Top Factors To Consider When Entering The Buy To Let Market
The property industry was up in arms against the Chancellor, George Osborne last week, after it was announced in the 2015 Summer Budget that the tax relief that private landlords currently enjoy on their mortgage interest payments would be halved.
Over the next five years, the tax relief rate for mortgage interest payments will be cut from its current 40 percent to 20 percent.
Landlords can also currently deduct from furnished properties 10% of the rent charged for wear and tear – even if they have made no actual improvements. However, from April 2016, the Government will replace this with a scheme that ensures landlords can only deduct expenses they incur in relation to the property.
So why has the government cut tax relief for buy to let landlords? The main reason is to boost homeownership. And George Osborne has assured the property industry that the changes will only affect one in five landlords.
If you are looking to enter the buy to let market in the UK, and these changes leave you undaunted, then this article is designed to inform you of factors you need to consider when purchasing your first buy to let.
Choose the Right Location
The old advice of choosing the worst house on the best street is still good, especially when it comes to purchasing buy to let properties. To attract long-term, stable tenants, the ideal property should be close to schools, shops and transport links.
If you decide to manage your own property, rather than enlist the services of a letting agency, it is worth considering purchasing a buy to let close to home, to allow you to keep a close eye on your tenants.
Be Realistic About Finances
The cold hard fact is that entering the buy to let market is an expensive business. Before committing to anything, you need to sit down and do the maths. Most lenders require at least a 25% deposit for a buy to let and demand that the rent received for the property is a minimum of 125% of the mortgage payments. Then you need to factor in furnishings, utilities, insurance, repairs and accounting for periods where the property remains untenanted.
Calculating Rental Yields
Landlords make money in two ways;
- Capital growth on the value of the property itself
- Rental income
Rental yield is the amount of money a landlord receives in rent over one year, shown as a percentage of the amount of money invested in the property.
For example, if you purchase a buy to let for £150,000 and expect rent of £600 per month, then to calculate the annual rental yield, you multiply the rent by 12, and then divide that total by the amount of the property and then multiply the result by 100 to reach a percentage.
7,200/150,000 = 0.048
0.048*100 = 4.8% yield
Along with the normal legal considerations when buying a property, purchasing a buy to let property has its own legal issues. These include:
- Tenancy agreements
- Gas and electricity safety and energy performance certificates
- Tenancy deposit schemes
- Repairs and maintenance
The tenancy agreement is a legally binding contract between the tenant and their landlord. It will include such details as whether or not the tenancy is fixed term or periodic, how much rent is to be paid and any covenants associated with the tenancy and how and when the rent will be reviewed.
To avoid disputes, it is imperative to have the tenancy agreement drafted by a legal professional who has experience in the buy to let market.
Gas and electricity safety and energy performance certificates
As a landlord, you have a legal obligation to commission annual inspections of gas appliances and gas supplies in your buy to let property by a Registered Gas Engineer. Failure to do this can lead to a fine of up to £25,000 and/or imprisonment.
Before a new tenancy commences, a landlord is also has a duty to have the electricity supply and all electrical appliances checked for safety. Again, failure to comply with this stipulation can result in a hefty fine and/or imprisonment.
Finally, all properties available to let in the UK must have an up to date Energy Performance Certificate that is available for a prospective tenant to peruse.
Tenancy Deposit Schemes
As a landlord, you have a legal obligation to put your tenants deposit in a Government-backed Tenancy Deposit Scheme within 30 days of receiving it.
If a dispute over the return of the deposit develops at the end of a tenancy, a free disputes resolution process is available through the Scheme.
As well as having building and contents insurance your lender is likely to insist you have landlord’s insurance (or buy to let insurance) to cover any financial losses connected with the rental property.
Repairs and Maintenance
A landlord has the responsibility to keep a rented property in a decent standard of repair throughout a tenancy.
Section 11 of the Landlord and Tenant Act 1985 (which refers to all residential leases covering a period of seven years or less, including periodical tenancies) states that the landlord has a responsibility to:
- 1. to keep in repair the structure and exterior of the dwelling, including drains, gutters and external pipes,
- 2. to keep in repair and proper working order the installations in the dwelling for the supply of water, gas, electricity and for sanitation (including basins, sinks, baths and sanitary conveniences) but not other fixtures, fittings and appliances for making use of the supply of water, gas or electricity, and
- 3. to keep in repair and proper working order the installation in the dwelling for space heating and heating water.
Under the Act, the landlord is not required to carry out any repairs until the tenant notifies them of an issue.
Entering into the buy to let market is not something to be done on a whim. It takes time, money and commitment to ensuring a property is adequately tenanted and properly maintained. However, even with the Conservative government’s latest cuts to landlord’s tax relief, in many cases, property remains a lucrative and relatively safe investment.
If you would like more information on purchasing a buy to let property, please phone our London office on 020 3588 3500, or click here.
If you have any comments to make on legal issues surrounding buy to let properties, then please feel free to put your thoughts in the comments section below.
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