INDUSTRY NEWS DECEMBER 2015
CONSIDERING PROPERTY INVESTMENTS? TIPS FOR BUY-TO-LET LANDLORDS.
Investing in the purchase of property as a buy-to-let landlord can be a challenging venture. It definitely requires more consideration than just going through the conveyancing process of acquiring the property, getting the tenant in and sitting back to watch the rental income flow in.
Statistics reveal that 20% of UK homes are now owned by private landlords, with 2 million people choosing to invest in residential housing. Supplementing other income streams with a decent rental yield is now seen as attractive for first-time landlords. Rising rental prices (especially in the capital) and the improving economic climate are also making long-term investment in property a seemingly viable proposition.
However, turning property investment into a profitable revenue source is not a foregone conclusion and there are several pitfalls for the uninitiated. Would-be landlords must be sure to carefully consider a host of factors in order to set-up the best possible chance of successful investment:
The first consideration for potential landlords is to work out a reasonable budget. There is little point in approaching an estate agent or mortgage lender if a landlord cannot provide proof of finances and suitable planning.
A good start is for landlords to consider the current monthly cost of a mortgage. Much attention should also be paid to how much any changes in interest rate would affect this initial evaluation.
A sensible next step is to consider additional costs that will need to be paid. These include tax on all rental income; necessary insurance; agent fees; compulsory inspection fees; re-mortgaging costs, in the event of a fixed-term mortgage; other maintenance costs.
Of course, it is impossible for landlords to predict when fixtures/fittings such as washing machines or boilers will need repair. However, landlords that put aside emergency funds for this kind of eventuality will be better equipped to deal with it. Additionally, there are quite a few insurance companies that offer “maintenance targeted” policies to cover every-day breakdowns in rental properties. The premium asked for these policies are often quite affordable.
These are periods in the life of a tenancy when a tenant is not in the property. Available data suggests that typically, a privately rented property can lay vacant for 20 days per annum. This can be down to landlords simply being unable to find a suitable tenant or landlords availing themselves of time to undertake essential maintenance work. In both instances, landlords are to ensure they have budgeted enough to cope without a rental income.
This is an often encountered aspect of letting. In the most common situations where the tenant refuses to pay rent for one or more months, legal steps or simple deferment arrangements with a tenant both take time and incur costs. Landlords must factor in this possibility and be prepared to cope financially. Important for landlords is the need to have in place competent landlord/tenant solicitors that will quickly apply the recovery of possession procedure to take back property from tenants who are in default of rent or otherwise in breach of their covenants in the tenancy agreement.
When a suitable budget has been carefully worked out, the next major choice facing potential landlords is the location in which they are to invest.
When choosing an ideal area, would-be landlords must consider where rental property is high in demand. Furthermore, an area with lots of appeal for specific tenant groups should be considered. Location is key for a number of renters and potential owners should consider this when committing to a home purchase.
Buy-to-let investors should already have an idea of what their target renter group will be and should choose the location of properties around this. For example, landlords looking to rent out to students should look at homes close to University buildings. In the same light, homes close to public transport links can appeal to a different genre of renters.
Type of Property
With a target renter group in mind, landlords will be better placed to narrow down the choice of property that they are to purchase. For example, if a landlord wishes to rent to a group of students, they will need to look at investing in at least a four-bed property to accommodate friendship groups. Similarly, if the landlord wishes to target young-professionals, they could look at smaller property, such as a one or two-bedroom flat, with good links to public transport.
At the forefront of all consideration over property should be the potential investment returns. Of course, properties of different types and in different locations will offer varying returns. It is imperative then that landlords work out the sums for every property that they are interested in. Consideration must be given to mortgage payments, proposed rental income, maintenance cost, and the tax on income.
Discerning landlords must also consider the eventually of selling-on their investment even at the point of purchase. A good history of rental could see landlords being able to easily sell-on their property. However, properties that have been on the market for a considerable amount of time could be a warning for investors at the point of purchase that they too may face a tough-sell when coming to move on from their particular property.
Capital Gains Tax
Another change announced by the Chancellor is related to Capital Gains Tax (CGT). From April 2019, a payment on account of any CGT due on the disposal of residential property (unless it is your principal private residence) will be required to be made within 30 days of the completion of the disposal. Currently, CGT due on residential property is paid between 10 and 22 months after a disposal has taken place.