Buy to Let Guidance from Next Home


Getting Started
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Historically, property has proved a good investment for long-term returns. Rental yields typically run at around 5% – 7% dependent on location of a properties value.

Despite the credit crunch and the threat of house price falls, current conditions still favour the rental market. High levels of immigration and the increasing number of people being priced out of the housing market have helped to maintain significant demand for rental properties.

When you purchase a property to rent out you are becoming a landlord and will be running a small business. You will require a Buy To Let mortgage which is used to purchase the property that is to be rented out as a source of income.

Finding the right property is key to the success of your long term investment strategy. You will need to research the size and type of property, having a comprehension of what is in demand and what rental income you can expect to obtain. It is worth getting advice from experienced letting agents who will know the local market and where such demand is.

It is important to consider the source of your funding, to see an indication of how much you may be able to borrow; this will enable you to focus your time on properties within your budget.

Mortgage Options
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  • The term of a Buy To Let mortgage can be between 5 and 40 years
  • Property and tenant type will affect borrowing options
  • Limited company Buy To Let mortgages are available
  • Buy To Let mortgages, unlike residential mortgages, are generally not calculated
    as a multiple of the applicant’s income. Instead they are calculated using the achievable
    monthly rent, against the interest only mortgage payment.
  • Buy To Let mortgages are available to first time buyers, although criteria is more restrictive

Choosing a Mortgage

  • Consider what type of mortgage you would like to buy the property with
  • Consider the impact of future rises in interest rates
  • Consider how you would meet monthly mortgage payments if the rent was not paid
    or the property is empty
Lenders
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Generally Buy To Let mortgages are available for between 5 and 40 years and up to 80% of the property value.

Through the Buy To Let scheme, the rental income you get for the property can be taken into account. Rental income should equal about 100% – 130% of the monthly mortgage (figures vary from lender to lender, but you should use 125% as a benchmark). This will provide a rough guide of the anticipated profitability of the let and is calculated taking into account the cost of repairs, maintenance and unplanned rental voids. In addition, the lender will expect you to use an ARLA accredited letting agent to confirm rental value.

e.g. If your monthly mortgage repayments are £500, the rental income should be between £500 to £650.

Lenders will expect tenants contracts to be drawn up as Assured Short-hold Tenancies and it is recommended that landlords use a letting agent, although this is not a lending requirement.

Loan Types
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Buy To Let mortgages like residential are available in numerous formats, fixed, discount and tracker rates.

Highly competitive fixed rate mortgages tend to attract a high arrangement fee, but this should be offset against the fixed period to work out the true value of the mortgage, typical arrangement fees range from a flat fee of £999 to as much as 3.0% of the loan amount.

Void Periods
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These are the time frames in which the property is not being rented or the tenant does not pay, meaning you won’t receive a rental income.

Monthly mortgage payments are still required to be paid, so it is essential to allow for void periods in your contingency plan, otherwise you may find that you do not have the funds to cover these mortgage payments.

Top Tips
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The Buy to let market is making a comeback as lower house prices, rising rents and an improving mortgage market are tempting investors once again.

Our friends at independent mortgage advisors Charles Cameron & Associates provide their top tips to consider if you are thinking of investing in property.

Location, location, location

That old cliché is still one of the most important factors when deciding where to buy. Do some research, and make sure that you find a property that will appeal to tenants. Good transport links are vital, as are the availability of good schools and local shops.

Towns that have major companies, hospitals and universities will always be popular with investors as there will be plentiful demand for rental property from office workers, nurses and students.

Do the Maths

You will need to budget carefully, check the cost of the property and the rent you are likely to receive by speaking to local agents.

Most buy-to-let lenders will want rent to cover 125% of the monthly mortgage repayment. You will need a deposit of at least 25% to secure a reasonable deal, although rates and fees will be considerably higher than for a residential mortgage.

Negotiate over Price

As a buy-to-let investor you are in a strong position to negotiate a discount on the selling price, as you are not part of a chain and there is less risk of a sale falling through. Do not be embarrassed to offer a low price and do not get talked into overpaying.

Letting Agents

Unless you have a lot of time on your hands and are very practical, it is probably a wise move to employ a managing agent for your property. They will source your tenant and undergo the necessary credit checks to ensure there is less chance anyone will default on their rental payments. Agents also look after any repairs that may need doing, and often have a list of electricians, plumbers and other handy men they can call upon in case of emergency. The only downside is you will usually have to pay between 10-15% of the gross rental income for their services.

Landlords Insurance

As a landlord you are responsible for insuring your property building and contents. Leaseholders letting out their flats will need to inform their management company that the property is let who will then ensure the buildings insurer is also advised.

Refurbishment

If you need to refurbish your property it is best to stick to neutral colours. Magnolia for walls, and white for the bathroom and kitchen. Don’t make the mistake of decorating and furnishing the property to your own tastes. There is often little difference in rents between having a furnished and unfurnished property and it will all depend on the type of tenant you are targeting.

Produce a detailed inventory

This is especially important should you decide to furnish your property. The inventory is your only proof of how the property was provided for at the outset and should accurately describe in fine detail everything in it.

Taxes

Be aware your rental income will be subject to income tax and any profit you make when you sell your buy to let property will be liable to Capital Gains Tax that HMRC will charge at your highest rate.

Use a Specialised Broker

There are over 500 buy to let mortgage products available and this number will continue to increase as lenders want to gain a share of this growing market. At Charles Cameron we offer clients independent advice and will search the whole of the market to source the most competitive mortgage for your situation.

Further Reading
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ARLA
The Association of Residential Lettings Agents (ARLA) - professional self-regulating body solely concerned with residential lettings - www.arla.co.uk

NAEA
The National Association of Estate Agents - www.naea.co.uk

BPF
British Property Federation - www.bpf.org.uk