Buy-to-Let Guide

There's no denying it, property has been a success story for those who get it right. According to the Halifax House Price Index healthy growth in house prices were achieved in 2006 with house prices rising at an annual rate of 9.9 per cent (Source: Datamonitor April 2007).

Here at Saffron we offer a range of Buy-to-Let mortgages with something for everyone from discounts to lifetime tracker mortgages.

We know, you've probably watched all the property shows and thought you would like to make some of the easy money that seems to be being made on TV.

This guide will get you started on the road to be a landlord and once you're ready to start, give us a call and we'll help you get your property portfolio started.

Like many good investments, Buy-to-Let should be seen as a long-term prospect. Usually making money fast is not an option with Buy-to-Let given fluctuation in the property and rental markets, and the lengthy time periods and relatively large costs involved in acquiring and disposing of property.

But unlike many investments, Buy-to-Let has the potential, thanks to rising house prices and high rental yields, to deliver good income and good growth.

What is Buy-to-Let?

Quite simply, Buy-to-Let is buying a property with the intention of renting it out to individuals rather than living in the property yourself.

Historically buying to let was considered by lenders to be a commercial undertaking. Therefore mortgages, on property intended to be let, have attracted higher interest rates than those available to owner occupiers. Also, rental income was not usually allowed to be considered in the assessment of a borrowers ability to repay the mortgage.

Recently things have changed and changes in the lending criteria mean mortgages are available and with lower interest rates currently available, can make Buy-to-Let an attractive opportunity for private investors.

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What should I do first?

Research, Research, Research. The key factor to investing in property is researching the market throughally.

Research your location, the property type, and how much rent you can anticipate to receive. One of the best ways to gain a lot of information about the area you are interested in investing is to speak to local letting agents on local rental market demands. Other good starting points are; the Royal Institute of Chartered Surveyors (www.rics.org) and the Association of Residential Letting Agents (www.arla.co.uk).

Doing your homework will save a lot of heartache and potential problems later.

Once you've decided on where you want to buy, the next task is working out if you can afford to invest in property

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Can I afford it?

You should now know where you want to invest in, but how much is it all going to cost?

Make sure you've got the money to fund your plans. Whether you're looking for a swanky city apartment or a one-bed terrace, there are up-front and running costs to consider. It's worth taking the time and making sure you get all the sums right at the start.

The bottom line is that your up-front costs and running costs, including mortgage payment need to be less than the income you make from renting your property.

A Buy-to-Let investment should be considered for the long term and you must bear in mind that this means tying up your money for the long term, and with the time constraints in property buying and selling you won't be able to get your hands on your money quickly either!

When it comes to the mortgage, a mortgage consultant will help you understand whether you can afford to Buy-to-Let.

The terms for Buy-to-Let mortgages differ from a mortgage that you would take out to buy your own home. Charges are higher and they usually require a minimum deposit of 15% of the property value. Lenders calculate how much they are prepared to lend by reference to the amount of rent the property is expected to produce. Generally, this is about 125% of the monthly mortgage interest payment. Visit our current range of Buy-to-Let mortgages, which aim to cover everyone's needs.

As well as money for deposit, it is a wise idea for you to keep aside cash, amounting to at least three months' rent, in order to make mortgage payments during 'void periods' and cover agent fees and unexpected costs - the times when the property has no tenants.

Start with your purchase costs of the property itself. On top of this, you need to budget for stamp duty, legal fees, surveys, valuations, decorating and refurbishment costs, as well as any mortgage fees.

Then there are your running costs including things like repairs, insurance, service charges, council tax, your agents letting or management fees (if you use one) and then of course the mortgage interest.

Sounds like a lot, doesn't it? But don't worry, the idea is that the income you make from renting it out outweighs all of these or at least covers the mortgage and management fees.

If you choose to use a letting agent to deal with your property they'll usually charge around 10-12% to find, vet and install tenants, and 15-18% for a full ongoing management service (which means, amongst other things, that they will sort out any tenant gripes), the other option is to do this part yourself, providing you live close enough to the property to sort out any problems your tenants may have!

Once you've crunched all the numbers and worked out that you can afford the investment, the next task is finding the perfect property

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Finding the perfect property

Ok, so you've spoken to the letting agents, know what the local area is like, if there's a demand for rental properties and approximately how much you might receive in rent, how much it's all going to cost you - now the fun really starts, finding the perfect property for you.

The most important rule to be remember when buying a property to rent is Buy what will rent, not what you personally think is a great house.

This is a major pitfall for some people and represents a hard obstacle to overcome, but try and bear in mind that you are not actually living there; this is an investment, pure and simple.

The type of property you buy will also depend on what type of tenant you are looking for.

Generally, professional people will want one or two-bedroom properties within commuter distance of a major town or city, while students requiring houses will want to have multiple bedrooms and will, of course, be near a college or university. Executives will expect first-class fittings and high quality accessories.

Some areas tend to be over subscribed - particularly parts of London, Manchester and Newcastle. But with several hundred thousand investment properties currently being rented in the UK, there is a very healthy balance of supply and demand in the sector.

