12 tips you need to know for making buy-to-let work
THE CRITERIA FOR BUYING A PROPERTY to let are considerably different from those you might apply if buying a place in which you would live. Whether you are planning to acquire one rental property or more, a buy-to-let portfolio can offer a reliable, and in some cases substantial, return on investment.
1. DO YOUR RESEARCH Before you make any decisions, it’s important to do your research and understand the buy-to-let market. This includes understanding the potential risks and rewards involved, as well as familiarising yourself with the different types of properties that are available to rent out. Research locations that are most popular with renters. Ask local letting agents which areas are sought-after, and why. Tenants are often attracted by locations with plenty of employment opportunities or good communications for commuting to nearby towns and cities. University students are readymade tenants and the correct type of accommodation near to their faculty should always let well. Keep an eye open for local news that could affect the demand for rental properties – such as big company relocations bringing lots of new potential tenants, or the opening of a motorway or rail link that will increase the popularity of an area.
2. FIND THE RIGHT PROPERTY Once you’ve done your research, it’s time to start looking for an investment property to buy. As with purchasing a home, buy the best rental property you can afford, in the best area for demand and future growth. When considering which property to buy, think about things like the location, the type of property and the potential rental income. Talk to local letting agents about what type of properties are most popular with tenants. It could be family homes, apartments or student accommodation. Ask if there is a shortage of a particular type of popular rental property and go looking for one to buy. Sometimes properties are for sale with a tenant already in place. Watch out for new housing developments being built in the area. They could bring a number of rental properties onto the market and potentially cause a supply surplus that might affect future rents.
3. GET A BUY-TO-LET MORTGAGE If you’re going to buy a property, you’ll more than likely need to get a mortgage, unless you are a cash buyer. When applying for a mortgage, it’s important to shop around and compare different deals to find the one that’s right for you. Many lenders consider a buy-to-let mortgage as higher risk, so you may need to meet certain conditions to be eligible for one. Interest rates on buy-to-let mortgages are usually higher. The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20% to 40%). Most buy-to-let mortgages are interestonly. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full. Buy-to-let mortgages are also available on a repayment basis. If you are already the owner-occupier of the property and it is subject to a normal mortgage, the lender will need to know that you are intending to let it out and this may affect the level of your repayments.
4. CONSIDER USING A LETTING AGENT If you’re not experienced in lettings, you may want to consider using a letting agent. A good letting agent can help you find tenants, manage the property and deal with any problems that may arise. Letting agents also help ensure that your legal responsibilities to tenants are met and are therefore contractually obliged to put your best interests front and centre. However, it’s important to keep in mind that any legal liability always lies with you the landlord in the landlord-letting agency relationship – even if the mistake lies with the letting agent. But a good letting agent should make your life as a private landlord easier by freeing up your time by carrying out tasks such as rent collection and property inspection to make sure everything is in order. When searching for a letting agent, it’s a good idea to ensure that they belong to a professional body such as the Association of Residential Letting Agents (ARLA), UK Association of Letting Agents (UKALA) or National Association of Estate Agents (NAEA) as they’ll need to operate to specific rules and regulations and give landlords more protection.
5. BE PREPARED FOR VOID PERIODS You need to be prepared for the fact that there may be times when your property is empty and you’re not receiving any rental income. This is known as a void period, and it’s important to factor this into your financial planning. The majority of rental investments are successful but it is wise to err on the side of caution in calculating yields and in deciding what you can afford to buy. It may take longer than expected to find a tenant, the rental figure may be lower than anticipated and there may be void periods between tenancies. This can reduce the return on your investment and put pressure on your cash flow.
6. KNOW YOUR RENTAL YIELD You are buying an investment property for the purpose of generating an income from the rent to be paid by a tenant. This rate of return is called the ‘yield’ and is calculated by dividing the annual rent by the capital value of the property (the amount you paid for it). Take, for example, an apartment that is on the market for £180,000. If the current typical rental rate for this kind of home in this particular area is £900 a month, the total annual rental income would be £10,800 (assuming that the property had tenants for the full 12 months). This would give a rental yield of 6% (£10,800 divided by £180,000 is 0.06). However, you will have some costs during the year – including repairs to the property. This will reduce the rental income and result in a net yield.
“It’s important to note that you’ll usually need written permission from your mortgage lender before you let your property, and that failure to get this may mean that you’re breaking the terms of your mortgage.”
