There’s a lot to consider when deciding on whether to invest in a buy to let property. Eleanor Burroughs, Partner in the residential property team at Tees, outlines here some of the risks and benefits along with some key legal considerations.
What is a Buy to Let property?
Generally, Buy to Let refers to property which has been bought solely as an investment for letting to tenants whether that is single families or a group of students, but that is not always the case.
Sometimes a buyer may become a landlord by default, for example, they want to purchase the property for themselves to live in at a future date but must let it out in the meantime.
What are the benefits of a Buy to Let?
Landlords generally look for two things, capital growth and rental yield. In some areas of the country one of these may outperform the other so it is important you decide what you are looking for in terms of either a regular income or long-term gain and chose a property accordingly.
For some, being a professional landlord is their job and all their income derives from what they make on their rental properties, others may have just one property which they may have purchased as a pension for the future. Whatever your situation it is important you do your homework thoroughly before taking the plunge.
What are the risks in buying to let?
As with any investment, buying property does not come without risk and is not something you should engage in on a short-term basis as property prices go down as well as up.
You need to ensure you have enough capital behind you to pay for repairs to the property as and when they are needed and that you can meet your obligations in void periods. When a property is empty, as well as loss of rent keep in mind that you will still have to pay any mortgage costs as well as council tax and utility charges.
This is not always easy if the property is empty for some time. There are also the risks of tenants not paying the rent or causing damage and legal action being needed to gain possession.
You also need to be available to carry out repairs to the property so if that isn’t possible for you then you need to factor in the cost of employing someone to manage the property for you and for professionals to carry out repairs. These costs can quickly erode profit if your margins are tight.
What property should I buy?
The important thing is to take your time in deciding what is right for you and what is right for your potential tenants. Being a landlord is a business decision and you need to approach it that way.
You need to think about the type of tenant that would be attracted to the location and how adaptable the property is to the needs of the tenant group you are looking to attract.
There is no point buying a student let miles from a university or aiming to attract families with a one bedroom flat on the top floor of a tower block.
If you want something lower maintenance, a new build property or a flat in a professionally maintained block may be the answer.
Are there restrictions on the type of property I can let?
In order that you can let a property it must meet certain energy performance ratings. There are certain exceptions, but they are few and far between. For most properties, you can only let where the energy rating is E or higher.
If you are thinking of buying a leasehold property it is important that the terms of the lease are checked carefully to ensure there is no restrictions on lettings. Even if the lease does allow lettings to take place the landlord may have restrictions on the length of the term and is likely to require notice of this which may involve you paying a fee each time a new tenancy is agreed.
It is vital that you tell your solicitor of your intentions so as they can make sure everything is in order.
What are my legal obligations as a landlord?
There are many and they change regularly which is why a lot of buy to let landlords choose to use the services of a professional letting agent to manage the property for them and keep them updated of any changes.
If you don’t then you need to ensure that you not only know the legal implications of letting when you first let the property but that you continue to stay abreast of changes throughout the entire letting period.
Amongst other things you must ensure that the gas and electric are safe to use and that the property is well maintained. Additionally, you must ensure that your tenant has a right to rent and that any deposit provided by the tenant is properly protected and held in a government-approved scheme
Letting to students or letting a house in multiple occupation (HMO) requires licencing and there are more stringent controls on letting. Some local authorities now require you to have a licence even if letting to a single household.
What if I fail to comply with my obligations as a landlord?
This will depend on the type breach but failing to comply with your obligations can result in financial penalties and in the worst case a prison sentence so it’s important to seek the right advice and get it right!
Do I need a different type of mortgage for a Buy to Let?
The answer to this is yes and the fees and interest rates on buy to let mortgages tend to be higher than for a standard mortgage and you will need to advise the lender if you intend to let to students or on an HMO basis.
You can obtain interest only loans on buy to let as lenders will accept that the capital can be repaid on the sale of the property but do remember if prices fall and the sale price does not cover the loan, you will have to make up the difference.
You will also generally need a higher deposit and your lender will want to ensure that the rental income you are likely to obtain will cover at least 125% of the mortgage costs. If the property is being bought by a company the legal costs for dealing with the mortgage are also likely to be higher. Buy to Let mortgages require properties to be let on an Assured Shorthold Tenancy basis.
Are the costs of buying to let higher than for buying my main home?
When you are buying a property for the purposes of letting it out there are tax implications you need to be aware of. Firstly, you will generally have to pay a stamp duty land tax surcharge of an extra 3% on the entire purchase price. Stamp Duty Land Tax is a complicated area but we can guide you to the right advice. Your rental income must also be declared in your annual tax return and there are capital gains tax implications when you come to sell if you have made a profit.
If you have chosen to set up a company to own the rental property, there are different tax considerations to consider. The rules around reporting and paying capital gains tax have recently changed and the timeframe is now limited to 30 days from completion of the sale. Our article on this topic explains this in more detail here.
We’re here to help
At Tees we can help you with all aspects of your buy to let purchase.
Our residential team can guide you through the buying process and deal with your mortgage.
Our litigation team is on hand to help you with draw up your new tenancy agreement and assist you with possession proceedings in the unfortunate event that things to wrong.
When you come to sell or make your annual tax return, our team of dedicated tax accountants can assist you with your reporting requirements.
If you are looking to buy property to let, please do not hesitate to get in touch.