Buy to let
Buy-To-Let has remained one of the most popular investments available for many years. This is based simply on buying a property and renting it out to a tenant. Buy To Let should be considered a medium to long term investment, and investors should be aware that property prices can go up as well as down. That said the long term trend has historically always been up.
The advantages of investing in property are two-fold. The investor benefits both from cash flow (usually through monthly rent payments) and capital growth. Many investments only provide a benefit of capital growth, for example gold, wine, classic cars, or watches which appreciate over time – but these don’t give cash flow (a monthly profit) as well.
Furthermore, property has consistently outperformed most other investments consistently over the years. And because it’s such a tangible asset, it’s not hard to see why we as a nation have a fascination with property as an investment.
When you buy a property to let, the options are buying with usually to either but with cash or with mortgage. In most cases there isn’t enough cash available to buy the property outright with cash. Even if there is enough cash to buy the property outright, a mortgage would usually be the favourable option.
What to buy?
You should do a lot of research before buying a property! Buying a property without sufficient knowledge is often a quick way to lose a lot of money! You should know what yield or ROI you are looking for, and you should balance this against the capital growth prospects. In general terms, often high yielding properties often give low capital growth. Whereas many properties offering strong capital growth prospects often offer low yields. You will need to think about risk and reward balance here. Usually a combination of growth and yield is a safe place to be.
You should know about the area you are looking to invest it. Who lives there, what are the amenities like, where are the schools, the transport links, the bars and restaurants, and what is the access to local employment like? What sort of tenant do you want?
When you buy a property you will have Solicitor’s fees to pay for the conveyance (the legal process for transferring the title to you), survey fees, finance costs (for arranging the mortgage), and stamp duty (SDLT). You can calculate how much stamp duty will be by following this link.
When you exchange contracts, you will need to have Landlord’s insurance in place. As a minimum this will be buildings insurance, but you may also choose to add on contents insurance if you wish.
You’ll likely need to pay income tax on rental income as well.
Buy-to-let landlords can currently offset some of their mortgage interest payments and some of their costs against their income.
Higher and additional rates of tax relief are being phased out however, and this will be restricted to Landlords in the 20% tax bracket by April 2020, where the property is owned in the Landlords personal name (not in a company).
These changes mean that taxable income will rise for many, especially if you’re a higher or additional rate tax payer.
For the tax year 2018-2019, buy to let landlords in the higher rate tax bracket can offset 50% of their mortgage interest payments against their rental income. 50% of the mortgage interest payment qualifies for a 20% tax credit. From April 2019 this will change again, with 25% of mortgage interest payments qualifying for offsetting against rental income, and 75% qualifying for a 20% tax credit.
When you ask a Letting Agent to let and manage the property, fees will be payable for them to carry out their work, however these would usually be deducted from the rent. A management service will ensure that the rent you receive will be as passive as possible without giving yourself another job.
If you make a profit when you sell your buy-to-let property, you may be liable to pay Capital Gains Tax.
Inheritance Tax (IHT) may also apply if you are handing down the property to your children.
Tax is a complicated area, in dependent on your individual circumstances. Although we’re not qualified to give tax advice, we can refer you to a specialist if you would like.
If you like to more detail around this subject, feel free to get in touch.
Dwell Leeds also source Buy-To-Let investments on behalf of Landlords. This service de-risks the process as Landlords are able to leverage our in depth knowledge and experience of the Leeds property local market.