Investing in rental property is a popular choice for people wanting to reap the benefits of a long-term investment.
It’s essential to do your research first, however, otherwise you could end up making poor financial decisions. This quick guide outlines your key responsibilities and decisions that you’ll need to make before you start your buy-to-let journey.
Remember: you can always speak to your local mortgage adviser in Rotherham to make sure a buy-to-let property is feasible for your current circumstances.
How buy-to-let mortgages are different
Buy-to-let mortgages have different rates and terms compared to those for people buying their main residence. These increased costs reflect the commercial gain you’ll receive from the property.
You’ll also find that, for most buy-to-let mortgage deals, you’ll need a larger deposit than if you were buying a home for yourself. Typically, this is about 25% of the property value but could be as high as 40%.
You need to already own your own home before you apply for a buy-to-let mortgage. This could be outright ownership or a property with an existing mortgage on it. You may be able to use your existing home to release equity for the deposit on your new buy-to-let property. Speak to your mortgage adviser for more details about this.
Buy-to-let mortgages are usually interest-only. This means you pay interest on the loan for the duration of the term. You only pay back the original amount borrowed once the mortgage term comes to an end.
The amount you borrow will depend on the property valuation and the anticipated rental income you’ll receive.
Working out rental yield on a property
You’ll need to work out your rental yield to decide if a buy-to-let mortgage is a good investment. Look at similar properties in the area and find out how much the monthly rent is. You may also want to have an independent valuation completed on the property before you apply for a mortgage, to make sure you’ll receive the income required.
Rental yield is worked out by taking the annual rental income, dividing it by the purchase price, then multiplying by 100 to get the percentage.
For example, if your rental income is £20,000 per year and the property cost £250,000, the rental yield is 8%. (20,000 divided by 250,000 x 100).
A good rental yield is 8% or above, as this is likely to cover mortgage repayments as well as additional costs you’ll have as a landlord.
Your insurance requirements as a landlord
You’ll need to factor in building and landlord insurance costs for your new property. This covers you against damages to the building through fire, flood, accidents, and even damage caused by tenants.
Landlord insurance policies also offer legal protection and costs for tenants who are behind on, or refuse to pay, their rent. This is essential if you want to make sure your property doesn’t end up costing you thousands of pounds in court fees or lost rental income.
Landlord obligations: what you have to include by law
Purchasing a buy-to-let property means you’ll need to take into account elements that you have to include for your tenants by law.
These are straightforward demands but must be adhered to. If your property doesn’t have these things, or they need to be repaired, factor the costs into your purchasing budget to make sure you can comply with everything required.
You’ll need to provide:
- Gas safety certificates
- A tenant deposit scheme
- Your EPC certificate (rated E or above)
- Access to fresh running water
- Access to hot water
- A sink and toilet
- A heating system in working order
- Fitted carbon monoxide and smoke alarms
You don’t need to provide these for each separate tenant: for example, one bathroom for a couple of tenants is accepted. If you’re running an HMO property, additional requirements apply.
You’ll also need to pay income tax on the rent you receive, so make sure you account for this when creating your affordability budget for the buy-to-let property you’ve got your eye on.
Seeking advice as a first-time landlord
Investing in buy-to-let property is an attractive option for many – but is it the right one for you?
Speak to your local mortgage adviser in Rotherham to find out more about getting your first buy-to-let mortgage to start your property investment strategy.
Find out more about our Mortgage Advice service in Rotherham