Investing in buy-to-let property
Very simply, buy-to-let is the process of buying a property in order to rent it out to tenants. In recent years, the rental market has enjoyed a significant boom, as fewer people are choosing to buy or sell their homes, and opting to rent instead.
Despite the healthy rental market, ‘buy-to-let’ has slowed down somewhat, after recent changes to taxation made it more difficult to secure high returns. However, for many people it remains a popular investment choice.
How does buy-to-let work?
You can either use your own cash to buy a property, or apply for a buy-to-let mortgage along with a cash deposit. If you take out a mortgage you need to bear in mind the risks involved. If you have no tenants in your property you’ll still be responsible for making your mortgage repayments. And if in the future you sell your property at a loss, you may have to make up the shortfall in order to pay off the mortgage.
You will also have to cover the costs of buying your property, including:
- Stamp duty
- Conveyancing fees
- Property survey
- Searches
Once you’ve bought a property, you’ll need to find tenants. You can either advertise the property yourself, or use a lettings agency/website. Many local lettings agencies offer a managed service, which means they find your tenants (although this isn’t guaranteed) and take care of the day-to-day management of the rental property.
However, this is an expensive option which will eat into your rental income. Plus, it’s important to note that as a landlord, you have various legal responsibilities, which remain your own, even if you use an agency’s managed service.
How do you make money?
There are 2 ways to earn income through buy-to-let:
- Rental yield (the money you earn from rent, once running costs and mortgage repayments have been subtracted)
- Capital growth (an increase in your property’s value over time)
It’s important to note that property prices can go down as well as up, and rents are by no means guaranteed, so you should see buy-to-let as a medium to long-term investment which does carry some risk of losing money.
Need to know
- The rent you can charge will vary widely from area to area, so it’s important to do your research before purchasing
- In order to access your money, you’d need to either sell the property or remortgage it to release some equity
Costs
When calculating your potential rental yield, you should include the following costs:
- Advertising for tenants
- Credit checks (these can be carried out by a lettings agency but you may be charged extra)
- Property running costs
- Maintenance costs
- Agency management fees
- Mortgage repayments/interest
- Landlord insurance – this isn’t a legal requirement but will offer you some protection in case things go wrong
- Buildings insurance
- Your time
- You may want to put some of your rental income aside to cover the costs of more substantial repairs
You will also have legal and agency fees to pay when it comes to selling the property.
Changes to tax
On April 1st 2016, significant changes were made to the way buy-to-let income is taxed.
You now have to pay an additional 3% in stamp duty, when you buy a second home or a buy-to-let property.
You’ll also need to pay income tax on any rental income. Although buy-to-let landlords can offset mortgage interest payments and some costs against their income, tax relief is being phased out over the next 2 years, meaning your tax bill as a landlord is likely to rise, particularly if you’re a higher rate tax payer.
What’s more, if you make a profit when you sell your property, you will probably be required to pay Capital Gains Tax.
Find out more about paying tax on rental income here.
If you’ve considered all the risks and done your research, and have decided that buy-to-let is the right investment choice for you, contact Enact for a conveyancing quote.
