Investing in buy to let property can be a fantastic and rewarding journey. The residential property market, despite its long term ups and downs, overall has one of the most stable growth patterns in the investment markets.
How does buy-to-let property investment work?
Once you have bought a property, there is the potential to earn a profit in a number of ways:
Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agents fees and mortgage repayments.
Capital growth – the profit you earn if you sell your property for more than you paid for it.
Mortgage paid – if carefully planned, the rent could pay off the entire mortgage if the investment is left to run for the full mortgage term!
Remember to think about ‘all’ aspects of the residential property market when entering the buy-to-let world.
1. Considerations & risks
Buy-to-let’s can come with a lot of work, commitment and planning in order to be a successful landlord and a landlord that potential tenants will respect and want to stay with. An empty property or a tenant not paying their rent can pose one of the biggest risks to your investment as any mortgage repayments have to be paid by you regardless. Risks like these can happen regardless of having a professional property management company like us looking after the day-to-day running of them. It is always recommended to make sure that there are contingency funds in a dedicated bank account to cover the surprises and risks associated with buy-to-let investing.
2. Rental payments & yield
The amount of rent you can ask depends on a number of things such as the condition of the property, its location (the most important factor), other properties on the market at the time and general market conditions outside your control. Speak to one of our dedicated letting specialists to discuss these aspects prior to investing as we can potentially save you a lot of time and money in the long term.
If your potential tenant passes the referencing, Rental Payment Insurance may be offered which is a great way of covering any periods of non-payment and legal costs towards eviction. It is subject to terms and will most likely be a back payment so you will still need the contingency fund.
If you struggle to find tenants because you have the type of property that isn’t in high demand and are unable to ask the required level of rent you expected then you may not be able to cover your mortgage repayments.
There will always be day-to-day repairs and upkeep to the property which will reduce the overall rental received so these must be factored in to your plan.
Major repairs or difficult tenants may increase your costs unexpectedly so a minimum contingency fund should always be maintained in the bank account to cover them. These could include things such as new kitchen appliances if not insured, boilers, non-payment of rent for up to 6 months and solicitors costs.
4. Landlord insurance
It is always recommended to have both buildings and contents insurance and rental payment insurance in place. There are specialist products that cover the rental industry and these should be sought as they may include public liability insurance if a tenant gets hurt, damage to your belongings and even things like hotel accommodation in the event the property becomes uninhabitable. Speak to us about insurance products available.
We also recommend to tenants that they also take out their own contents insurance as items belonging to them will not be covered under the landlord’s insurance.
5. Mortgages & charges
If you are renting out a property that you have previously lived in you must always get your mortgage lender’s permission to do so. When you buy your property and rent it out you will have cover the usual costs of buying. These could include; Stamp Duty, Solicitor’s fees, Survey fees, Agents Letting & Management Fees.
When you sell the property you will have legal costs and further agent’s fees to pay for finding a buyer.
6. Tax responsibilities
Stamp Duty Land Tax
This charge applies to properties that cost over £125,000 (except in Scotland where from 1 April 2015 stamp duty does not apply). This tax is payable on both freehold and leasehold properties purchased outright or with a mortgage. Use our stamp duty calculator to get an indication of how much this could be.
Income tax is generally payable on rental income but Buy-to-let landlords can offset certain ‘allowable expenses’ incurred in the process of letting out a property in order to minimise it. These can include:
Letting agents’ fees.
Legal fees for lets of a year or less, or for renewing a lease for less than 50 years.
Buildings and contents insurance.
Interest on property loans.
Maintenance and repairs to the property (but not improvements).
Utility bills, like gas, water and electricity (if included in the rent).
Rent, ground rent, service charges.
Council Tax (if included in the rent).
Services you pay for, like cleaning or gardening.
Other direct costs of letting the property, like phone calls, stationery and advertising.
If let ‘furnished’ then 10% of the net rent can be claimed - Net rent is the rent received, less any costs you pay that a tenant would usually pay, eg Council Tax.
Allowable expenses don’t include ‘capital expenditure’ - like buying a property or renovating it beyond repairs for wear and tear.
You must report income from property rental if it is:
From April 2017 the higher and additional rates of relief will be phased out and restricted to 20% for all landlords by April 2020
You’ll also have to pay Class 2 National Insurance if what you do counts as running a property business, eg if all of the following apply:
Being a landlord is your main job.
You rent out more than one property.
You’re buying new properties to rent out.
You don’t pay National Insurance on your rental income if you’re not running a property business - even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.
Capital Gains Tax
When you eventually sell your investment property and if you make a profit, you will be liable to pay Capital Gains Tax. Further information can be found at: https://www.gov.uk/capital-gains-tax
Overseas Landlord Tax
If you are live or are going to be overseas for a period longer than 6 months you will be classed as and overseas landlord and as such liable for a 20% tax on your share of the rental income. Read our dedication section on Overseas Landlords.