Buy to Let
Buying a property to let can provide a stream of income and the potential for long-term capital appreciation.
There are 3 main differences in buy to let mortgages:
- Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In many cases earnings are not ever considered.
- Interest Rates - buy to let mortgages usually have slightly higher interest rates.
- Deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit.
Becoming a private landlord should not be seen as an easy way of making easy money. It can be risky and complicated. It can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will continue to rise. That said, having a second property to let to tenants could reap considerable financial rewards over time. When buying a second property to let you will need to decide whether your primary objective is to make a profit month on month or to make a profit through increased equity from the second property as it increases in value over time. The decision may affect the type of property you purchase, and the location.
When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a rough guide, you should be aiming to achieve a gross rent of about 135% of the rental property's interest only mortgage repayments in order to cover your costs should anything go wrong.
Additional costs could include: Maintenance costs for the property. Letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service. Ground rent/service charges for leasehold properties. Legal insurance to cover costs from evicting tenants in the event of non-payment is important, as such a problem could be very expensive. Building and contents insurance for the items provided as part of the rental agreement. Purchasing any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance. Costs of maintaining gas/electrical appliances and ensuring they comply with any regulations such as safety tests. The property may require work ranging from painting to a new bathroom suite before it is suitable for letting to tenants.
When choosing a property to let it is wise to take advice from local letting agents to determine what type of properties are in need and which parts of the town is best or most wanted. If there is a University in the town there may well be students looking for somewhere to live. The Association of Residential Letting Agents (ARLA) state that a property needs to be in the right area, close to transport and other facilities, and in good condition. When choosing a letting agent to act on your behalf it is sensible to choose one that is a member of ARLA. There are a number of tax issues that need to be looked at in order to maximise your tax position, such as being able to offset your maintenance costs, letting agent fees etc., as well as any interest paid on a buy to let mortgage against your tax.
You can visit the ARLA website at www.arla.co.uk for further information on becoming a private landlord.