Buying to Let Guide
'I’ve watched the property programmes. I’ve seen the money they can make. And let’s face it, my pension isn’t going to make me rich. I need a plan B, so where do I start?'
You’re in the right place. Because you’re talking to one of the best. Not surprising really, we’ve been doing it for years. Over 10 in fact, through Mortgage Express (part of the Bradford & Bingley Group), and now through Bradford & Bingley on 0800 11 33 33 or by searching online. You can find innovative products to get you on to the property ladder in a simple, no nonsense way – so turn off the property shows – the real advice starts here.
Weighing up the pros and cons
They always say past performance isn’t a guide to the future. But there’s no denying it, property has been a great success story for those who get it right – over the last 25 years UK property prices have risen more than 9% per year on average (according to Barclays Capital).
So will it make you money?
We can’t promise you that. There’s definitely potential in property, but you should see it as a long term investment. And there are lots of things which can affect how well your investment will perform. The ifs and buts really matter here.
Tips for budding investors
There are four basic things you need to get straight at the start;
- Make sure you’ve got the money to fund your plans. A penthouse apartment or a family terrace – whatever the possibilities, there are up-front and running costs to consider. So you need to get your sums right at the start.
- Make sure that you can tie up your money for the long term.
- Do your homework before you buy. The rest of this guide might help.
- Buy what will rent, not what you personally think is a great house.
The bottom line is that your up-front costs and running costs need to be less than the income you make – obvious really.
Getting your timescales straight
The first step is making your sums add up. It’s simple really. You just need to make sure the income you make from renting out your property is more than the costs of buying and maintaining it. You need a cool head and an eye for detail, a mistake here could cost you money later on. And that’s where we come in.
The main costs
Start with your purchase costs of the property itself. On top of this, you need to budget for stamp duty, legal fees, surveys, valuations, decorating and refurbishment costs, as well as any mortgage fees.
Then there are your running costs including things like repairs, insurance, service charges, council tax, your agents letting or management fees (if you use one) and then of course the mortgage interest.
Sounds like a lot, doesn’t it? But don’t worry, the idea is that the income you make from renting it out outweighs all of these and you make money!
What else do I need to know?
There’s a lot of jargon in the buy to let world, like gross yields and net yields. It helps to know a bit about them, especially when you are talking to letting agents.
• Gross yield. This is just rent you earn in a year, shown as a percentage of the value. (When prices are rising fast, yield is likely to fall because rents will not generally keep pace.)
• Net yield. This is the percentage left after taking off your running costs.
Some lenders may require rental income to exceed mortgage interest. This is a good idea because it helps you meet your ongoing annual expenses other than mortgage interest and, over time, build up a surplus so ‘void’ periods don’t become a problem (that’s when your property lies empty between tenants).
What about the Taxman?
Just like any other investment, there’ll be tax to pay. You can offset your expenses against your letting income, to reduce your tax bill. You need to also pay Capital Gains Tax if you sell your property. We'd suggest you get advice from a specialist tax adviser on this.
Finding a property to let
Buying a property to rent out is very different to finding a home for you and the kids, so take care not to get carried away imagining yourself snuggled up on the sofa, lounging in the garden, or cooking in that luxury kitchen. Remember it’s a business venture from the start.
How to pick the right property?
There’s 5 basic things to consider.
1 What type of tenant are you looking for? Students, young professionals or senior executives for example.
2 Where’s the best area? Don’t necessarily buy locally to your home. Think about universities and prosperous towns attracting new businesses.
3 What’s the location like? Transport links, parking, shops, decent schools – pick the brains of local letting agents for easy-to-rent locations.
4 What state is the property in? If you're buying a property needing renovation lenders might restrict what they'll initially lend.
5 How much rent are you likely to earn? Do your homework – talk to local letting agents.
What else do you need to consider
• Do I need a license from the local authority? Usually needed for larger properties (three or more storeys) to rent to more than two tenants (called a house in multiple occupation or HMO).
• Is it a leasehold property? Most flats are bought on a leasehold basis. Does this one allow sub-letting? How many years does the lease still have to run?
• Furnished or unfurnished? Either way you might make it more appealing if it has a modern bathroom and fitted kitchen.
• Will it meet the safety requirements? They also affect furniture and fittings as well as the property itself.
• Should I use a letting agent? They’ll usually charge around 10-12% to find, vet and install tenants, and 15-18% for a full ongoing management service (which means, amongst other things, that they will sort out any tenant gripes).
About buy to let mortgages
Buy to let mortgages are a little different. That's because they've been specially designed to help out landlords like yourself. And like houses, they too come with special fixtures and fittings to make your life even easier!
What’s different about them?
Buy to let mortgages are based on the likely rental income of the property, not how much you earn. You can borrow up to 85% of a property’s value (a percentage known as loan to value), so you'll need a deposit for the rest. Interest rates also tend to be slightly higher than normal mortgages.
Are there different types?
Yes – what’s right for you probably depends on one key question, ‘do you need an income straight away?’ If you do, you’ll probably want to keep your mortgage as small as possible to keep expenses down. If you don’t, you could consider aiming for ‘tax neutrality’, taking a bigger mortgage so that the rental income and running costs roughly balance each other out and there’s no ‘profit’ for the taxman to get his claws into.
Repayment or interest only?
Repayment mortgages are available but interest only mortgages are more common. This is because they’re cheaper – and you can always repay the capital by selling the property at the end of the mortgage term, as long as the value of the property is more than the outstanding mortgage balance. Interest only mortgages are also more tax efficient because you can offset all the monthly interest payments against rental income for tax purposes.
Fixed, discounted, or tracker?
Just like any other mortgage, buy to let mortgages come in all sorts of shapes and sizes. What’s best for you really depends on what’s likely to happen to interest rates and how much stability you want around your mortgage payments. There’s also your loan to value ratio and whether it’s a single property or part of a bigger portfolio. Don’t worry, we’re here to help you choose.
