Buy-to-Let guide

Is buy-to-let right for me?

Firstly, property investment isn’t a decision to be taken lightly, and must be well considered before putting two feet in. Many believe it to be an easy path to making money, however it is a business in its own right and you must approach with your eyes open, not focussing purely on the financial gains associated to it. If your objectives are clear to begin with, you are more likely to get what you seek from your property. 

Key tips to become a successful landlord

• Plan your finances – know from the offset what your intentions are. Will your money be used as your regular income or will it be set aside as capital growth? 
• Conduct research – find out the applicable laws around buy-to-let, and if needed, appoint a letting agent to keep on top of the rules and regulations. 
• Get advice – speak to a mortgage adviser and an accountant to get a full picture on your financial situation and the options available. The property investment market can fluctuate depending on economic conditions so it is important to speak to a mortgage adviser to protect your finances and sufficiently insure your property should the market worsen.
• Exit plan – it is wise to consider how you will exit the buy-to-let market should you need to. Creating an exit plan alongside an entry plan will allow you to settle finances in a tax-efficient manner.  

Actions to avoid:

• Diving in to a property – only purchase a property after due consideration. Take professional mortgage advice and understand the tax implications, responsibilities and costs involved with becoming a landlord. 
• Having insufficient financial protection – plan for the worst-case scenario, talk through protection policies available with your mortgage adviser.
• Being out of the loop with laws and regulations – always keep an eye out for new laws that you must adhere to.
• Not understanding what being a landlord entails – from a moral and legal standpoint – you must keep the property in good condition and maintain a paperwork trail accordingly, and being prepared to work with your tenants for whom it is their temporary home. 

What does being a landlord entail?

It’s important to be aware of all that a landlord has to do – it should rightly be considered as a job itself rather than seeing yourself purely as a property investor. 

Finding the right property 

Consider carefully what you are looking for and choose wisely. A newer property will, in theory, give fewer maintenance issues, yet an older property has much potential for adding value through investment in the right places. 

It is also worth considering desired occupancy levels – if you are housing more than three separate, unrelated tenants, it will be classed as a ‘House in Multiple Occupancy’, which can incur higher fees and solicitor costs. Additionally, you may find that tenant changes are more frequent. 

If you intend to house over five tenants in one property, then this will need to be registered and be subject to the following conditions: 

• The house is suitable and offers comfortable living standards for the number of tenants living there. 

• Either yourself, as the private landlord, or the letting agents you’ve chosen, needs to be ‘fit and proper’. This means a clear criminal record and no history of having previously breached any landlord laws or code of practice. 

• You need to send your annual gas safety certificate to the council. 

• When requested, you can provide safety certificates for any electrical appliances. 

• You install and maintain smoke alarms in the property

Finding the right tenants 

One of the more important tasks when renting out a property is finding the right kind of tenants – it could be counterproductive attracting tenants that require lots of your time and cause nothing but problems. Property location can dictate certain types of tenants, such as families seeking places close to schools and leisure facilities, or students close to a university.

Letting agents can assist in finding and vetting prospective tenants, securing references and performing credit checks for example – their resource comes at a cost, but it can be money well spent if they avoid costly problems in the long run.

Property maintenance

As a landlord, the property is your sole responsibility, and anything that needs repairing or maintaining falls to you to fix. You need to be easily contactable by phone or email, and it will help to have a network of affordable trade contacts who can resolve a variety of challenges at short notice. Be mindful that your responsibility extends to the outside of the property too, including gardens – it pays to consider low-maintenance setups such as patio instead of grass to reduce gardening costs, for example. 

Dealing with tenants 

Think whether you are up for the challenge of dealing with all types of tenants, even the most difficult ones. Ask yourself if you’re willing to have difficult conversations when needed, for example missed rent, communicating payment rises or issuing eviction notices to your tenants when the time comes. If you think this sounds a daunting concept, then a letting agent will be able to handle this for you. 

No rent coming in 

Be prepared, and budget for the eventuality that there are periods of time when you are not collecting any rent. The housing market can be unpredictable, so it is wise to contingency plan for a period without income, and how long you can last paying any mortgage & rates for before having to sell. 

How much to borrow?

Before diving in, because buy-to-let can be a medium to long term investment, ask yourself whether you can afford to tie up your money for a long period of time. Buy-to-let mortgage rates are constantly changing and variable by nature, but generally depend upon the following factors:

• Credit score 
• Amount of deposit put down 
• Level of risk in the loan for the lender
• Type of mortgage product recommended for your circumstances 

It’s always worth seeking advice from a qualified mortgage adviser before making any firm decisions, especially as chances are you will be investing a significant sum into a buy-to-let venture. Your borrowing (and speed of paying back) will be dictated by the amount of rent that you can derive from your property. 

