Buy-to-Let
means either an investment strategy of buying a residential
property to be let for profit; or to a particular category of
mortgage used to purchase a property for letting.
Will
massive falls in 2008 and 2010 of Real Estate values affect your
investments?
But have the good
times come to an end as real estate
prices fall around the world in 2007
and 2008?
Will buy-to-let
investors be able to ride out the Crash?
For many years landlords have invested in residential property
to be let for profit, but since the mid-nineties there has been
rapid growth in the property market leading to a surge in demand
for rental property which is being exploited by many mortgage
providers keen to encourage new landlords.
Benefits and Risk
The benefits for the investor and
landlord can be a stable income with
capital appreciation, to house
prices going up with time, thus
making it a valuable way to invest
in money. The risks are that you may
not be able to rent out the house
for all 365 days of the year, while
still having to pay a monthly
mortgage payment. The major risk is
a collapse in the value of your
property, as this can put you in
position of negative equity, and
leave you with debt.
Yields
The yield is crucial in a Buy-to-Let
investment strategy. If a yield is
too low then the loan and mortgage
cannot be repaid.
Buy-to-Let Mortgages
Buy-to-Let mortgages have been on
offer in the UK since the late
nineties; they are specifically
designed for investors to borrow
money to purchase property in the
private rented sector in order to
let it out to tenants.
Lenders take different approaches.
The amount of money investors can
borrow is determined by the rental
valuation of the property. Usually
the annual rental income has to
cover a certain percentage of the
mortgage repayments, somewhere
between 120% and 150%. This is to
allow surplus rent to cover other
costs such as property maintenance
and void periods (periods when there
are no tenants living in the
property and therefore no rental
income).
Other lenders will offer a three
times' salary multiple and half the
rental income.
Others base the amount that they
will lend on your salary and the
existing loan commitments that you
have, but then apply the 'deduction
rule'. This means that they will
lend up to 3.5 times your income (or
whatever salary multiple applies),
minus a representative figure for
annual mortgage payments worked out
at a pre-set level of interest. Say
you earn £40,000 and have an
outstanding mortgage balance on your
property of £120,000. Under the
rule, the annual mortgage repayments
may be calculated as £10,000. This
would be deducted from your salary
to leave £30,000, which is then
multiplied by 3.5 to give £105,000 -
the amount that you are able to
borrow.
Typically the interest rates that
are offered on Buy-to-Let mortgages
are fairly close to residential
mortgage rates but will on average
be higher and typically charge
higher fees. This is due to the
perception amongst banks and other
lending institutions that Buy-to-Let
mortgages represent a greater risk
than residential owner-occupier
mortgages.
Tax to pay?
This type of investment has become
very popular in the UK over the last
ten years, as house prices have
dramatically increased. Another
reason for their popularity is the
tax advantages that are available to
UK Buy-to-Let investors. Rental
income is considered in the same way
as salary, and is therefore often
taxed at 20% or even 40%.
But
Buy to Let normally involves paying
Capital Gains Tax when the property
is sold.
However, landlords can deduct costs
from the taxable portion of their
rental income, and these costs can
include the interest portion of
their Buy-to-Let mortgage repayments
as well as maintenance costs on the
property. This tax set-up has made
Buy-to-Let investments more popular
over the last few years.
Assured Shorthold Tenancy
One of the key innovations required
for widespread property investment
was the reform of tenancy agreements
and specifically the introduction of
the assured shorthold tenancy (AST)
agreement.
AST gives both the landlord and the
tenant assurance of the tenancy and
specifies the term the property is
to be let and specifies notice
period for both parties.
The 1988 Housing Act abolished
security of tenure for tenants.
Landlords gained the power to evict
problem tenants more easily, and so
the prospect of becoming a landlord
is more attractive and less costly
than previously.
The housing crash between 1989 and
1994 saw an increase in the number
of tenants, as people lost their
homes and were repossessed. The rise
in house prices since 1994 has meant
that unprecedented numbers of people
are now "priced out" of the housing
market, and have no choice other
than to rent.
Buy-to-Let as a term was coined in
1995 as a marketing badge for a
finance initiative launched by the
Association of Residential Letting
Agents (ARLA), although this type of
lending had existed for many years
for professional landlords.
Growth in Buy-to-Let
The apparent growth in Buy-to-Let
lending is attributable to the
success of specialist lenders in
taking market share by offering
bespoke products and services and
attractive pricing. In fact, as much
as 40% of activity is remortgaging
as established landlords switch from
more expensive commercial mortgages.
