Personal Finance - How to win the buy-to-let game
An explosion of mortgage deals has made it easier than ever to become a landlord. But there's a lot to take care of before the cash rolls in.
It has never been easier to be a landlord. Almost anyone with £8,000 a landlord. But there’s a lot to take care of before the cash rolls in. to £10,000 of capital, a clean credit record and a presentable face can take the first steps towards buying a property to rent out to others.
But making money from rental property is getting harder all the time.
Would-be landlords must go into any deal with a realistic view of the returns and the likely pitfalls.
The buy-to-let market has been transformed over the past three years by an explosion of specialist mortgages that allow investors of relatively modest means to join the fray.
If the investor can pitch in 20% to 25% of the property price as a deposit, they can borrow the rest at interest rates near to those of a normal residential mortgage. Repayments are secured against the expected rental income.
There are now more than 50 lenders offering buy-to-let mortgages and competition has encouraged some fabulous deals. For example, specialist broker Independent Mortgage Collection launched an interest-rate tracker loan for buy-to-let borrowers in August charging 0.99% above bank base rates – cheaper than similar products for residential borrowers. Buy-to-let borrowing has never been cheaper.
But easy credit is no guarantee of success in this type of investment.
The first trick is to find the right property at a realistic price and this is not always easily done.
‘You need to do your homework before getting into buy-to-let,’ says Hugh Dunsmore-Hardy, chief executive of the National Association of Estate Agents. ‘There is evidence that rents are falling in some parts of the market and that there is an over-supply of certain kinds of property.
This can make it harder to let them out quickly and so reduces income.’
‘Look at property through the eyes of a tenant or renting agent,’ advises Malcolm Harrison, spokesman for the Association of Residential Letting Agents (ARLA). ‘The kind of home you might buy for yourself is not necessarily the one that will work best as a letting investment.’
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Research by the University of York shows rental property has produced an average annual return to investors of 9% a year, counting both income and capital growth. But bedsits and one-bedroom flats have done best for landlords, with annual returns of more than 12%. Detached homes have bumped along at just over 6%.
It pays to be pessimistic in planning for a buy-to-let deal. Expect that the property will be empty for at least one month a year. And do not forget to budget for the essentials such as buildings insurance and maintenance.
The sample calculation in the box below sets out the key costs and shows that even with prudent assumptions, letting at a good rent should produce a healthy profit.
Most lenders insist on a rental income of at least 1.3 times the monthly mortgage repayments to cover costs. But ARLA suggests 1.5 times is a safer working margin.
Another key decision is whether you will manage the property yourself, or employ a letting agent to do the donkey work. Unlike an ISA or pension, property is an active investment and someone needs to take a hands-on role to make it work. A letting agent will cost between 10% and 16% of the gross monthly rental income depending on the level of service. But many first-time landlords are happy to pay this, rather than have to find and vet tenants themselves and then be on 24-hour call if there are problems.
Buy-to-let is relatively tax-efficient. Net rental income will be subject to income tax at the investor’s marginal rate. However, most expenses are allowable against this, including loan interest and the cost of professional agents. Capital gains tax will also apply if you make a profit on the final disposal of the property. The new capital gain tax regime encourages investment over the longer term, which fits well with buy-to let.
Social factors such as increasing job mobility and higher divorce rates suggest there will be a continued and growing long-term market for rented property. New landlords will make money out of buy-to-let. But the rewards will come to those who act on logic not emotion and are ready to work hard to get the right deal.
ARLA publishes a free introductory guide on buy-to-let. Call 01923 896555.
– Stephen Womack is a reporter with Financial Mail on Sunday