The amount you can reasonably charge for rent will be driven by the market itself. Compare prices online at Rightmove and Zoopla to get a feel for prices at similar properties.

Choosing the right mortgage 

It is always advisable to speak to a mortgage adviser for this stage, we will listen to your circumstances and help to recommend the most suitable mortgage products available to you, based on searches from a wide range of lenders. 

Broadly speaking, there are typically two main types of payment methods – repayment or interest-only. In a repayment mortgage you would make monthly payments towards both the interest and the capital borrowed, so by the end of the mortgage term you could potentially repay the entire balance, whereas with interest-only mortgages, you would typically only pay the interest only, with the outstanding balance remaining.   

Majority of buy-to-let investors typically opt for the interest-only mortgage option, which can be useful if intending to sell the property at the end of the mortgage term, after which you would repay the mortgage capital outstanding. The benefits of interest-only mortgages mean lower monthly payments which can leave more disposable cash from the rental income to cover any additional costs when occurring. 

There’s also choice on fixed or variable rate mortgages, with the fixed rate, they remain stable regardless of interest rate fluctuations, and for a landlord this could enable greater stability in managing cash flows. 

As always, the best course of action is to speak to an expert mortgage adviser to assess your situation and listen to your needs before recommending the most appropriate mortgages to suit your needs. 

Consider all the costs

It’s important to keep your eyes open for the potential costs of purchasing a property for buy-to-let usage, so we’ve highlighted a few points to consider (but is not limited to):

Arrangement fee

Product fees apply on some mortgages, and these can be larger than those found on standard residential mortgages, and are either required to be paid up front, or can be tagged onto the cost of your mortgage. Watch out for additional administration charges made by lenders for arranging the credit on your mortgage. 

Stamp Duty 

If the property you’re investing in is over a certain price, you’ll have to pay a lump-sum tax known as Stamp Duty Land Tax (SDLT) in England and Northern Ireland, Land Transaction Tax (LTT) in Wales, or Land Building Transaction Tax (LBTT) in Scotland. The price you’ll pay will vary on the amount you paid for the property. This price will also vary depending on whether you already own a property in the UK. The below rates are different to the standard Stamp Duty rates for residential properties, as you have to pay a 3% surcharge in addition to the standard Stamp Duty rate. 

• A property under £125,000 – you pay 3% Stamp Duty 

• A property between £125,001 and £250,000 – you pay 5% Stamp Duty 

• A property between £250,001 and £925,000 – you pay 8% Stamp Duty (Information correct as of March 2022) (Please see the official government site for more accurate / up to date information). 

(Please note – we do not provide tax / legal advice in this area. Please seek specialist advice.)

Legal fee 

Solicitors fees must be budgeted for, typically incurred for handling the contracts, documentation and the range of searches undertaken.

(Please note – we do not provide tax / legal advice in this area. Please seek specialist advice.)

Valuation 

Many lenders will wish to carry out a mortgage valuation which you may have to pay for. However, you can look to upgrade to a structural survey or a homebuyers survey report for an additional cost, if you wish. 

Insurance 

It’s vital to take out adequate insurance on your property, starting out with Buildings Insurance as a minimum, and Contents Insurance to cover the furnishings within. You would require a dedicated landlord’s policy, different from standard residential cover. When it comes to insurance, you do not need to cover for any of the tenant’s belongings, it is their responsibility to be insured separately.

There are some specialised landlord’s protection polices available, such as rent insurance or covering legal expenses for evicting tenants, for example, so it is worth speaking to us about insurance and protection options available at the same time as discussing your mortgage. 

Here are some of the types of insurance you may wish to consider, and what they do (please note this list is not exhaustive list and others may be applicable): 

• Landlord building insurance – protects against risks to the building that may result in replacement or repair work, e.g. subsidence, fire, burst pipework. 
• Landlord contents insurance – covers against fixtures and fittings supplied, such as white goods and carpets. 
• Portfolio insurance – ideal if you own five or more properties, allowing you to cover buildings & contents across multiple locations under a single policy. 
• Home emergency cover – can provide emergency assistance for landlords, including access to plumbing, heating, roofing, drains, sewer blockages and locksmiths amongst other services. 
• Rent guarantee – there to cover for when tenants can’t make rent payments, protecting you from any losses as and when they occur. 
• Legal expenses cover – cover to assist with legal protection costs for property damage, recovering rent arrears, repossession, evictions or prosecution defence costs. 

