Should you Buy to Let?

In the past, whether to invest in a Buy to Let property may have been an easier choice. However, property prices have been growing at a slower pace in recent years and landlords are faced with increasing amounts of legislation. But it can still be a lucrative way to generate more income.

With this in mind, it’s crucial to weigh up your options before plunging into the Buy to Let market. It’s not a step that’s suitable for everyone and, even when it is, careful research is needed to maximise the investment you’re making. So, what key factors should you be thinking about if you’re considering purchasing a second property to let out? Here are seven to get you started.

1. How are property prices performing in your area?

One of the biggest factors influencing the property market at the moment is the uncertainty that Brexit brings.

Historically, house prices have been rising when you look at the long-term trend. But recently, the rate of growth has been slowing, and in some places, property values have actually decreased in recent months. It’s impossible to predict how property prices will perform over the near and long-term, especially when the outcome of the Brexit deal is in turmoil. But it’s still crucial to look at how property prices are performing where you want to buy and how they’re projected to change.

2. What properties are in high demand from tenants?

Before you start looking for a property to purchase, it’s important to understand what’s in demand within the area you’re planning to buy. In an urban area that’s popular with young professionals, a flat may gain the most interest. But if the community is filled with families, you may struggle. Take the time to research which rental properties are snapped up fast and the average yields.

At this point, it’s also a good idea to consider the income the property will generate. If you’re using a mortgage to purchase a Buy to Let property, you’ll need to show that the rental income will cover your mortgage payments plus a further 25-30% depending on your lender.

3. The costs of arranging a mortgage

Unless you have the capital to purchase a Buy to Let property outright, you’ll need to take out a mortgage.

Compared to a standard mortgage, the costs are much higher. Firstly, the deposit you need to put down will be more. Usually, this is 25% of the property’s value but it can be as high as 40%. Secondly, you should expect the fees and interest rates you pay to be higher, increasing your outgoings.

4. Will it diversify your wider portfolio?

Don’t look at a Buy to Let opportunity as a standalone venture. It’s a step that should form part of your wider financial plan and help to diversify the assets you already have. You want your whole portfolio to contain a range of assets that reflect your attitude to risk. Would purchasing a Buy to Let property do this?

5. How will you offset void periods or deal with difficult tenants?

Once you’ve secured a mortgage, there are still challenges to consider. There will undoubtedly be times when the property is empty or ‘void’. Of course, your mortgage repayments will still need to be paid. It’s wise to have a backup plan for when you don’t have tenants, particularly if you’ll be using the additional income generated for everyday expenses.

Even when you have tenants in the property there is another area of concern; what happens if they’re difficult? Tenants benefit from a lot of protection and it can be incredibly difficult to evict them, even when you have just cause. It can lead to a lengthy process that not only means you may not be receiving further rental income but paying out additional expenses too.

6. What maintenance costs will you face?

As well as the mortgage payments, your rental yield will need to account for maintenance costs. From those you’ve already budgeted for to the unexpected, you have a responsibility as a landlord to maintain the property. Unexpected costs can run into thousands of pounds.

You’ll also need to consider the safety features that you’re responsible for and the proper maintenance of them. This includes the installation of smoke alarms, gas safety checks and electrical appliance checks where necessary.

Now is also a good time to consider landlord’s insurance. It’s not compulsory but it can give you peace of mind. If you have tenants in your property, standard buildings and contents insurance won’t cover you. Some policies may also cover additional areas, such as loss of rent, legal expenses or eviction.

7. How will a Buy to Let income affect your tax liability?

There are a couple of areas to consider when it comes to Buy to Let and tax.

First, you will need to pay a higher level of Stamp Duty, even if the value of the property is under the usual 0% threshold for residential homes. The increases in Stamp Duty charges, which came into force in April 2016, are as follows:

Property value Buy to Let Stamp Duty rate
£0-£125,000 3%
£125,000-£250,000 5%
£250,000-£925,000 8%
£925,000-£1,500,000 13%
Above £1,500,000 15%

Rental income that exceeds your mortgage interest payments will count as income. Depending on your other income, this may increase your tax liability, as well as taking up a portion of your Personal Allowance. Should you sell the property for a profit, you may also have to pay Capital Gains Tax.

You should also factor in the ability to offset costs against tax. For example, you can offset costs against the amount of interest you pay on the Buy to Let mortgage, letting agent fees, or the cost of repairs.

If you’re considering investing in a Buy to Let property and want to understand how it could affect your finances, as well as explore other options, please contact us.