Buy-to-let properties are once again soaring in popularity thanks to low mortgage rates and new tax cuts for landlords. Many have seen the stamp duty holiday as a window of opportunity for buying new property. While landlords have still had to pay the extra 3% of stamp duty they were charged under the previous rules, total savings of up to £15,000 have been possible on new property purchases.
If you are planning on investing in buy-to-let property for the first time, there are some things you need to consider. Here, we’ll go through the most crucial aspects behind a successful buy-to-let purchase to help you make an informed decision.
1. Understand the risks of buy-to-let property
As with any investment, research is crucial. You need to understand fully both the benefits and the risks involved with the buy-to-let property market. The rewards can be substantial, but when you become a landlord, you’re effectively running a small business with important legal responsibilities and financial risks.
It’s important to keep an eye on the long-term house price forecast. While UK property values have increased a lot over the past decade, the Covid-19 pandemic has caused significant drops in rental prices, particularly in central London. If the market crashes further in future, your mortgage will stay the same but the value of your property could be much less than you initially anticipated. Conversely, if the market performs well, you could sell your property for a big profit.
There are also risks around rental payments. For instance, if your property remains untenanted for a long time, it won’t generate income. Or you might secure a tenant but receive less rent than you originally anticipated. First-time landlords are often caught out by following exaggerated rental projections from letting agents. Landlords should always conduct their own research to ensure rental projections are accurate.
2. Get your finances in order
Keeping on top of your finances is crucial when investing in buy-to-let properties. You need to have a good understanding of how much houses cost in the area you’re looking to buy in, the average rent they attract, and whether you need to raise capital for a deposit. It’s also a good idea to consider things like the cost of repairs and property maintenance, which can quickly add up if you’re caught off-guard. You’ll also likely have to pay income tax on any rent you receive, which is another cost you should keep in mind.
When it comes to financing a buy-to-let purchase, there are a few types of borrowing that are available to you.
In most circumstances, you will need to take out a buy-to-let mortgage if you plan to rent out the property. There are a few key differences between buy-to-let and residential mortgages, the main being that providers see buy-to-let mortgages as higher risk. This is because landlords won’t get any rent if a property is unoccupied for a period of time, which can make it difficult to pay off the mortgage. Because of the higher risk, buy-to-let mortgages tend to need larger deposits.
Second charge borrowing
Also known as a second charge mortgage, this type of loan is worth considering if you already own property elsewhere. A second charge mortgage is an additional loan where the equity you’ve built up in a property is used as security. While it requires you to put your equity up as collateral, it allows you to raise funds for a deposit on a new property without having to remortgage.
This short-term borrowing option allows you to ‘bridge the gap’ if you know you don’t have enough money immediately, but you will have in the near future. For example, if you’re selling a property but it hasn’t gone through yet, and you want to buy new property, a bridging loan gives you short-term access to the capital required to do so. You may be eligible for a closed or open bridging loan.
- Closed bridging loan – There is a fixed repayment date. This is best suited if the sale on an existing property isn’t yet complete.
- Open bridging loan – There is no set repayment date, but it is generally agreed that you’ll pay the loan off within a year.
3. Consider your target tenant
Just like a business owner needs to consider their target market, you need to think about what kind of tenant your property is likely to attract and what their requirements might be. For example, if you’re investing in a property in a university town, you’ll most likely attract students who need a fully furnished space. However, if you’re investing in a more suburban area, you’re more likely to attract families looking to turn your property into their own home.
The tenant you’re looking to attract will also likely influence how hands-on you need to be as a landlord. For example, students come and go with the academic year, so landlords might need to be involved with sourcing new tenants and preparing a property for new occupants more often, whereas families tend to stay longer, meaning landlords won’t need to interfere as much.
4. Get the right insurance
As the owner of buy-to-let property, you should have the right insurance in place to protect you financially. Most landlord insurance policies concern issues regarding the building itself and the items inside it, but some providers also cover unexpected circumstances such as claims for injuries sustained at the property or loss of rent if tenants are unexpectedly forced to move out temporarily.
There’s no legal obligation to have landlord insurance. However, you will need to have it if getting accepted for your buy-to-let mortgage requires you to do so. If you need a mortgage for your buy-to-let property, it’s likely you’ll also need buildings insurance, which protects you financially in case any accidents cause damage to the structure of your building, such as a fire or flooding.
5. Consider the type of landlord you want to be
Do you want to be a hands-on landlord that manages the property single-handedly, or would you prefer to leave the management to someone else? Landlords can have different arrangements depending on the extent to which they want to be involved.
- Landlord – The owner manages the property themselves fully, which involves sourcing tenants, doing viewings, tenant referencing, organising tenancy agreements, collecting and protecting deposits, managing inventories, collecting rent and managing repairs.
- Part-management – A letting agent deals with sourcing tenants, doing viewings, referencing, agreements and deposit protection. Once the tenants are in, the landlord handles all enquiries, collects rent and keeps on top of any maintenance or repairs.
- Full-property management – A letting agent deals with everything. They deduct a fee from the rent before passing on whatever’s left to the landlord.
Aside from responsibility, the main difference between the three options is the cost. Being an independent landlord is the cheapest option, while full-property management is the most expensive.
Before you purchase buy-to-let property, be sure to shop around and consider the five tips above. If you still have questions on the buy-to-let market and process, seek the advice of a professional buy-to-let broker. Their advice can be instrumental in securing the best deal possible.