When house prices are rising and you have tenants who pay the rent on time, being a landlord is exciting and rewarding. But, when house prices are steady and the economy has stalled, should you even think about becoming a landlord? Expert buy to let mortgage adviser, Agata Rogozinska shares her views.
To a certain extent it doesn’t matter what house prices or the economy are doing, if you’ve done your research and your sums, any time can be a good time to become a buy to let landlord.
Research, research, research!
As with any new venture, research is key to success. It’s imperative to prepare yourself for the costs and the risks.
The costs include but may not be limited to:
- Administration – all the paperwork, think banking, accountants, licences, certificates, landlord association membership, training
- Finance - the mortgage and the cost of arranging it
- Tax – income tax or corporation tax, stamp duty, capital gains
- Property maintenance
- Management fees – letting agents offer a variety of services from finding and vetting tenants to full service management.
The most important thing to remember, is that the rent needs to cover all of these things.
As with all investments, there are risks, for example:
- The value of the property could go down
- You might have void periods, i.e. periods when there are no tenants in occupation
- Tenants might not pay the rent
- The property might get damaged
Where to invest?
According to our last property investor survey, 72% of landlords said they owned property within 25 miles of their home. 55% said the property was within 10 miles of their home. Proximity is clearly important for a couple of reasons:
- Landlords are likely to have a very good understanding of the rental opportunity (flat, house, HMO, etc), amenities and transport links.
- Landlords can be on hand to manage their properties
Investing close to home can be a good place to start your journey into property investment. However, if you think you’d be better off investing further afield, remember to factor in the costs.
Becoming a landlord
When you’ve done your basic research on costs, risks, location, property types, you’ll then need to find out what it might take for you to become a landlord.
Before doing anything, we recommend that you take professional advice from an accountant to help you determine the best investment strategy for you. In particular, you should ask your accountant whether you should be investing personally, in partnership or using a limited company.
The answer will depend on your current and projected income, and your investment plans. Everyone’s situation is different but bear in mind that if you are in the higher or additional tax bracket, the income tax rules for residential landlords have changed, resulting in a great tax liability. This means it is harder to turn a profit from renting property than it was a few years ago, particularly if you are investing personally. Even basic rate tax payers can be adversely affected, so do make sure you take advice before you start.
You’ll find it easier to get a buy to let mortgage if you have a clean credit record and you own your own home. (There are options if you don’t match these basic requirements, but they will be costlier). Take a look at your credit profile to check its accurate and up to date. This will give you time to get any anomalies fixed. If your credit record is not perfect, a broker may need to see it, to help determine which lender to use.
First-time landlord, first-time buyer
If you don’t have a buy to let property and you haven’t owned one for the last 18 months lenders will consider you a first-time landlord. If you’re a first-time buyer too, your borrowing options will be restricted because some lenders will suspect that you may plan to live in the property yourself which is strictly against the regulations.
Expect the few lenders which will lend to first-time buyer/landlords to dig a little deeper when assessing your mortgage suitability. They will underwrite the application as though you were applying for a home-buyer mortgage as well as applying the buy to let mortgage underwriting criteria.
You need to have a deposit! Most lenders like you to put down 25% of the property price. Some will allow 20% and one will even allow 15%.
The deposit must come from a suitable source, i.e. your personal savings, a gift from a family member or by remortgaging your home. A deposit from borrowings is not allowed!
You need to have an income. Some lenders require you to earn a minimum of £25k pa. Some don’t require a minimum but will want a proof of regular income. If you are employed lenders will ask you to provide at least three latest payslips. If you are self-employed you will need to show your accounts for the last two years and a certificate of income from HMRC known as an SA302.
The rental income is the most important! Lenders will assess how much you can borrow based on how much income the property generates in rent.
You will also need to be ready to show proof of identity and address and provide the lender with a list of all your assets and liabilities (this information goes on the applications form).
If your accountant has recommended you use an SPV limited company as the borrowing vehicle, make sure you get this set up before trying to get a mortgage. You’ll need a business bank account too. Setting up a bank account can take longer than setting up a company!
Use a specialist buy to let mortgage broker
That’s where we come in! Although you can go direct to some lenders, the majority of providers in the buy to let mortgage industry can only be accessed by intermediaries.
Using an independent, whole of market broker, particularly one that specialises in buy to let, will save you time and ensure you find the best deals possible for your circumstances. If you use us, we’ll do all the hard work for you. We research the market, do all the sums, submit the mortgage application, negotiate with the underwriters and then work with all parties to ensure that your application completes successfully.
Once you’ve done all of the above, you will be in a better position to decide if investing in buy to let is right for you. If you need any of the above points explaining, do get in touch and I’ll happily talk you through it.
Ready to get a buy to let mortgage? Call me on 01732 471602 or 07976448467 to talk through the current options available for your circumstances. Alternatively, you can request a call back at a time to suit you.
Not quite ready? Sign up to our Investor Update email which will help you to learn more about buy to let mortgages and other forms of property finance. (You can unsubscribe at any time).
1st February 2019