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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.
Lauristons currently manage over 1000 residential investments for other investor landlords who have taken the path of investing in buy-to-let.
Below is our guide on how you could join them.
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How does buy-to-let (BTL) property investment work?
Buy-to-let is where a property is bought specifically to be rented out to tenants as an investment rather than lived in by the purchaser.
Investors can make a return on their investment typically in the following three ways, in many cases, a combination of all three:
Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agents fees and mortgage repayments. This is calculated as a percentage return over a 12 month period and is typically about 5% on average.
Capital growth – the profit you earn if you sell your property for more than you paid for it, less an Capital Gains Tax (CGT).
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.
There is certain requirements that need to be met in order to be able to get a buy to let mortgage, typically a larger deposit is required that with a Residential purchase and the rent needs to be a certain amount higher than the mortgage payment, so doing a lot of research is key before any purchase is made.
But, like all investments, there are risks attached to buy-to-let. For example, you could be hit by rising interest rates, stuck with difficult tenants or unable to sell if the housing market changes.
And times are set to get tougher for buy-to-let with the introduction of higher Stamp Duty taxes and less flexible rules on the tax relief you can claim. Start your homework on all of this and more with our simple guide and remember to think about all aspects of the residential property market when entering the buy-to-let world.
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 manager like Lauristons 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.
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 Lauristons' 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 Indemnity 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.
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. If the property is in a development, there could always be one off demands from the block management company that might not be covered in the service charges, for example expensive lift repairs.
Major repairs or difficult tenants may increase your costs unexpectedly so a contingency fund should always be maintained 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
It is always recommended to have both buildings and contents insurance and rental indemnity 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 tripping over loose carpet for example, damage to your belongings and even things like hotel accommodation in the event the property becomes uninhabitable. Make an appointment to see one of our insurance advisors here.
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.
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. They may charge you a fee for their consent, or ask you to swap over onto one of their BTL mortgage products. It is always good practice as well to do the same with yoru Freeholder if there is one, and your insurer. Some policies will be automatically invalidated if you make a claim and they were unaware you no longer lived there.
When you buy your property and rent it out you will have cover the usual costs of buying which will 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.
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. From 1st April 2016, BTL properties attracted an additional 3% stamp duty, payable on the entire property price, not just teh amount over £125,000. 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.
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 at 18% or 28% depending on your tax bracket. See HMRCs guidance on CGT here. You do have allowances though. For the 2016/2017 tax year the first £11,100 profit is CGT free. For couples with joint assets this doubles to £22,200. You can also offset the cost of the SDLT paid on purchase against CGT.
CGT currently needs to be paid within eighteen months of completion, but from 2019 it will need to be paid within a month.
Non Resident Landlord (NRL)
If you own a rental property in the UK but you are living abroad outside the UK for a period of 6 months or more, then you are an Overseas Landlord and need to comply with the Non-Resident Landlords (NRL) scheme which sets rules around how you pay tax.
The basic guidelines are as follows:
A Non-Resident Landlord is a person who has UK rental income and whose ‘usual place of abode’ is outside of the UK.
Individuals who are outside of the UK temporarily (less than six months) are not Non-Resident Landlords.
If Lauristons or any other agent receives rent on behalf of a Non-Resident Landlord they have a statutory obligation to deduct 20% of the net income and make payments to the Inland Revenue on a quarterly basis. This
In cases where properties are jointly owned, each individual is liable to pay tax. Both the income and the expenditure is split equally between the two parties.
Non-Resident Landlords include members of the HM armed forces and other Crown Servants who are outside of the UK for over 6 months.
When a Non-Resident Landlord receives rent direct from the tenant, the tenant has a statutory obligation to deduct 20% of the net income and make payments to the Inland Revenue on a quarterly basis.
Non-Resident Landlords can apply to the Inland Revenue for exemption that will permit their letting agent not to deduct tax at source by completing an NRL1 form. However, approval of an NRL1 does not mean that the rent is exempt from UK tax, it simply means HMRC will expect to see your rental income accounted for in your tax return and the any amount due will then become payable.
In cases of a jointly owned property each owner must complete their own NRL1 application form.
Landlords Statutory Responsibilities
Whether and a first time landlord or an experienced investor, if you are not using an agent to fully manage the property, there is a huge amount of statute that needs to be complied with other than just the Landlord and Tenant Act 1987.
There are regulations and statute affecting the following areas that needs to be considered, understood and complied with:
Smoke & Carbon Monoxide
Portable Appliance Testing
In addition it is good practice to understand how preparing and concluding a tenancy efficiently avoid any unnecessary expense, for example, the advantages of having the property professionally cleaned at the start of the first tenancy and an independent inventory check in completed. For more information of the various services that need to be considered prior to a tenancy commencing, please visit our Preparation of Tenancy services.