The Buy-To-Let Basics

The Buy-To-Let Basics

Buying to let refers to buying a property in order to rent it out to interested tenants.

Is buy-to-let property investment right for you?

• You must be willing to have your money tied up over a long period of time
• You must be able to make time for tenants and the different features of property such as repairs and maintenance
• You need to understand that property prices could go down, not just up
• You must be aware that not all of those who invest in buy-to-let earn a profit
• You must understand the additional outside risks to borrowing money to buy a property 

How does it work?

The initial purchase of the property depends on you... are you going to pay with cash you already have? or do you plan on taking a buy-to-let mortgage out from the bank?

For those who are considering this, you must consider the potential risks of mortgages: 

1. If your tenant moves out and you can't find a replacement, you won't be gaining rent but you will still be paying mortgage repayments
2. If your in a position you need to sell your property for a loss, the amount you gain from the sale may not cover the outstanding mortgage payment
3. If the property doesn't cover your mortgage - you'll need to make up the difference another way
4. If you can't pay your mortgage back, the bank will begin to add interest and your debts could begin to pile... 

You could gain profit from your buy-to-let investment in one of two ways:

1. Rental yield: the amount you gain in profit in regards to what your tenants pay and goes in your back pocket
2. Capital growth: the amount you gain in profit if you were to sell your property in comparison to the price you bought it for 

Potential risks and return

• Your return can depend on your rent - and your rent can depend on a number of factors including the property itself or wider market trends
• Not being able to find ideal tenants could be a risk as your investment won't be generating any profit at all
• House prices in your market could fall which could result in the value of your property falling as-well
• If you can't sell your property for enough to cover your mortgage, you could face added interest and further debts
• You could be faced with difficult tenants who don't abide by your agreement and could even increase your costs
• Any major repairs in your property could end up costing you a lot of money
• You may have a high return on your property if the market does well and you're able to sell your property for a profit

Additional charges

Buying a property comes with additional charges, including:

• Solicitor's fee's
• Stamp duty land tax and other taxes
• Survey fee's
• Running costs
• Maintenance costs
• Letting/Sales agent fee's
• Marketing fee's if you were too sell

Protect yourself!

Landlord Insurance - Landlord insurance is not a legal requirement however it can be the difference between being protected or being left with nothing. Taking out a landlord insurance policy can contribute to helping you protect your investment if you're targeted by fraudsters for instance.

Buildings insurance - Buildings insurance is something you'll be required to have if you have a buy-to-let mortgage, it can also contribute to protecting your investment.

Home insurance - Landlords require a particular insurance less broad than home insurance - having basic home insurance won't cover a landlords potential risks/losses.

Tax 

Stamp Duty Land Tax applies to properties which cost over £125,000 in England. The amount you pay depends on the price of the property you buy - the higher the property cost, the higher the tax. If your property costs £125,000 or less, than you won't have to buy stamp duty land tax, however you will have to pay 2% stamp duty for the next £125,000. If your house costs between £250,001 - £925,000, you will be charged 5% stamp duty. 

On the other hand, if you live in Scotland you don't pay Stamp Duty, instead, you are charged with Lands and Buildings Transaction Tax if your home costs more than £145,000.

Main Responsibilities

You must consider your responsibilities as a landlord particularly in relation to electricity, gas and fire safety:

Electrical Equipment (Safety) Regulations 1994 

• Electric supplies and appliances must be granted 'safe' in a property
• Electrical appliances must be checked at regular intervals - for guaranteed safety, although not required by law, you should have annual checks carried out by a professional engineer
• Unsafe items need to be removed before tenants move in 
• Smoke alarms are important electrical equipment and are necessary in any property, they should also be checked annually

Gas Safety (Installation and Use) Regulations 1998

• Gas appliances and pipework should be checked annually by a professional and granted safe to use
• Appliances with an open flue should not be in any bedrooms
• Instructions on how to use gas appliances should be given to the tenant
• Gas Safety Record must be presented to the tenant to sign before moving in 
• Any faulty appliances must be removed by the landlord

Fire and Safety Regulations 1993

• Properties must have fitted smoke alarms
• Suitable fire exit on the property
• All furniture must carry appropriate labels for fire compliance

Potential Penalties

If you do invest in buy-to-let you must ensure that you stick to all of your responsibilities and know the possible penalties you could face if you do not. Landlords could be at risk of facing fine's, imprisonment or criminal records. Tenants who receive injuries and are part of an accident due to the lack of responsibility from a landlord could even result in manslaughter charges. 

So... Why invest in buy-to-let?

Despite potential pitfalls, buy-to-let can be a profitable and economically viable with a number of pro's:

• A carefully considered buy-to-let property should become a reliable, profitable investment for you and should take care of itself. If you pick the right, trusted tenants and know you're spending limitations, there's no reason why you can't make a profit.
• The income you make on rent should subsequently cover the tax you pay on owning the property.
• Buying to let can be a long-term investment - your property is more likely to increase in value in a stable market more over the course of 15 years than over the course of 1 year
• House prices are growing therefore even more likely to be a viable long-term investment - research carried out recently on the market showed that a buy-to-let investment in 1966 would have made a 1,390% return on investment if it was sold now (that's an enormous amount).
• If your main career is buy-to-let investments you can have freedom with the time's you work and could potentially give you a lot of free time if their are few problems