Buy-to-Let
Buy-to-let is a form of residential
investment where you buy a property,
usually with the aid of a mortgage,
and rent it out. The 1988 Housing
Act made investment in residential
property more attractive to
landlords when it introduced a new
type of tenancy giving landlords
more control over their properties
and there has been a modest recovery
in the private rented sector since
then. The increased availability of
loans at attractive rates of
interest for buy-to-let purchasers
has also increased the appeal of
owning rental property.
When you buy a property to let out,
you are becoming a landlord. And
owning investment property is not
like owning your own home. Instead
you are effectively running a small
business.
Before you choose a property and
arrange the finance to purchase it,
there are a number of factors you
should look into, which are
described below.
What
kind of Property should you choose?
You should carefully research the
market where you want to buy your
property. You can either do this
yourself or employ a specialist
letting agent to help you find the
area and property you are looking
for. If you research the market
yourself, you will need to gather
information from estate agents,
local papers, local employers and
even the local authority, about the
demand for and supply of, rented
housing.
How
to find Tenants?
You will also want to think about
the type of tenant you are aiming to
attract. Are you hoping to attract
single people, or families, as they
will have different requirements. It
is important to remember your
property should have features that
are attractive to would-be tenants,
rather than would-be purchasers.
Choosing your Location?
You should also look at how close
the property is to local amenities
such as shops, transport and
schools, and are these the type of
amenities that are important to your
tenants? So, if you are aiming to
let your property to say a family
with school-age children, how close
the nearest schools are, will be an
important influence on where they
choose to rent.
Choosing your Property’s size and
condition
Equally, you should think carefully
about buying a property whose size
is attractive to households looking
for rented accommodation in that
location. As well as the size, type
and location of your property, what
about its condition? Have you
assessed whether the property will
require expensive maintenance.
Generally speaking, older homes
require more attention.
Choosing a property you can afford.
Obviously, the size of mortgage you
can afford will have a major
influence on the size and location
of your property. Choosing a
mortgage is described in more detail
in the section below. And finally,
in considering how much to spend on
a property you should bear in mind
that as well as increasing in value,
your property can also fall in
value.
Managing your Property?
When you have chosen a property, you
will need to decide who will manage
it for you.
If you manage it yourself, you will
be responsible for:
finding tenants
checking tenants’
references
collecting the rent
maintaining the property
and dealing with
problems
You will also need to be aware of
your legal responsibilities as a
landlord such as -
carrying out repairs
ensuring the safety of
gas and electrical
appliances
and ensuring that the
furniture and
furnishings meet fire
safety requirements
You should also consider
familiarising yourself
with landlord and tenant
law, to understand your
responsibilities as a
landlord, and the rights
your tenants enjoy. This
is an area you may wish
to take legal advice
about. The Department of
Communities and Local
Government (DCLG) have
published a useful guide
for landlords in England
and Wales called
"Assured and assured
shorthold tenancies: a
guide for landlords”
which is free and can be
downloaded online.
When
your Property is empty?
You should remember there may be
periods when you are unable to find
tenants for your property and it
will be empty, with no rental income
coming in. Obviously you will still
be expected to continue repaying
your mortgage so you will need to
think about how you will meet your
mortgage repayments in these
circumstances. This could
particularly apply if you choose a
property in an area where the supply
of rental property exceeds demand
from tenants.
Maintaining your Property?
As well as managing your property,
you will be responsible for
maintaining it. Besides repairs and
regular maintenance, properties can
benefit from routine improvements
which maintain their attractiveness
with would-be tenants. You may find
that your property is in need of an
overhaul after a tenancy finishes.
Naturally, you will have to finance
this yourself. What is more, your
property is likely to be empty and
you will not receive a rental
income, while your property is being
improved.
Using a Managing Agent
Given the number of different
responsibilities you face as a
landlord and the limitations on your
own time, you may wish to use a
managing agent to look after your
property for you. This will cost you
approximately 10% - 15% of your
monthly rental income.
Choosing a mortgage: Paying for your
Property?
Obviously, when you choose a
property, you will need to ask
yourself how much you can afford to
pay, and how you will pay for it? If
you take out a mortgage, you should
work out what percentage of the
value of the property you need to
borrow. The size of the loan is
usually linked to the expected
rental income. As a guide, your
lender will expect your monthly
rental income to be 25%-50% greater
than your monthly mortgage payments.
