Buy to let
The number of first-time buyers choosing to become landlords is rising. If you fancy yourself as a landlord, you'll need to get plenty of independent advice, think far ahead and take the risks seriously.
What is Buy To Let?
Buy To Let (BTL) means a private individual buying residential property and renting it out to tenants. It's becoming a popular investment because landlords bank on their property being worth more than they paid for it when they sell. In the meantime there's the added benefit of earning a good rental return to cover costs, including mortgage payments.
Take me to your lender
There are hundreds of BTL mortgage deals available. These are slightly more expensive than normal loans, but rates have recently dropped as more providers enter the market. All the usual fixed and discount rates are available, as well as the option of interest-only or repayment mortgages. One big difference is that BTL mortgage lenders can take account of rent you will earn as well as your 'day job' salary and lend you more. BTL mortgages aren't regulated by the Financial Service Authority (unlike traditional home loans) so lenders don't have to follow such strict rules on selling, promoting and advertising deals. You should speak to an independent mortgage adviser to find the best deal.
Lump sum
As a first-time buyer, lenders make more rigorous checks to ensure you can meet repayments. Lenders consider BTL mortgages more risky so you may have to find a large deposit - often the minimum is 15% of the purchase price, but if you can stump up 20-25%, you should find better deals.
Doing the sums
Each mortgage lender has a method to calculate how much you can borrow, but as a general rule the rent you charge must be 130-150% of your monthly repayments. For example if your monthly mortgage repayment is £1,000, your tenants should pay you £1,300 to £1,500 a month.
Taxing
You pay tax on rental income just as with any earnings. The Government allows you to claim back tax on interest repayments, rental insurance, property maintenance, professional fees, ground rent and service charges.
Landlords
The term 'Buy To Let' was coined by the Association of Residential Letting Agents (ARLA) in 1996. ARLA estimates the average BTL landlord is aged 40-45 with 40% of BTL borrowers in the 36-45 age range, roughly 25% each in the 26-35 and 46-55 year brackets and only a very small number of landlords aged 25 and under.
ARLA spokesman Malcolm Harrison, explains: "You rarely hear about very young investors going into BTL. People aged 16-24 are much more likely to be tenants than landlords. One exception is students whose parents help buy a house to rent out while they are at university and this can prove a sound investment.
"As a general rule, the start-up costs can be prohibitive and we would urge young people to be certain before making such a long-term investment - there is no such thing as a 'quick buck' in 'Buy To Let'."
Learning the hard way
Aaron Budd was 22 and just out of uni when, with his Dad's help, he bought a three-bedroom flat in west London. As he had three school friends starting work in the capital and looking to rent, he chose them as tenants.
"I thought this would be a great investment and that I was one step ahead. I soon found friends are not the ideal tenants - they had little respect for the flat and as I spent more money on repairs and hassling them to take care of the place, our relationship crumbled. Eventually I had to ask them to leave and start from scratch, which was stressful. I wish I'd employed a lettings agent early - it would have saved me heartache and I might not have lost mates in the process."
Onward and upward
Trainee lawyer Farah ul-Haq was 24 when she bought a two-bedroom house in Crawley, West Sussex. "After renting as a student, I started thinking about investing in a BTL property. I had some inheritance and knew I'd be happy to live at home with my mum and sister. I did research into the area for more than a year and spent ages finding good contacts, including a letting agent, to take care of dealing with my tenants (a young family) and the rent. I don't plan to sell for six or seven years and then I hope to have a nice amount of cash to invest in my own dream home."
Tips for BTL
- Never buy property which will overstretch you - if your desired area is out of your price range, consider different parts of the country or even abroad;
- Carefully research your property to make sure it's suitable for tenants and think objectively;
- Student lets can provide some of the best returns, so look at hotspots such as Bristol, Brighton and Oxford;
- Finding and vetting new tenants can be tricky, but a lettings agency will charge 5-15% to take care of this;
- Remember hidden costs, including furniture and fittings, management and insurance;
- Take into consideration the fact there will be void periods without tenants - on average at least two weeks per year;
- BTL landlords are at high risk of identity theft so redirect your post and visit http://www.creditexpert.co.uk/ for advice.
