What to consider with a Buy to Let property
If you are considering investing in a Buy to Let property, it is worth taking a little time to understand the potential risks and costs involved with a buy to let property, as well as the likely return on your investment.
Is buy to let a good investment?
In 2014, concerned that the buy to let sector was fuelling inflation of prices in the housing market, the government began introducing rules on the taxation of income derived from renting out residential property. These rules stipulated that you could no longer deduct mortgage expenses from rental income in order to reduce tax liability on the rental property. Instead, it provided landlords with a tax credit based on 20% of the mortgage payments. That said, buy to let properties remain an excellent investment, providing you understand the pitfalls.
Buy to Let Instability
At the time of writing, rental income yields are high, due in part to many buyers being unable to obtain a mortgage or save up a sufficient deposit to purchase a property of their own. But this will not always be the case, resulting in falling buy to let rents, and landlords should be prepared for this eventuality.
Nature of markets
Buy to let should be seen as a long-term investment, so if you like to pursue quick profits, buy to let is probably not for you. This is predominately because of the time it takes to off-load investments in times of trouble, which can cause losses. As most of us have experienced at one time or another, the period from placing a property on the market to completion of the sale can take several months.
It is probably unrealistic to presume your buy to let property will be let out at all times. The rental market fluctuates, with tenants moving on fairly regularly because of work or family issues. This requires you to consider how you will finance your buy to let property during periods when it stands vacant.
Rental Yields for buy to let properties
Most of us will at some time have watched the BBC morning programme Homes Under the Hammer and heard Martin Roberts or Lucy Alexander waxing lyrical about expected rental yields. The rental yield is the return on a buy to let property, and depends upon several factors, including type of property, market conditions, location, and condition of the property.
This is calculated by dividing the annual rental income by the purchase price, then expressed as a percentage. The average rental yield in 2021 for various locations around the UK is shown below:
|Region||Average Rental Yield %|
|Yorkshire and the Humber||4.56%|
This is the annual rental income on your buy to let property, minus costs such as mortgage payments, repair costs, void periods, and fees, divided by the purchase price expressed as a percentage. The net yield can be significantly less than the gross yield if your costs are high or you have extended void periods. Cheaper buy to let investment property provides a better annual yield, and you should look for a rental yield around 130-150% of your mortgage payments. Although, as previously stated, the location of your buy to let will influence the return.
Using a mortgage to purchase a buy to let property
To secure most buy to let mortgages you will require a minimum of 25% deposit of the purchase price. As with ordinary mortgages, the higher the deposit, the better the buy to let mortgage deal you are likely to secure.
- Initial costs – besides the required minimum deposit of 25%, there are the usual costs involved in purchasing a property such as survey fees, stamp duty, legal costs, mortgage admin fees and insurances.
- Letting costs – You will probably need to clean the property, carry out any repairs, decorate or in some cases a total refurb, furnish the property with appliances and equipment and need to pay for a Gas and Safety report to comply with legislation. In addition, you will have advertising costs (if letting privately), or letting agency fees if using those services. There are also fees involved in carrying out an inventory, drawing up tenancy agreements, and obtaining credit and personal references.
- Running costs – the single biggest cost is likely to be your mortgage payments. Presently, mortgage payments are low, but you should make allowances for rises over the coming years. If the property is leasehold, you will have to pay service charges and ground rent.
Responsibilities as a landlord
The primary responsibilities of a landlord are:
Electricity – Electrical Equipment (Safety) Regulations 1984
- Electrical supply and appliances within properties must be ‘safe’
- Every electrical appliance must be checked at regular intervals for defects, for example, poorly fitting plugs or loose wiring. There are no statutory timescales or checking procedures, although it is strongly recommended that yearly checks are carried out by a qualified electrician. Records of the checks must be kept and made available for inspection if necessary.
- If there are any unsafe items in the property, they must be removed prior to renting it out.
- Smoke alarms should be fitted in all rental properties and included in the yearly checks to ensure they are working.
Gas – Gas Safety (Installation and Use) Regulations 1998
- Every gas appliance, pipework and flue should be maintained to ensure they are safe to use. It is a legal requirement to obtain an annual inspection by a qualified Gas Safe engineer.
- A Gas Safety Record (GSR) must be kept and include the dates of inspection and any identified defects. This record must be given to the tenant when the tenancy agreement is signed.
- A gas appliance with an open flue must not be installed in any bedroom.
- If there is a meter box, the tenant must be provided with a suitably labelled key.
- If any work is carried out on an appliance, a Gas Safe engineer must carry out a specified series of safety checks.
- The tenant must be provided with instructions on how to operate any gas appliances.
- Any gas appliance that has been shown to be faulty or incorrectly installed must not be used and either repaired or removed immediately.
- Care must be taken to ensure vents, and air bricks are not blocked.
- Failure to comply with the gas safety regulations is a criminal offence and could result in a large fine and, in some cases, imprisonment.
Furnishing – Furniture and Furnishings (Fire and Safety) Regulations 1993
- All beds, mattresses, headboards, scatter cushions, pillows, stretch or loose covers for furniture, children’s furniture, and garden furniture must have the appropriate labels for fire compliance.
- Failure to comply with the furniture regulations is a criminal offence and could result in a large fine and, in some cases, imprisonment.
- A landlord (or their agent) must pay the tenant’s deposit into a government approved tenancy deposit scheme within 30 days of receipt.
- Failure to pay into a governmental approved deposit scheme could result in a financial penalty of up to three times the amount of the deposit.
If a buy to let landlord flouts the regulations, as set out above, they leave themselves open to any, or all, of the following:
- Civil damages claim by the tenant
- Potential manslaughter charges
- Criminal record
- Invalid insurance
Tips for being a successful landlord
- Decide your strategy from the outset. The amount you are going to spend on the purchase, the purpose of the investment, the type of property you wish to buy, and perhaps most importantly, your exit strategy if you need to get out.
- Do your research. Understand the properties and locations that will give you the best yield on your investment, understand the problems that can arise, such as tenants not paying their rent, and what can be done about it. Think about talking to other buy to let landlords and get their take on things – good and bad.
- Choose the right property. Find out what areas provide the best rental yields. Do you want a property that is ready to let out, or one that needs some improvement? Always buy a rental property based on rental yield, not on whether you would live in it yourself.
- Decide the type of tenant you want to attract. Will you allow children, pets, those on benefits? Will you let to students, let it yourself or use a letting agent?
- Do your sums. Understand the full costs involved, such as stamp duty, solicitor fees and any other fees associated with the purchase. If you are buying at auction, there will be auctioneer fees to be considered.
- Understand the legal issues. Landlords have legal responsibilities they must adhere to, which can have serious consequences if ignored. Know and understand them.
- Shop around for the best mortgage.