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 main advantage of investing in property is 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.
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 a favourable option.
Buying with mortgage
Many people naturally feel that they should keep their borrowings and debt down to a minimum. However buying with mortgage can be less risky and has a number of significant benefits over buying with cash.
You will need to put a deposit down (25% of the purchase price is the norm) as well as paying some interest on the mortgage, but rates are very low and the cost of borrowing has never been more favourable. This option allows you to leverage the banks to make your cash go much further (for example you might be able to by 3 properties with mortgage instead of buying 1 with cash! This also spreads your risk, and vastly increases cashflow since there are more properties paying you rent. In addition your return on investment (ROI) will be significantly higher when you buy with mortgage since you are putting in 75% less cash to begin with!
When you apply for a mortgage, the banks will now run vigorous affordability tests to make sure you can afford to make the repayments. This is now based on your income as well as your expenditure. You will also need to have a good credit score in order to be approved for a mortgage.
If you need some independent mortgage advice from a specialist, please get in touch. Our Mortgage Broker has access to the whole of the market and the best rates and will provide a free telephone consultation in order to show you what your best options are. We don’t advise approaching High Street banks as their rates are usually more expensive and you may lose money on application fees that are unlikely to be approved.
What to buy?
You should do alot 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?
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 offset their mortgage interest payments and some of their costs against their income.
Higher and additional rates of tax relief are being phased out and will be restricted to 20% for all landlords by April 2020.
These changes mean your taxable income will rise, affecting your tax bill, especially if you’re a higher or additional rate tax payer.
For the tax year 2018-2019, buy to let landlords 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’ll be liable to pay Capital Gains Tax.
Inheritance Tax (IHT) may also apply if you are handing down the property to your children.
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.