Your
choice of Mortgage
When you choose a mortgage, your
choice will be between a repayment
mortgage or an interest-only loan.
With an interest only mortgage, some
lenders may require you to have a
suitable investment product. If you
have a repayment mortgage, some
lenders may also advise you to
arrange life insurance alongside
your loan. You may be able to choose
between fixed rate and variable rate
mortgages. Fixed rate loans will
give you some certainty about your
mortgage repayments whilst variable
rate loans could move up or down.
You should also remember that your
mortgage payments could rise if
interest rates rise, depending on
the type of mortgage you have. But
before choosing your mortgage, you
should consider taking advice from
your lender or a mortgage
intermediary.
What
will your costs be?
As well as your mortgage payments,
you will need to pay for:
buildings insurance
consider contents cover,
if your property is
furnished
maintenance costs
periods when you are
receiving no rental
income because the
property is empty or the
tenants have fallen
behind with their
payments
mortgage repayment
increases because of
interest rate rises,
which you may not be
able to recover
immediately from rent
increases
Your tax liability
How much Income can you make?
Before you can calculate what your
income from your property will be
after taking into account all
necessary expenditure, you should
recognise that the profits from
renting property are taxable.
However, you will be able to offset
some of the costs you incur as a
landlord against tax. You will have
to pay the following taxes:
Income tax
Stamp Duty when you buy
your property
and Capital Gains Tax
when you sell it
You can find out more
about the tax treatment
of income from rented
property in Taxation of
rents: A guide to
property income
published by HM Revenue
and Customs.
Invest with caution?
You should consider the following
points before making any financial
commitments:
Are you investing to generate an
income or hoping to see your capital
grow and are your expectations
realistic?
Do you have sufficient capital of
your own to invest in a property?
Are you prepared to tie-up your
capital for a considerable period?
Will you have sufficient savings and
other forms of capital after you
have made this property investment?
Have you taken specialist tax advice
about the implications of buying and
selling a Buy-to-let property, and
the tax treatment of all income and
expenditure from renting?
Choosing and managing your
Property
It is equally important that the
property you buy is appropriate for
the purpose and is properly managed
thereafter.
You should consider the following
points before deciding to proceed:
Are you regarding this as a medium
to long term project?
Have you consulted a professional,
qualified local letting agent before
beginning your search for a
property?
Have you thought about the type of
household which will want to rent
your property?
Have you considered that demand for
this type of property may change
from year to year?
Have you made independent inquiries
to confirm a likely rental figure?
Is the location of the property
attractive to tenants?
Most lenders will require you to
have an Assured Shorthold Tenancy
agreement with your tenants. Are you
aware of the legal implications of
this?
If you are thinking of buying a
leasehold property, what is the
length of the lease remaining and is
sub-letting allowed?
Have you consulted a solicitor about
the legal implications of renting
out your property?
Have you investigated the running
costs of the property (e.g. ground
rent, service charges, repairs,
letting and management fees, etc)?
Have you allowed for furnishings and
other start-up costs in your
calculations?
Have you considered how you will
repay your mortgage if you have no
tenants paying rent?
Are you aware that your property
could decrease, as well as increase,
in value?
Are you aware of all the safety
regulations applying to rented
property?
Have you considered the likely costs
of dealing with tenants who do not
pay their rent or damage your
property, including the costs of
evicting a tenant in court?
Have you considered using the
services of an agent to let and
manage your property on a day-to-day
basis or will you be doing this
yourself?
If you are using a letting agent,
have you assessed how much they will
charge you for their services?
Will the net rental yield i.e. the
rent remaining after you have paid
your running costs, be sufficient to
meet your monthly mortgage payment?
If
you are thinking of raising a
mortgage to help fund the purchase
of a property, you should consider
the following:
Have you considered what type of
mortgage to buy your property with?
Would you welcome assistance from a
mortgage consultant?
Have you considered the impact of
any future rises in interest rates?
Could you meet the monthly mortgage
payment from your own resources, if
the rent was not paid or the
property was empty?
If you are unsure of any of your
answers to the questions in this
checklist, you should seriously
consider taking appropriate
independent professional advice. In
particular, you may need to take
specialist legal and tax advice from
suitably qualified professionals.
Buy
to Let Mortgages
