Buy-to-let mortgage guide Becoming a landlord
Before deciding to invest in a buy-to-let property, it's important that you understand all the costs you'll be liable for plus the key responsibilities involved with being a landlord. Find out what's involved in this guide.
Choosing the right buy-to-let property
Choosing the right property to invest in is crucial to having a successful buy-to-let. It's generally a good idea to look for a property that will be cheap and easy to maintain.
Avoid older or non-standard properties, and ideally buy somewhere that will be ready to let immediately.
Think about what type of market you want to target - young professionals will have very different requirements from families or students, for example.
As a first step you can look on property portals such as Rightmove and Zoopla to understand what types of property are available locally, and also what types are being advertised for rent. This will give you an idea of what your budget for buying a property needs to be, as well as your likely rental income.
But it's also a good idea to speak to letting agents to really understand the local rental market, for example which types of property are easiest to let, what types of tenant there are in the area and whether there are any types of property in short supply.
It's especially important to speak to letting agents if you will need a buy-to-let mortgage to buy the property. Lenders will want to see evidence that your anticipated rental income will comfortably cover your mortgage payments - typically by 125%. This evidence will be more robust if you have spoken to some agents, rather than just looking at properties online.
The buy-to-let mortgage calculator on the Which? Mortgage Advisers website can help you figure out how much you may be able to borrow.
Once you know how much rental income you could earn, you can figure out whether you are likely to make a profit by calculating your landlord expenses.
When calculating whether buy-to-let is right for you, make sure you consider all the below costs. It's also sensible to have a contingency fund set aside in case any of your costs are greater than you expected.
Buy-to-let mortgage costs
If you are buying your property using a buy-to-let mortgage, your monthly repayments are likely to be your biggest cost. The bigger the deposit you have the better the rates you will be able to get.
If you would like to speak to someone about finding the best buy-to-let mortgage for your specific circumstances, Which? Mortgage Advisers offers whole-of-market, impartial mortgage advice. You can call them on 0808 252 7987.
If you plan to take out a variable-rate mortgage, bear in mind that there are likely to be interest rate increases in the coming years, so your costs could go up.
There's no exact science to working out maintenance costs, but if you already own a home you should have a good idea of what they might be. Experienced landlords recommend a 'little and often' approach to maintenance as it will often keep costs down over the long term. As a minimum, budget for costs of about £250 a year.
Every few years it is likely you will need to redecorate or refurbish parts of the property. Again, the best guide to likely costs for this type of work is to think about when you've done something similar in your own property. As a rough guide, budget for costs of around £2,000 over five years.
If you decide to use a letting agent to find tenants, you should budget for a fee of up to a month's rent. If you would like the letting agent to fully manage the property for you, ie collect rent, deal with tenants' problems and queries etc, you should budget for 10-15% of your annual rent.
It's a good idea to take out landlord insurance and, if you have a mortgage, your lender will usually expect you to do so.
You can get different levels of landlord insurance, for instance cover for the building and cover for your contents if the property is furnished. Costs for landlord insurance will vary depending on where you live, the property type and how comprehensive the cover is that you're looking for.
You should also allow for the property being empty for about 8% of the year between tenancies or during repairs.
Tax on buy-to-let property and rental income
You may need to pay income tax on profit you earn from letting out your property. Your profit is what you have left from your rental income after deducting 'allowable expenses'.
Allowable expenses include:
- Letting agent fees
- Landlord insurance
- Maintenance and repair costs
- Legal fees
- Interest on buy-to-let mortgages
The rules on 'finance cost relief', which is the tax relief you can currently claim for interest payments on buy-to-let mortgages or loans to buy furnishings, are changing from April 2017. The changes will affect anyone who is claiming this tax relief and is a higher-rate taxpayer.
If you let out a furnished property, until April 2016 you can claim 10% of your rental income as 'wear and tear' allowance. From April 2016 this is being replaced with a new 'tax relief for replacing furnishings'. Under the new tax relief you will claim the actual cost of replacing the furnishings, rather than a flat rate of 10%.
It is a good idea to get tax advice from a qualified specialist before becoming a landlord, as property tax can be very complicated. For example, something which you may think of as a repair or a replacement of existing furniture may actually be categorised as a capital 'improvement' by HMRC - in which case you would not be able to claim tax relief for it.
Once you have calculated your profits, this is added to any other income you may have earned in the year (eg income from a salary) to calculate how much income tax you will need to pay.
Find out more: tax on property and rental income - our guide to tax for landlords
As a landlord, you have a number of responsibilities for the buy-to-let property, including:
- Repairs to the structure and exterior of the property
- Maintenance of heating and water systems
- Maintenance of bathroom installations
- Gas safety check of all gas appliances carried out each year. This must be done by a Gas Safe-registered engineer
- Ensuring electrics and all electrical appliances are safe
- Ensuring furniture meets fire safety regulations
- Carrying out a condition check at the start of the tenancy, including smoke detector testing
Find out more: buy-to-let basics - check out the guide from Which? Mortgage Advisers
Tenancy deposit protection
If you ask your tenants to pay a deposit, you (or your letting agent if you are using one) must protect it using one of three government-approved deposit schemes:
You either pay an insurance premium to the scheme or use it to hold a deposit. The schemes provide a dispute resolution service, if you and your tenants disagree about the return of the deposit.
Costs vary but landlords typically have to pay a one-off joining fee and then a fee per deposit you would like to protect. Some letting agents include scheme costs within their set-up and management fee.
You need to make sure the tenant is told which scheme you have chosen. You can do this via their tenancy agreement or in a letter, which must be delivered to the tenant within 14 days of the tenancy starting.
If you don't protect the tenant's deposit, and they can prove to a county court judge that you haven't done so, you may find it difficult to serve a section 21 possession notice to ensure the tenant leaves the property. You may also be penalised with a fine of three times the deposit.
You need a special licence from the local council if the property is three or more storeys high and inhabited by five or more people from two or more households.
A household is defined as a single person or members of the same family living together. This is known as a 'house in multiple occupation' (HMO). Some lenders won't allow you to let on an HMO basis.
Assured Shorthold Tenancy
You should let your property using an Assured Shorthold Tenancy (AST). Legally, all new tenancies are automatically ASTs unless you set something else up.
An AST allows you to reclaim your property after six months, as long as any initial fixed term has passed and you give your tenants two months' notice. Most mortgage lenders will require you to have this type of tenancy.
Energy performance certificates
You need to get an energy performance certificate (EPC) when you let the property to new tenants. This tells them how energy-efficient the property is, and gives you recommendations for how you can improve energy efficiency.
If you don't have an EPC available for prospective tenants to view you could risk a fine. The only exception is houses in multiple occupation (HMO). These are exempt from the EPC rules as they typically have to abide by stricter regulations.
Right to Rent
From February 2016 all landlords have been required to carry out 'right to rent' checks when setting up a new tenancy agreement.
You will need to check that your tenants have the legal right to live in the UK by looking at and making copies of immigration documents, such as their passport.
If you use a letting agent, it can conduct these checks for you. For more information visit https://www.gov.uk/check-tenant-right-to-rent-documents.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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