Becoming a buy-to-let landlord remains a popular option among many people as it provides attractive growth potential for your capital. Investing in the right property can see your money perform better than investing in a savings account and the rental payments provide a steady stream of income.
Property investment is a long-term commitment though, and if you are thinking about becoming a buy-to-let landlord for the first time then you’ll need to understand what your responsibilities are. It is a sensible idea to conduct some research first, so that you understand what will be involved, the costs that you’ll be liable for, and what your legal responsibilities are.
As a first time landlord, you may be eager to start making money from your first property investment without first investing some time into research of regulations and the most common mistakes that first-time landlords make. These are some of the things that you need to know if you are thinking about taking your first steps towards becoming a buy-to-let landlord.
Buy-to-Let is Different to a Homeowner Mortgage
A buy-to-let mortgage is different to the type of mortgage that you would take out on your own home. You will need a larger deposit in order to avoid high-interest rates, usually at least 25 per cent of the property purchase price.
A huge majority of buy-to-let mortgages are available on an “interest-only” basis which can be good in the short term, as it will allow you to minimise your outgoings, but it’s important to have a plan in place to pay off the capital at the end of the mortgage.
You will also need to be able to prove that the rent will cover the monthly mortgage payments, with a surplus amount. Lending criteria usually stipulates that the monthly rental income should be between 120% and 135% of the monthly mortgage repayment amount.
If you inherit a buy-to-let property or property or portfolio, then you should seek independent financial advice, especially if the homes have outstanding mortgages.
Think About Your Costs Versus Your Returns
The initial costs associated with purchasing a property include property valuation and surveys, legal costs, arrangement fees and stamp duty. Day to day costs include things like the mortgage interest, letting agent’s fees, insurance, annual safety checks, redecorating and maintenance costs. You must also pay income tax on your rental income, minus costs and Class 2 National Insurance contributions if your profits exceed ££6,515 a year and being a landlord is considered your main job.
Your return will come from rent and from the capital growth of the property value going up, but don’t forget, just like any other investment, it is possible to lose money on a buy-to-let. For instance, if the property is vacant for a period of time or if the value of property in the local area decreases then your outgoings could exceed your rental yield. You want to try and keep the rental yield on your buy-to-let property at no less than 7%, anything less may result in cash flow problems.
Contact HMRC if your income from property rental is between £1,000 and £2,500 a year and if your annual income from property rental exceeds £2,500, you must declare it on a Self Assessment tax return.
Landlords Legal and Financial Responsibilities
As a landlord you’ll be legally responsible for things like checking the tenants right to rent in the UK, paying tax to HMRC and securing your tenant’s deposits in a government-approved tenancy deposit scheme until the end of the tenancy. You are also responsible for making sure that the tenant pays the rent regularly so that you are able to meet your monthly mortgage payments.
It’s also your responsibility to fit and test smoke alarms and carbon monoxide alarms, following all fire safety regulations for the property. The Housing Health and Safety Rating System is used by local councils to ensure that properties in the area are safe. This involves inspecting them for possible hazards. If you own a property and rent it out your tenants can ask the council for an HHSRS inspection if they feel the property is not being kept to required health safety standards. You should also follow the government’s coronavirus advice.
How to Protect Your Buy-to-Let Property
If you’re considering becoming a buy-to-let landlord, ensure that you research everything thoroughly before buying a property and protect your buy-to-let property with landlord insurance. There are many things that could happen that may result in you needing to make an insurance claim and so having the correct level of cover is of utmost importance.
Ashburnham Insurance provides landlord insurance for buy-to-let properties with flexible and comprehensive policies. The type of cover you need may vary, so you can build your own landlord insurance policy choosing from covers such as buildings and contents insurance, loss of rent, public liability insurance and more. To find out more contact Ashburnham Insurance on FREEPHONE 0800 1696137.