Duty Land Tax – Buying a buy-to-let property may mean you have to pay a higher rate of Stamp Duty Land Tax in England and Northern Ireland. The amount you pay increases with the value of the property.
Income Tax on rental income – Once you start letting your property, you must let HM Revenue and Customs know. You may be required to pay tax on any profit you make, after taking any allowable expenses into consideration. It is strongly recommended you seek advice from a qualified tax adviser before making any decisions.
Capital Gains Tax – If you profit from the value of your property increasing (capital growth), you will need to consider the potential cost of Capital Gains Tax when you sell it.
6. Factor in your agent fees
It can be useful to use a letting agent to manage your property, especially if you are letting a property for the first time or you if don’t live nearby. You can expect to pay between 5 and 15% of the rental income to the letting agent, depending on the level of service you require from them.
You can also pay a letting agent to find and vet a prospective tenant. Not only will this save you time, but the agent can also carry out checks to ensure your property is let to someone who can afford the rent. They can also check that your tenant has the right to rent in England. This is a crucial legal responsibility of you as a landlord, and failure to carry out this check could result in significant fines or even a prison sentence.
7. Consider your responsibilities as a landlord
Appliance Checks – As a landlord, you need to ensure the property is safe to live in. This means you need to:
- Arrange for a Gas Safe registered engineer to carry out annual safety checks on all gas appliances, including the boiler
- Arrange for a Part P-qualified electrician to check all fitted electrical appliances are safe prior to the beginning of each tenancy
- Provide a copy of the gas and electrical safety certificates to tenants
- Install smoke alarms on all floors, with carbon monoxide detectors in rooms with fuel burning devices
- Get an Energy Performance Certificate within seven days of putting the property on the market for rent
- Make sure all furniture meets safety standards
- Repair all structural faults or broken appliances
Insurance – Lenders require that buildings insurance is in place on all mortgaged properties, although if you purchase a leasehold property this is usually covered in the property’s service charge. It is also worth considering getting contents insurance if you intend to let your property furnished.
Specialist landlord insurance can also help to cover loss of rent, replacement locks and keys, damage inflicted by tenants and injury or damage to possessions that happen in the property.
Licencing for houses in multiple occupancy – If you choose to let your property in England or Wales to three or more individuals who are not part of the same household who share facilities, such as a kitchen or bathroom (for example, a student rental) then you may need a special licence. You should contact your local council to check if this is needed.
8. Tenancy contracts and deposits
The rights and responsibilities for the landlord and tenant are set out in a tenancy contract. The most common type of contract in England and Wales is called an Assured Shorthold Tenancy agreement (AST), in Scotland it’s called a Private Residential Tenancy. These run typically for 6 or 12 months but can be negotiated for a specific length of time and can be extended by mutual agreement.
The law states that landlords need to pay a tenant’s deposit into a scheme to ensure their money is protected. This money needs to be available at the end of the tenancy and can be used as part of a dispute resolution service. Tenants can take legal action should you not use a deposit protection scheme, and courts can order that the landlord pay the tenant up to three times the original deposit.
Putting it all together
Our expert mortgage advisers are here to make the buy-to-let journey as simple as possible, and will secure your perfect deal from the whole of market. We can spin all the plates for you, talking to estate agents, solicitors and lenders to ensure they have all the information they need, and work side-by-side with you to project manage that all important first investment as a new landlord. Find out more and book your free consultation today.