The five things first-time landlords need to know
In a recent report, Mintel revealed that 8% of the UK adult population is considering making a Buy to Let investment for the first time during the next few years. It’s perhaps not surprising, given that over half the population (55%) reckon that investing in property is a safer bet than buying stocks and shares – and more than a third (36%) would rather invest in a rental property than a pension. And it means that we can expect a continued increase in the flow of new landlords seeking to take out their first Buy to Let mortgage.
These new landlords will need advice when planning their investment.
1. There are two ways to make money from Buy to Let
Rental income is the first thing that potential landlords think of when considering Buy to Let – but capital appreciation may turn out to be just as important for many, and this can lead to very different decisions about where and how to invest, including how long they should seek to hold onto a property for.
If you are relying on increases in the property’s value to deliver a return on your investment or pay off the Buy to Let mortgage at the end of its term, you may need to look at different types of property than landlords who are seeking the maximum possible monthly income from rent.
2. High rents don’t always mean more income
Potential landlords may be attracted to Buy to Let by news headlines around rocketing rents. But the amount that they can charge tenants each month isn’t really the number landlord’s should be focusing on.
Understanding rental yield, and the difference between gross and net yield, might lead landlord’s to very different decisions about where to buy rental property – and how to structure their investment. And they will also need to consider rental cover, and the need for rents to cover 125% of mortgage payments when applying for a Buy to Let mortgage.
3. Buy to Let is an investment – and taxed that way
First-time landlords won’t be accustomed to paying tax when they sell a home, and so may not have considered factoring in Capital Gains Tax (CGT) on any increase in their rental property’s value when they sell it. And they will also need to get used to paying income tax on any rental profit that they receive. Landlords may be able to offset any improvement costs from CGT and deduct mortgage interest from income tax payments.
4. How to protect a Buy to Let investment
Any investment needs protection – and Buy to Let is no exception. Potential landlords may already have concerns over how to deal with rental arrears and problem tenants – and may not know about options for rental protection income, or the different protections available through landlord insurance policies. Advice can be obtained on planning for void periods and the importance of background checks and tenancy agreements.
5. Why you need an exit strategy
Since Buy to Let mortgages are predominantly interest-only, they require borrowers to have a clear strategy either for selling the property or paying off the mortgage at the end of the term. This is a particularly important consideration for those depending on Buy to Let to provide an income in retirement, who may find age restrictions narrowing their options for remortgaging, or for those who intend to leave Buy to Let property as an inheritance for their children.
If the plan is to pay off the mortgage by selling the property, then it’s important to plan ahead and link the sale date with the mortgage maturity date, to avoid a last-minute sale that could erode the property’s value. For those landlords not driven by rental income, a repayment or part-repayment Buy to Let mortgage may be an alternative at the start of the investment, or when remortgaging.