Before thinking of getting a buy to let property there are a few things you will need to consider. Buy to lets tend to be a long-term investment so be prepared to be in it for the long run. Buy to lets can be a good source of passive income. Not only will you get monthly rent but also the property itself will increase in value over time.
A good annual yield of 6%-9% is the average you can expect to achieve. Every area of the country will produce different yields so it’s important to do your research into your selected area for average yields. A good place to find this kind of information is Rightmove and Zoopla. Check out property’s similar to the one you intend of buying, find out what they are selling for and the asking rent. Make sure you account for months when the property is empty. A good rule of thumb is 2 months in a year. Most buy to let mortgages will expect this information to ensure the rent will cover the repayments and some.
Below are a few things to consider thinking of getting a buy to let.
Furnished VS Un-Furnished
Generally there isn’t much in the difference of rental income you can achieve from furnished vs. unfurnished. You will need to do your research in your chosen area but don’t expect it to be a huge difference. The main benefit is the type of tenant it will attract. Professionals who are traveling quite a bit or have residencies in multiple locations tend to like furnished flats. Having a bad tenant is a nightmare situation for most landlords and the tenants like furnished properties tend to be less hassle.
Obviously the biggest disadvantage is the cost of furniture. All electrics must be pat-tested and unto latest standards of fire resistance. Furniture will also be subject to ware and tear and might have to be replaced when the next tenant arrives.
When it comes to student proprieties and HMOs then furnished is the way to go. Most student properties are let as furnished. The average student doesn’t tend to have much spare cash to spend on furniture.
Buy To Let Type of Tenant
HMO – HMO stands for home of multiple occupancies. A HMO is defined as a property with 3 people living there that aren’t from the same family. You will need a license in order to run a HMO or you run the risk of being prosecuted. HMO’s license requirements are different in each district, so you will need to check with your local council for the rules and regulations.
The biggest benefit of a HMO is the higher rental yield achievable. HMOs will make your more money but they will use up a lot more of your time. The property grounds such as garden will normally have to be maintained by you. You will also be reasonable to get yearly safety certificates along with ensure healthy relationships and arguments amongst tenants.
Student – Student rentals are exactly like HMO’s but target students as the tenants. The issues regarding students are the way they treat the properties and their personal financing. A lot of the time it will be there first time away from home and money management. Student loans don’t stretch very far so you need to ensure they don’t fall behind on rent. The benefits form the extra rental yield can be well worth the risk. The minimize the risk you can instruct your estate agent to only show groups of girls or mature students your property. Generally this type of tenant will be more reasonable and respect the property compared to a group of 5 student boys.
Students tend to be tenants for a maximum of 2 years and a lot of the time will leave after the first year. This means you will have to look for new tenants regularly. Good thing is there will always be new students waiting to fill their space, just make sure you buy in a popular student area.
Housing benefit – This type of tenant gets benefits from the government to help to pay for part or all of the rent. A lot of landlords don’t accept housing benefits due to their reputation of being bad tenants so there is a shortage. This shortage means there’s high demand from local councils for housing benefit buy to lets.
Private – This is the standard family or couple tenant. As long as you get good references you can’t really go wrong. Although the yields aren’t as attractive the tenants will more than likely be long term. Private tenants tend to treat your property with respect as if it where their own home. It’s not uncommon for them to do ask if they can do home improvements such as painting and tilling.
Tax will have to be paid on the money you have earned for rent. You are able to claim expenses such as legal fees, estate agent fees and property management costs. Getting an accountant is recommended; they will probably end up saving you money. Since 2017 you are no longer be able to claim loan interest as an expense. This was a huge shake up by the UK government and made a lot of landlords sell up! Make sure you do your calculations so you know exactly what to expect once tax has been paid on the rent. You will need to register for Self-Empolyed with the HMRC.
For example before 2017 If your rent was £1000 and your interest repayments on the loan where £700, you would only have to pay tax on the £300 profit made. From 2020 you would have to pay income tax on the whole £1000. You can see now why this made loads of landlords jump overboard.
When it comes to selling the property you will have to pay capital gains tax. This tax is paid on any profit made form the increase in value of the property. You will be able to take out all legal fees and expenses involved in the sale. Unfortunately there is not way around this tax. The property was essential a business (Making money) and therefor subject to capital gains. This tax is generally around 20% as standard. You will have to pay any national insurance on income earned.
Local property VS un-local away
There are a few things to consider before you decide on the local of your buy to let. Having a local property means you can keep an eye on it. Your not a million miles away if something requires your attention. Buying in an area that you know also gives you the benefit of local knowledge; you know the good streets from the bad.
The attraction with far and wide a buy to lets are higher yields. Yields very from town to town. The higher rental yields tend to be in more northern cities and towns. When it comes to student properties your buy to let will need to be near a university or college. Most estate agents will offer a managed property service. They will charge you a higher agent fee but will take care of the property on your behalf.
Financing your Buy to Let
Cash – The main benefit with cash is you won’t have to pay interest and you get to keep all the profit made from the rent. With the new rules regarding bank interest expenses it will be more profitable to avoid this. You don’t want to be paying income tax on money you have spent on interest. The downside is it requires a large amount of capital. So you will need to save your cash. This capital will generally be tied up for a lengthy period of time so be prepared for a long term investment.
Mortgage – Banks and lenders will offer buy to let mortgages. These mortgages are specifically designed for buy to lets. They will generally require at least a 75% loan to value ratio meaning you will need £25,000 deposit on a £100,000 property. Buy to let mortgages will also have higher interest rates compared to private residential mortgages and will also have extra requirements such as minimum rental yield.
Check with your loan provider if you plan on renting your home in which you already have a home mortgage on. Some lenders won’t allow you to rent out your property.
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