The whole process of acquiring a ‘Buy to let’ property is different to, for example, that used when buying a residential property to live in. The purchase is still part of a conveyancing process – but some of the charges and expectations are different.
Purchasing a buy-to-let property is still worth considering if you’re aware that it’s a long-term investment. There are many factors to consider, including your budget, where you want to buy and what type of property you want to purchase.
1 Understand what investing in a buy to let property involves
You’re investing both time and money into a buy to let property so make sure that you don't go in thinking that there are no potential pitfalls, so you are properly prepared. Do also take into account that being a landlord means you have certain legal obligations because failing to comply could mean you commit a criminal offence.
Some rules and regulations cover:
- keeping the property in a decent (habitable) state of repair
- annual safety checks
- how you hold any deposit your tenants pay to you
- recovering rent or evicting tenants if something goes wrong
Even if you already own your own home, buying a buy to let property is not always the same. If you need a mortgage, this will be a buy to let mortgage, which will be different, with specific rates, rules and interest rates applying.
There are also different rules when it comes to Stamp Duty
reallymoving note: Please be aware that as of 6th April 2020, the deadline for paying CGT will be reduced from 10 months to 30 days.
- Research what buying a buy to let property really involves and prepare to comply with your obligations as a landlord.
- Talk to a conveyancing solicitor or licensed conveyancer about your purchase, so they can guide you through the legal complexities of buying a property to rent out.
- Talk to an accountant who can help you with investment advice so you know about tax implications. You will usually have to pay tax on income earned from renting and you will pay Capital Gains Tax when you sell the property.
If you need a mortgage, then you should obtain an agreement in principle from your chosen mortgage company at an early stage. This will prove your eligibility for this type of mortgage and clarify how much you can borrow.
It is important that you let the mortgage provider know you are buying to let because this is a special type of mortgage with different rules and interest rates applying. You should not apply for a routine residential mortgage and then rent out the property unless you get the mortgage provider’s written permission to use it for commercial rental purposes. In most cases this would be a breach of the terms of any residential mortgage and mean that the mortgage provider could start the repossession process.
2 Can you afford it?
Do your homework before you start looking for a property so that you are clear what you can afford. It’s also a good idea to consider taking some financial advice to ensure that you understand and use any available tax/savings advantages.
Remember that you’ll also be responsible for maintaining your property and making sure it is safe for a tenant to live in. For example, if the sink needs replacing, that’s probably at your expense and not your tenant’s.
You also need to consider that you may not always receive regular rental income. For example, your tenant might not pay on time meaning you must follow a procedure and incur expense to recover what’s due (it’s against the law to pester /harass a tenant) or there may be a period of time when the property is empty (between tenants).
If you have a mortgage, take into account that general changes in interest rates and/or the end of any fixed term deal could mean an increase in what you have to pay.
Do your calculations carefully – this is not a time for guesswork. Ideally, have a “slush fund” (equivalent to at least 6 months rental income) available for unforeseen repairs and lack of rental income, incase your property is left empty in between tenants.
3 Investment “yield”
Buy to let property is generally a longer term investment but any investment should “yield” a profit. For example, if you buy a property for £150,000 and your annual rental income is £7,500; your yield is 5%.
You will also want to consider any costs, like advertising the property is available for rent, or if you decide to use an estate agent to manage the property. Also remember to factor in the original costs, like Stamp Duty.
If you are planning on being a landlord directly, without a property management company, then it is worth considering the value of your time as well. Whether that’s finding tenants, dealing with paperwork or arranging for a replacement boiler.
Like any investment, property prices and rental incomes can go up and down. Providing tenants with a good “service” will mean that they want to stay put which, in turn, means a more regular rental income because you don’t have to keep finding new tenants.
4 Consider your potential property
Some elements of the buying process are the same when acquiring a buy-to-let property, but some of those questions you need to ask are slightly more specific.
You need to consider:
- exactly who owns it
- whether there are or have been any issues with the property
- exactly what will be included in the sale (fittings and contents)
- what warranties, guarantees and safety certificates the property and its’ contents have and if these are transferrable to you
- that the property can be rented even if there are already tenants in the property (for example, there are often restrictions if the property you are buying is a leasehold rather than freehold property)
- if the property is currently rented, this will also include details of the types of tenancy held and when it comes to an end (which could mean a delay in completing). Even if it suits you to let the tenants remain in the property after you become landlord you need to be very careful and take specific and detailed legal advice about this. It is, for example, possible for tenants to acquire certain rights through various types of tenancy which make eviction very difficult if you have not followed the correct procedures
It is also important to bear in mind that if the seller is the landlord of the property (i.e. you are not buying from someone who lives in the property) then the seller:
- will have legal obligations as a landlord which they must have met, such as maintaining the property (otherwise those obligations could be transferred to you)
- may know less about the property and may give a limited title guarantee, so you need an experienced legal representative to ensure you are protected
You must make sure that your legal representative understands your plans and your situation as they go through all of the information with you so that they can fully advise you. It is also really helpful that you share any knowledge that you might have acquired about the property, such as fast turnaround of tenants.