7. ENERGY EFFICIENCY RULES The current rules state that private rented properties in the UK must currently have an Energy Performance Certificate (EPC) grade of ‘E’ in order to be legally let out. However, England and Wales have proposed raising the minimum rating to ‘C’ by 2025. The Lettings Industry Council has submitted a recommendation to defer this requirement. Therefore, if your rental property is rated ‘D’ or ‘E’, now is the time to start improving its energy efficiency before the new laws take effect. Costs in doing so are currently capped at £3,500 inc. VAT; however, the proposal is to increase this cap to £10,000 inc. VAT. Under certain circumstances, you can apply for an exemption. In Scotland, legislation mandating all rental homes to have a minimum ‘E’ rating was scheduled to come into force in April 2020 but was postponed because of the pandemic. The decision was made to skip the ‘E’ requirement in April 2022 and replace it with a ‘D’ requirement.
8. ASSURED SHORTHOLD TENANCY AGREEMENT An Assured Shorthold Tenancy (AST) agreement is the most common type of tenancy agreement. It is a contract between you the landlord and your tenant, setting out the terms and conditions of the tenancy. AST agreements are typically for a fixed term of 6 or 12 months, after which the tenancy can be renewed. The tenant will usually have the right to stay in the property for the duration of the fixed term, unless they breach the terms of the agreement (e.g. by not paying rent, causing damage to the property).
9. INVENTORY AND SCHEDULE OF CONDITION Your rental inventory gives full details of the condition of your property and its contents at the start of any new tenancy. This is a catalogue of the property and its contents. A schedule of condition is a record of condition. The inventory and schedule of condition has several functions: it is a catalogue of the property being let; it records the condition of the property and any items that are included in the tenancy; and it forms part of the legally binding contract that is set out in the tenancy agreement between the tenant and the landlord.
10. PROTECTING A TENANT’S DEPOSIT As we covered above, most tenancies are an AST. Your tenant will pay a security deposit to you as the landlord that is held for the duration of the tenancy and must be registered with one of the government approved Tenancy Deposit Schemes (TDS). If you do not protect the deposit you can be fined and it can make it much more difficult to end the tenancy. At the end of the tenancy, the deposit will be used to pay for any dilapidations caused by the tenant outside of ‘fair wear and tear’ and any unpaid rent. TDS has launched a Code of Recommended Practice. This Code of Practice sets out the recommended requirements which letting agents and landlords should meet as members of the TDS.
11. GET COVERED – CHECK YOUR INSURANCE Landlord buy-to-let insurance covers you for property owner’s liability and damage to the buildings or to your contents against a range of risks such as flood, fire, burst pipes or storm. There’s no legal obligation for a landlord to take out a dedicated insurance policy. However, a conventional home insurance policy won’t cover you for rental activities, and if you have a mortgage on your property it’s very likely that your lender will require you to take out insurance before you take on tenants. It’s important to note that you’ll usually need written permission from your mortgage lender before you let your property, and that failure to get this may mean that you’re breaking the terms of your mortgage.
12. TAX – DECLARE YOUR INCOME Any rent that you receive, any non refundable deposits or any additional payments that you receive from your tenants, such as the cleaning of communal areas, property repairs or utility bills all class as income and must be declared. This applies for any money that’s kept over from a returnable deposit at the end of the tenancy. Any rental profits are taxed at the same rates as the income you receive or would receive if you have additional employment, depending on which tax band the income falls into. If your rental income is added to the extra income you earn, you may get tipped into a higher tax bracket. When it comes to paying your tax on rental income, you must declare rental income for the tax year it’s due, even if you’re not paid until the tax year is over. You can deduct any allowable expenses which relate to work done for a particular tax year, regardless of whether you pay the bill before or after the end of the tax year.
>> NEED TO FIND A BUY-TO-LET MORTGAGE THAT WORKS BEST FOR YOUR CIRCUMSTANCES? << By following these tips, you can help to make sure that your buy-to-let investment is a success. It’s important to obtain professional advice to find the mortgage that works best for your circumstances. To find out more, speak to Omni Finance – telephone 01424 236903 – email simon.hickman@omnifinance.co.uk
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. BUY TO LET MORTGAGES ARE NOT USUALLY REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. OMNI FINANCE IS AN APPOINTED REPRESENTATIVE OF NEW LEAF DISTRIBUTION LTD WHO ARE AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY (FCA). FCA NUMBER IS 460421.
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