Investing in real estate with the intention to become a landlord may be as risky as it is appealing. There are numerous things to consider, ranging from the type of property to be acquired to the procedure of obtaining a buy-to-let mortgage, all of which must be properly examined before going ahead.
There will undoubtedly be factors you can’t control when you’re a landlord, but with our help in this article on buy-to-let properties, you’ll have a good start in entering the often challenging but highly rewarding landlord position.
Continue reading for our best advice on what you should consider in a buy-to-let home, along with your obligations as a landlord and more.
What exactly is a buy-to-let property?
A buy-to-let property is one that is acquired with the aim of renting it out to one or more tenants. A residential buy-to-let property extends from a small apartment to a big property and, with careful planning, can provide experienced landlords with a steady rental income.
What exactly is a buy-to-let mortgage?
A buy-to-let mortgage, like a standard residential mortgage, allows people without the finances to buy a home entirely to reside in, whereas a typical residential mortgage gives a credit to landlords searching for financial aid to acquire their property.
As the criteria of a buy-to-let mortgage may vary depending on the lender, some limitations that are not included in a typical mortgage agreement should be expected.
For example, it is usual that the rent charged on your property is not inferior to 125% of the monthly mortgage repayments in order to protect the mortgage lender. Also, nearly all lenders will not accept a mortgage contract if you ask to borrow a value of around 60% to 75% of the property’s value.
These extra concerns are to protect the lender from the somewhat riskier investment that buy-to-let property is compared to the – in theory – safer investment of a residential mortgage.
What exactly is rental yield?
To calculate rental yield, use the following simple formula:
Rental yield = (Monthly rental revenue multiplied by 12) ÷ Property value
Here’s how to use this formula to determine rental yield in more detail below:
- Multiply the monthly rental revenue or anticipated rental income by 12
- Subtract it from the property’s purchase price or current market value
- To get the percentage, multiply this value by 100
Your monthly rental revenue is: £1,650
Your annual rental revenue is: £1,650 x 12 = £19,800
You acquired the property for: £275,000
Your rental yield is: (£19,800 ÷ £275,000) x 100 = 7.2%
You may also use an online rental yield calculator to calculate your rental yield. Insert your monthly rental income and the purchase price of the rental property, then click “Calculate.”
Do I need to do any tenant screenings?
The type of tenant that rents your home might have a significant influence on your goals. By doing a tenant check on your tenants, you may reduce the chance of rent arrears and other difficulties.
Background checks will provide an insight into your tenant’s rental history, financial background, and any criminal records your tenant may have. As a property owner, you should exercise caution and check out who you are leasing your home to before handing over the keys.
Furthermore, under UK law, any landlord discovered renting to someone who does not have the legal right to rent a home can be prosecuted, fined up to £3,000 per illegal tenant, and even imprisoned. Avoid this by retaining documentation of your tenant’s authorization to rent in the UK.
What type of buy-to-let property should I invest in?
When buying a buy-to-let property, whether at auction or on the open market, there are a few things you should think about before starting your search that will help your chances of ensuring a worthwhile investment property. These are the property’s type, location and ideal tenant profile.
When looking for your own home, choosing the appropriate property in the correct area is critical. However, it is just as vital when shopping for a buy-to-let home. Therefore, prior to your search, consider the type of tenant you are looking for.
For example, a student probably wants to live in an affordable house near the nightlife and university, whereas families would want to be close to good schools, lots of storage capacity and a rear garden.
If the property location is poorly chosen, rentals will be cheaper, and renters will be more challenging to find.
Don’t forget that some homes are not easy to obtain financing for. Former council buildings, new constructions, and apartments over commercial properties such as stores are examples of these.
Property types that are ideal for the buy-to-let market include, but are not limited to:
- Huge homes with four or more bedrooms
- Family residences
- Foreclosed properties
- Properties undergoing renovation
- One-bedroom studios or flats
What are my duties as a landlord?
The tenants must have confidence that their payment is secure, and they have the right to live in the property thanks to a tenant contract.
Although AST (assured shorthold tenancy) is the most usual form of tenancy contract, there are more types available.
These contracts grant renters the legal right to inhabit in the property for a certain period of time or on a rolling basis.
An AST is only valid for a specified period of time, generally six or twelve months. It will state how much rent the renter must pay during that time, who is responsible for maintenance, when rent may be adjusted, how long the tenancy can last, and the tenant’s entitlement to have their deposit safeguarded.
Deposit protection schemes are a legal obligation, and failure to offer one will result in a fine for you or your rental agent. Insurance and custodial deposit programs are the two forms of government-backed deposit systems.
Other duties of a landlord include:
- Ensuring that the property is safe for tenants to reside in
- Handling repairs to the structure and exterior of the building
- Upkeep of heating and water systems
- Ensuring that furniture complies with fire safety requirements
- Ensuring the safety of the gas and electric systems
- By law, you must provide certain documents to your renter
Is it necessary for me to employ a letting agency, and how much will it cost?
You may or may not choose to hire a letting agent based on your budget and intended degree of engagement with the home.
Letting agents’ services cover from locating, preparing an inventory, to arranging for a broken boiler to be repaired and collecting late rent, doing credit checks on possible tenants and setting up a contract.
Also, gas safety and energy efficiency inspections are required, that must be performed, which an agent may undertake on your behalf.
You may be charged one month’s rent for lettings-only while continuing costs to control the property might begin at about 10% of your monthly rental revenue.
Are Buy-to-Let Mortgages still worth it?
Following changes to the law regulating buy-to-let properties and tax relief, some potential landlords question whether it is still worthwhile to get a buy-to-let mortgage. We believe that if you have a strong desire to invest in property and pick your location strategically (i.e., it is appealing to prospective renters), obtaining a buy-to-let mortgage is still well worth it.
With the assistance of a financial advisor specialised in financial planning and investment advice, you may still obtain a suitable mortgage arrangement with a cheap rate, lowering your expenditures while your renters cover the mortgage and, in most cases, generating a profit on top of that.
Indeed, the tax laws are changing, but you will still be allowed to deduct repairs and renovations (but not extensions) off your tax bill. Finally, long-term rental (for which the buy to let mortgage is designed) is here to stay, with the number of individuals renting long-term growing year after year.