Buy-to-let (known as BTL) is not for the short term. Residential letting should be seen as part of a portfolio with at least a decade in mind, making it appropriate as part of your retirement planning.
The key is to ensure rental income easily exceeds the expense of borrowing and other overheads. Until a property is sold, fluctuating capital values should be of less concern.
Decide on the type of tenant. Professional business people require quality stock and appropriate furnishings, while students accept lower standards. If a property is in a good state of repair and decoration, agents say it is more likely to be looked after by a tenant.
Voids (the time a property is empty) should be factored in and there are letting agencies which will guarantee a particular level of income throughout the year. As a generalisation, whilst 8 per cent gross return is currently available, 6 per cent is a more realistic figure to work on.
A good adviser can not only help with securing the best BTL mortgage deal but should also be up to date on buildings – and possibly terrorism – insurance. Research by the National Landlords Association shows that the average BTL loan application is £149,000.
There are several specialist BTL lenders, including Aldermore, Keystone Mortgages and Shawbrook Bank. These sources are used to clients with multiple BTL properties and where the mortgage request exceeds £500,000. Shawbrook, for instance, will lend against the aggregate value on flats up to a maximum of five units in a block.
For a simpler process, opt for an experienced lettings agent to find your tenant and to carry out all the appropriate checks. Obtain references from two past landlords and bank statements for the last quarter. Credit check both the tenant and guarantor, where one is used. Unless you have the time, the agent could organise the deposit (which has to be held on an independent basis) and regular payments as well as maintenance of the property.
The online service Rentify suggests that rental payments by direct debit should be a condition of any tenancy. Where there is more than one tenant, agree which who is to be the lead with responsibility for the others so that there is a single payment to collect.
Take care with a prospective tenant who wishes to move in immediately for no apparent reason, or who will not reveal financial information, or has made rather too many moves in a short time. They are all signs that this could be a problem arrangement. One trick used by some difficult tenants is to offer half a year’s rent in lieu of references, but that may be just storing up trouble for the future.
Tenant demand is currently high as many have had to postpone purchasing their own home owing to the high deposit required in most cases. The Help to Buy scheme may change this though.
Remember that as an investment, BTL can be expensive in terms of both the acquisition and disposal costs. It is also illiquid and disposals can take time.
Yet, while long-term, BTL funds do not have to be committed over the same period as, say, money invested in a pension, which is usually tied up until at least age 55 and, even then, only 25 per cent can be withdrawn as a tax-free lump sum.
Gearing is certainly an aspect for BTL: if someone borrows a typical 75 per cent of the purchase price, the property would only need to rise 25 per cent, ignoring expenses, to double the value of their investment.
If you accept pets, take out pet insurance for the damage they can do. The premium can be offset against rental income. It may also be wise to seek a higher deposit to cover prospective damage and the costs of professional cleaning.
When selling a BTL property, ensure any profit is declared to HM Revenue & Customs. They are currently cracking down on the sector as an area of tax evasion, using Land Registry records to find capital gains liability. Inspectors are also investigating undeclared rental income, which is estimated to cost the public purse £550 million annually.
Only the interest, not the capital element of repayments, can be offset against rental income. The tax relief is available even on a traditional residential mortgage and does not have to be deemed a specialist BTL loan.
Ensure you also claim for repairs and maintenance. With furnished accommodation, up to 10 per cent of rental income can be claimed for wear and tear. HMRC allows replacing on a like-for-like basis but not, for instance, replacing a basic kitchen or bathroom with a luxury one, although such higher expenditure can be offset later against the capital profit. If expenses genuinely exceed rental income, such a “loss” can be carried forward to reduce tax in the future.
One tip is to have a professional inventory and record with photographs from the beginning. Ensure both the tenant and letting agent have copies which should prevent later disputes.
Make it clear where there is communal space and who has responsibility, notably where there are several tenancies on long-term leases. Such tenants have obligations for central parts like corridors and stairwells in addition to exterior spaces. They should be set out in the tenancy agreement.