5 Where to buy
Part of your research must include looking for the best areas to rent out properties which might not be in the area where you currently live. Buy in an area which is attractive to tenants and where there are sufficient people who will want to rent.
Do bear in mind that if you have decided not to use an estate agent to manage your rental property, you will have to be available to your tenants if something goes wrong. As such, in this case it may be better to choose somewhere you can easily access.
Remember that this is not somewhere you are planning to live! It’s not about what you’d like but what your prospective tenants will want.
6 Know your tenant
Just as a business must know their target market (who they’ll sell to), you must identify your own prospective tenants so that you can ensure that your property is attractive to them, which in turn will make prospective tenants want to rent from you. For example, the needs of a professional couple will be different to those of 5 university students in everything from how much rent they will pay to what fixtures they will expect you to provide.
Identify your “target” tenant and cater for them.
Key issues you must take into account include when searching for property include:
- Thinking about who you want to rent to (your prospective tenant)
- Buying in an area where your prospective tenant will want to live and which serves their needs so you can locate a plentiful supply of suitable tenants (finding tenants will be your responsibility)
- How you will deal with any problems that occur
- Thinking about your ideal tenant and developing a profile of your requirements
- Calculating a clear budget (including legal costs so compare quotes) and not over-extending your finances. Check you can pay any mortgage (to avoid repossession) and outgoings at times when you don’t have a tenant or there’s a problem with rent collection. Investigate rental insurance so your personal finances are protected.
If you are purchasing a property that already has tenants, you will need to carefully check what their existing tenancy agreement includes and when it expires. Whilst in many ways taking on a property with existing tenants is an advantage, you will want to create your own agreement with them to ensure each side knows the expectations of the other. Discuss this with your solicitor.
7 The right price
Once you’ve found the property you’re looking for, don’t be afraid to haggle over the price. Markets fluctuate and you may not know the personal circumstances of the sellers so this is not a time to be coy about asking for a price reduction.
Once the price is agreed you will need to exchange your details (including those of your legal representative) with the seller. If you are using an estate agent, they will usually organise this for you.
Bear in mind that until you have formally exchanged contracts neither you nor the seller is legally obligated to complete the process and can back out without any serious repercussions.
If you need a mortgage then you will need to organise the survey and work towards getting a formal mortgage offer. Your mortgage provider may offer a range of survey options, so make sure that you get the right one for you and the property you’re buying (for example, you may want to obtain a more detailed survey for an older property).
Be confident and professional when haggling but there is no need to be arrogant or rude.
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8 Get the right mortgage
A mortgage for a buy to let property is different from one you would be granted when buying a property you are going to live in (a residential mortgage). Although mortgage rates on buy to let properties can sometimes be higher than residential mortgages, don’t be tempted to mislead or deceive the mortgage company about how you’re using the property because that would constitute fraud.
Top Tip: shop around to make sure you get the best mortgage deal. We recommend speaking to the Mortgage Advice Bureau.
9 Research Insurances
You will need to have specialist building and probably contents (depending on what’s in your property) insurance for a buy to let property. However, don’t be tempted to buy an often cheaper insurance for a residential property because if something happens (such as the tenant causes a fire) your insurance company will not cover your losses. Instead you will need specialist cover designed particularly for buy to let properties – often referred to as “Landlord insurance”.
You may also be able to purchase an insurance policy which covers your rental income if your tenant doesn’t pay – something to consider if you will be left paying a mortgage on the property.
Make sure that you not only get the right insurance cover that protects your investment but that you shop around for the best quote, comparing like with like.
10 Make it legal
Last, but by no means least, never try to cut corners by not using a valid written tenancy agreement. Particularly in England and Wales, if you don’t provide your tenant with certain notices and obtain a signed tenancy agreement before they move into the property, they may acquire rights that neither of you intended. For example, you may find that it is virtually impossible to ensure your tenant vacates the property, even if they are not paying you the rent due.
Bear in mind that your tenant’s deposit must be stored in a Tenancy Deposit Scheme account, which means it is protected. This is also helpful in adjudicating if there are any disagreements with a tenant about how much of their deposit they receive back.
It’s also important to remember that your property has to meet legal requirements before it can be rented out – this includes having an up to date EPC that meets Minimum Energy Efficiency Standards (MEES) and a House of Multiple Occupation (HMO) licence if applicable.
Seek professional help with your tenancy agreement and accompanying paperwork.
11 Stamp Duty
In April 2016 the law changed regarding Stamp Duty on second homes. On a first home, you pay Stamp Duty on properties over £125,000. On your second home, even if you are buying to let, you will pay on anything over £40,000. So a second home purchased for £125,000 would cost you 3% in Stamp Duty.
When looking at a property, work out the Stamp Duty and automatically add it to the cost of the property. If you are aiming to make money from the rental of the buy to let property, you need to know the full cost before you commit.