Should I invest in property?
Investing in a property is not a decision that should be taken lightly. Many people go down this path as a means of making money, but it’s important to go into the business with your eyes open and not just simply focusing on the financial gains that can be associated with it. The main thing
to bear in mind is your objectives. If your objectives are clear from the start, then you’re more likely to get what you want out of your investment.
So, how can you be the most successful landlord?
Plan your finances
Know from the offset what your financial intentions are. Will the money be used as
your regular income or will it be set aside as capital growth?
Do your research
With over 160 laws around buy-to-let, realistically, you’re never going to remember each and every one of these. You might want to appoint a letting agent who will know more about these rules and regulations, but we still recommend you take the time to learn the main ones in order to maintain the safety of your tenants.
Speak to a mortgage adviser and an accountant to better understand your financial situation and what your options are.
The property investment market can fluctuate, depending on the economic state at any given time, so it’s crucial to speak with a mortgage adviser in order to protect your finances and insure your property, should the market take a turn for the worst.
This is probably the last thing you’re thinking about right now, but it’s important to consider your exit from the buy-to-let market, just as much as your entrance to it. Having a clear exit plan will also help you settle your finances in the most tax efficient way possible.
In contrast, there are certain things you should always avoid, as a landlord:
• Seeing a property and diving straight into buying it with no wider consideration of the buy-to-let market. This includes not seeking the right mortgage advice, and therefore not understanding the implications of tax and other costs involved with renting out a property - not to mention the responsibility that comes hand in hand with being a landlord.
• Not protecting your property or your finances against the worst-case scenario, should anything happen.
• Not keeping up with the buy-to-let laws and regulations e.g. health and safety, and therefore not protecting your tenants.
• Not understanding exactly what being a landlord entails e.g. keeping the property in good condition, looking after your tenants needs and dealing with paperwork accordingly.
For those of you who have stumbled into the buy-to-let market unintentionally, you might want to read our accidental landlord article which gives a simple overview of how to manage your property and tenants.
Considering all the costs
Before you go ahead and dive into the world of buy-to-let, it’s important to know that you need more than just the deposit in order to have a smooth experience of being a landlord.
Mortgage arrangement fee
Some mortgages come with a product fee, which is normally larger than on residential mortgages. This can either be paid upfront or tagged onto the cost of your mortgage. There can sometimes also be an administration charge made by the lender for arranging the credit of your mortgage.
Buy-to-let stamp duty
If the property you’re investing in is over a certain price, you’ll have to pay a lumpsum tax known as Stamp Duty Land Tax (SDLT) in England and Northern Ireland, Land Transaction Tax (LTT) in Wales, or Land Building Transaction Tax (LBTT) in Scotland.
The price you’ll pay will vary on the amount you paid for the property. This price will also vary depending on whether you already own a property in the UK.
• A property under £125,000 - no Stamp Duty
• A property between £125,000 and £250,000 - you pay 2% Stamp Duty
• A property between £250,000 and £500,000 - you pay 5% Stamp Duty
• If you’re already a homeowner (either as a landlord or by owning your own home), you will have to pay an additional 3% Stamp Duty
Buyers of buy-to-let properties bought for £400,000 or more will have to pay an additional 3% in Stamp Duty.
Your solicitor will charge a fee for their services, which includes handling the contracts, documentation and searches amongst other things. To see a simple breakdown of the costs, click here.
Many lenders will want to carry out a standard mortgage valuation which you may have to pay for. However, you can look to upgrade to a structural survey or a homebuyers survey report for an additional cost, if you wish.
Buildings insurance is a must, and if you’re furnishing the property then you’ll no doubt want contents insurance too. Just remember that it’s a landlord’s policy you’ll need rather than a residential policy. Don’t worry about insuring the tenant’s belongings, they’re responsible for insuring those themselves.
There are other types of insurance available for landlords, such as landlords and rent insurance. These can cover you for legal expenses for evicting tenants, or if there are periods where the property is empty and you aren’t therefore making any money from rent. However, if you’re purchasing a flat, this may be included in any service charge that is payable, which as a landlord, you would normally be responsible for paying. Your solicitor will be able to confirm if you still need additional buildings insurance.
Additional costs to consider
Capital gains and income tax
You’ll pay income tax on all the rent money you receive. We recommend that you seek independent tax and legal advice as mortgage advisers are not qualified to offer tax advice.
If and when you come to sell the property, if you’ve made a profit (capital gain) then you’re liable to be taxed on the profit, not the total amount you receive.
Letting agent fees
It’s common for landlords to haggle with prices when it comes to choosing a letting agent. Letting agents offer a variety of support, depending on which level of service you’d like. For instance, they can offer rent guarantees, tenant replacement and tenant moving out fees. Some even offer a ‘fully managed’ service where they can arrange for any repairs work to be done using their own contractors. Just make sure you do your research upfront and know roughly what you can afford to pay.
Hopefully it will never come to this but it’s always best to prepare for the worst-case scenario. If you end up having to evict tenants who aren’t paying their rent, then you might have to take them to court in order to resolve the situation.
You’ll no doubt need to spruce up the property before your tenants move in, and there may also be a few repairs to carry out to make sure the property is in the right condition. If you’re pretty hands-on yourself, then you’ll no doubt find it easy enough to carry out the maintenance work yourself. However, if you don’t have the time, skills or inclination to do this, you might want to consider finding a trusted handyman to carry these jobs on your behalf.
If you already know that your property is likely to need a certain amount of work doing to it, it’s worth allocating a realistic budget for this and any ongoing repairs, especially when considering your rental yield.
Gas safety check
This check needs to be carried out annually and will make sure any gas equipment is safely installed and maintained. Make sure the engineer who carries out the check gives you a copy of the gas safety record before your tenants move into the property, or within 28 days of them moving in.
Legionella risk assessment
As a landlord, it’s your duty to carry out a risk assessment for legionnaires disease - a lung infection caught by inhaling contaminated water droplets which can be picked up from water systems in properties. This assessment should be carried out periodically, so make sure you read up on your exact responsibilities for Legionella risk assessments as a landlord.
Service charges and ground rents are normally all payable by the landlord and not the tenants. You also need to consider the length of lease remaining as this could need extending during your ownership.
Unfurnished or furnished property
Your property may be more attractive to prospective tenants if it’s already fully furnished, as this saves them a job. However, if you decide against furnishing the property, you don’t have to worry about having to replace things with general wear and tear.
Even in unfurnished properties, many landlords still provide kitchen appliances, such as white goods to tenants. For example, a cooker, washing machine, fridge and freezer. If these break or need repairing, you’d need to cover the cost of this.
Because we play by the book we want to tell you that…
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.