Again remember it's a business venture from the start, so don't get carried away imagining yourself in the property! There are a few basic things which can help you in the long-term:

  • Bearing in mind the prospective tenant type you want is this the best area for your target market. Location, location, location, three words that always mean so much when considering buying a property and even more so when considering a Buy-to-Let investment property.
  • Consider your prospective tenant and what they need - so what are transport links like? Is there parking available? Are there shops nearby? Are there decent schools in the local area?
  • Look at the condition of the property, if the property needs renovating, lenders might restrict what they will initially lend you.
  • It's advisable to not buy anything with intensive maintenance problems. Large gardens add little to the rental value and will cost you a lot to maintain.
  • If you are considering buying a flat, ask if it is a leasehold property? Most flats are bought on a leasehold basis. You will then need to find out if this allows sub-letting and how many years does the lease still have to run?
  • Once you've chosen the property:
  • You will need to decide if you are going to rent it out as furnished or unfurnished. Even if you are not renting the property out furnished tenants will expect a good quality bathroom and kitchen at the very least.
  • If you are planning to furnish, here are a few basic tips for you when considering furnishing your property.
  • Furnish and decorate your property to a high standard. Good quality bathrooms and kitchens will attract the best tenants and help you to let quickly every time.
  • I know it's hard but try to not allow your own personal taste to influence your decisions. Ensure the property you choose matches the local market needs.
  • As tempting as it may be to try and save costs don't use second hand furniture or old soft furnishings. You have to abide by the Furniture and Furnishing Regulations.
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What else do I need to consider?

t is advisable to not use off-the-shelf tenancy agreements from stationary shops. Ensure your paperwork suits your circumstances. Also ensure you issue the right documents or have a condition report or proper inventory made before a tenant moves in.

Do I need a license from the local authority? Usually needed for larger properties (three or more storeys) to rent to more than two tenants (called a house in multiple occupation or HMO).

Will it meet the safety requirements? They also affect furniture and fittings as well as the property itself.

Should I use a letting agent? They'll usually charge around 10-12% to find, vet and install tenants, and 15-18% for a full ongoing management service (which means, amongst other things, that they will sort out any tenant gripes).

If you choose to let it yourself, don't leave the running of your property to friends or relatives when you are away. Tenants will need a proper management service.

Once you've seen the property of your dreams, the next job is finding the mortgage for your Buy-to-Let property

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What type of mortgage can I get for my property?

A wide variety of Buy-to-Let mortgages are available, visit our current range of Buy-to-Let mortgages, which aim to cover everyone's needs.

With Buy-to-Let mortgages, typically a deposit of at least 15% will be required.

You ought to adopt the same approach to a Buy-to-Let mortgage as you would to an ordinary residential one. So, be sure to review your mortgage arrangements regularly in order to maximise return. You may be able to make a significant saving (depending on early repayment charges) by re-mortgaging onto a cheaper deal.

  • Repayment or interest only?

  • Repayment mortgages are available but interest only mortgages are more common. This is because they're cheaper - and you can always repay the capital by selling the property at the end of the mortgage term, as long as the value of the property is more than the outstanding mortgage balance. Interest only mortgages are also more tax efficient because you can offset all the monthly interest payments against rental income for tax purposes.

    It is advisable to seek advice from an independent financial advisor, such as Saffron IFA.

  • Fixed, discounted, or tracker?
  • Just like any other mortgage, Buy-to-Let mortgages come in all sorts of shapes and sizes. What's best for you really depends on what's likely to happen to interest rates and how much stability you want around your mortgage payments. There's also your loan to value ratio and whether it's a single property or part of a bigger portfolio. Don't worry, we're here to help you choose.
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How much rent do I need/can I get?

Buy-to-Let mortgages are slightly different in that usually income is not taken into consideration. The rental yield is generally used to pay the mortgage. Some lenders may require rental income to exceed mortgage interest. This is a good idea because it helps you meet your ongoing annual expenses other than mortgage interest and, over time, build up a surplus so 'void' periods don't become a problem (that's when your property lies empty between tenants).

Again each mortgage is different and generally the better the rate, the more rental yield the lender will need.

When it comes to rental income (yield) there is two terms used. It helps to know a bit about them, especially when you are talking to letting agents.

  • Gross yield
  • This is just rent you earn in a year, shown as a percentage of the value. (When prices are rising fast, yield is likely to fall because rents will not generally keep pace.)
  • Net yield
  • This is the percentage left after taking off your running costs.

Attracting tenants away from other landlords is made simpler by charging 5% or 10% less than what you think you could make - if, of course, you can afford to do so. This may be more cost effective in the long run because tenants are more likely to leave for somewhere with lower rent, thus avoiding the potential problem of a void period.

Gross returns or the rent received before taking account of the costs incurred such as management fees, maintenance, service charges, ground rents and insurance, can vary between approximately 7% and 10%. Expensive properties may produce a lower return than cheaper ones.

The average rental return in the UK tends to remain at approx 10% and capital appreciation is likely to be higher than inflation for the foreseeable future.

Generally, your gross rents should be between 130% and 150% of your monthly mortgage repayment.

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How much money can I make from renting?

Of course there is no guarantee that you will make money from the renting. There's definitely potential in property, but you should see it as a long term investment. And there are lots of things which can affect how well your investment will perform.

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What about the taxman?

Just like any other investment, there'll be tax to pay. You can offset your expenses against your letting income, to reduce your tax bill. You need to also pay Capital Gains Tax if you sell your property. We'd suggest you get advice from a specialist tax adviser on this.

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Selling the property?

If you are selling the property and it has three or more bedrooms in England and Wales from September 10 2007, you will need to know about Home Information Packs. Find out more about Home Information Packs in our guide.

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