Guide for First Time Buy to Let Landlords
Thinking of making your first buy to let investment? Considering whether being a landlord is for you? Here’s a brief overview of the key things you’ll need to consider and some helpful advice for the best decision for you.
Investing in buy to let property and becoming a landlord is a significant personal and financial commitment. As well as fantastic benefits, there are responsibilities to consider before taking the plunge!
Is Property a Good Investment?
Like any investment, there is always an element of risk. However, property is often considered the safest form of financial investment. While house prices can fluctuate, everyone needs a place to live, meaning that demand for rental properties is reliably consistent. Even if a property’s market value falls, you’ll still receive an income from the rent.
Buy to let investment is a long-term process, not an overnight get rich quick scheme! Releasing cash funds from property is not the fastest process, so consider whether you’ll ever need immediate access to your money.
Do I Need a Letting Agent?
Whether or not you use a letting agent comes down to how much time you have to dedicate to managing your buy to let portfolio. Landlords with one or two properties close to where they live often manage everything themselves. However, if you’d rather someone else took care of securing tenants, sorting out credit checks and contracts and handling maintenance issues during a tenancy, then a letting agent is for you! Letting agents tend to take a cut of the property rental income.
Pros of using a letting agent
As professionals, they’re familiar with the processes involved in sourcing and vetting tenants. A lettings agent can also help manage any maintenance issues and ensure gas and electrical safety inspections and certificates are up to date. Using a letting agent takes out a lot of the admin and stress of managing buy to let property for many landlords.
Cons of using a letting agent
It’s fair to say that cost is the primary downside to using a letting agent. While fees vary on the company and how involved they are, this impacts your profits.
As with any service, not all lettings agents provide the same level of service. I advise you use agents who are members of the Association of Residential Letting Agents (ARLA), as they work under a strict code of practice to ensure quality across the industry.
What Type of Tenancy Agreement Do I Need?
AST: The most common tenancy agreement for buy to let property in England, Northern Ireland and Wales is an Assured Shorthold Tenancy (AST). In Scotland, ASTs are called Private Residential Tenancies. Typically, these are fixed for a specified period (usually six or 12 months) to give both the tenant and landlord stability. AST agreements do not cover holiday let tenancies!
Holiday Lets: New landlords often ask why standard buy to let property cannot always be let out as a holiday let. In short, buy to lets and holiday lets are very different! Due to the high turn-over of ‘tenants’, not all buy to let mortgages (or even lenders) accept holiday let properties. For more information on this, see our Holiday Let Mortgages FAQs here!
There are a few other types of tenancy agreement, however they are not often used by first time landlords. If you’d like more information about an agreement type not included above, do get in touch.
The Pros and Cons of being a Buy to Let Landlord
The Pros
Relatively safe long-term investment: while property values can fluctuate, property prices have steadily increased (and look to continue to do so), giving landlords substantial capital gains in the long run.
Income: Alongside the capital gain, landlords receive an income from their portfolio. This income can supplement your day job or be your only earnings. Many landlords invest to give them another income during retirement besides their pension!
Mortgage Affordability: Unlike mortgages for your own home, buy to let mortgage affordability is largely determined by the rental potential of the property in question. This means that your personal income isn’t necessarily a determining factor when investing in buy to let property. While some lenders have minimum income requirements (typically £25,000), some only require that you have an income (either from work or rent).
Demand: Demand for rental property is high. The UK has a substantial deficit in affordable housing, meaning that many people cannot buy their own homes and renting is their only option. Some people enjoy the freedom renting offers them and don’t want to own their own home! Either way, you should always be able to find tenants for buy to let property.
Things to Consider
Void Period Costs: It’s not always possible to have your property let out 52 weeks of every year, and you may experience some ‘void periods where you are not receiving a rental income. Sometimes this is while you find new tenants, or the property requires maintenance between tenancies. You will have to cover mortgage payment costs during this time.
Maintenance Costs: As a landlord, you are ultimately responsible for the upkeep of your properties and ensuring they remain in a lettable condition. Of course, this comes at a cost. However, the higher the standard of the property, the more rent you’ll likely be able to charge!
Higher Deposits: When purchasing a buy to let property, you will require a larger deposit than if you were buying your own home. Typically, a 25% deposit will give you access to reasonable rates, but some lenders will accept 15%. As with any mortgage, the more initial investment you put in, the better the rates available to you!
Tax: Purchasing a property for buy to let incurs a 3% stamp duty tax surcharge, so you’ll need to consider this in your investment budget. You can check the stamp duty for a property here. Furthermore, you will need to pay income tax on rental income (when investing individually) or corporation tax (when investing via a limited company). While some tax relief is available, you should speak to a professional tax advisor before making any property investment decisions!
This blog is not an exhaustive list of all the things you’ll need to consider, but hopefully gives you a good overview of some of the things people often forget about! If you have any questions specifically around buy to let mortgages, please do give me a call on 01732 471602 or email me, agatar@mortgagesforbusiness.co.uk. I can give you a detailed illustration of mortgage costs and fees and helpful advice on being a buy to let landlord!
1st September 2021