Taxes 

Income Tax and Capital Gains Tax must be budgeted for, we recommend that you seek independent tax and legal advice as we are not qualified to offer tax advice. When you come to sell the property, if you’ve made a profit (capital gain) then you’re liable to be taxed on the profit, not the total amount you receive. 

Letting agent fees 

Letting agents offer a variety of support and can pay for themselves when it comes to handling more troublesome tenants. They can offer rent guarantees, tenant replacement and tenant moving out fees. Some agents also offer ‘fully managed’ services where they can arrange for any repair work to be completed with their own contractors. 

Court and legal fees 

It is wise to also budget for the worst-case scenario of having to evict tenants, and any resulting legal fees. Talk to solicitors and familiarise yourself with the potential costs here, and ensure you have funds set aside as contingency just in case. 

Repairs, maintenance, and decoration 

The cost of repairs and maintenance all depends upon how ‘hands on’ you are prepared to be. If you are experienced in this field you may wish to do it all yourself, and carry out the maintenance work when required, or if you don’t feel the inclination then it is advisable to find some trusted contacts you can call upon on a regular basis, and negotiate some preferential rates if possible. Allocate a realistic budget for ongoing repairs. 

Gas safety check 

Checks must be carried out annually, making sure any gas equipment is safely installed and maintained. You must have a copy of the gas safety record before, or within 28 days or a tenant moving into your property. 

Legionella risk assessment 

Landlords must carry out risk assessments for Legionnaires Disease, a lung infection caused by inhaling contaminated water droplets. It is advisable to familiarise yourself with the periodic checks required and responsibilities in this area. 

Leasehold properties 

Service charges and ground rents are normally all payable by the landlord and not the tenants. You also need to consider the length of lease remaining as this could need extending during your ownership. 

Furnished or unfurnished 

Fully furnished properties may be more attractive to prospective tenants, however if they are unfurnished then it can save money on replacing items due to wear and tear. 

Provision of white goods

Generally provided across both furnished and unfurnished properties, landlords provide white goods, it’s prudent to consider the cost of replacements and repairs, and budget this in from the outset. 

Strategy: Viewing & selecting properties

When looking at potential buy-to-let investment locations, try to be as objective as you can, ignore emotions and find a property that can meet a set of defined criteria, to allow you to meet your business goals. 

Here are some of the topics you may wish to consider:

• Who do you want to rent to? 
• How long might it take to secure tenants around this area? 
• What is the rental market in the area like? Is it growing or declining? 
• Is there the potential to build in capital growth? 
• Will the rent you receive cover your costs? 
• Can you make improvements to the property in order to increase rental income or capital growth?
• Have you looked at any forecasts for property growth in the area?
• Should you rent privately or use a letting agent?

Applying for a buy-to-let mortgage

Firstly, we recommend to sit down and run through your finances to compare the cost you’d pay for the property, against the likely rent you can collect from tenants. This will help you identify firstly if the investment is likely to be profitable, and over how many years, which is useful to take into account when looking at obtaining a buy-to-let mortgage.

A mortgage adviser could talk you through this so you have a clear idea of whether you can comfortably afford the mortgage on your own. When you’re ready to apply for your buy-to-let mortgage, we will be able to arrange an appointment that can help to fit around you, whether that’s face-to-face, online or over the phone. 

We are ready to share our knowledge and experience to help to find you the most suitable deals for your circumstances. We know that no two mortgages are the same, and we’ll aim to listen to your needs and recommend the most appropriate products. 

Searching the market yourself can be time-consuming, but with our help, we can search thousands of mortgages. We have regular contact with a wide range of lenders, and with our help, you won’t necessarily need to search or contact each individual lender to compare mortgage terms and rates, we will aim to do all of this for you. 

We’ll explain the process in order to help you make a start in your buy-to-let journey. We will go through details of the different fees involved, what they are for, and take them into account when finding the right mortgage deal for you. We are also passionate about protecting your buy-to-let property, so our advisers will recommend a range of protection policies available to suit your circumstances. 

We have a duty of care for you too, and we are keen to point out that your home may be repossessed if you do not keep up repayments on your mortgage. 

We have made reference to investments in this guide, however please note that we do not provide legal / tax advice. Please ensure to seek independent tax / legal advice if this is required.