There are all sorts of reasons to consider investing in a buy-to-let property. Perhaps you’ve just retired and you have a pension that you would like to invest, or maybe you are working but you would like to build a nest-egg for the future. A buy-to-let property can offer you a steady income in the short-term and the means to capitalize on long-term property market growth. The past few years have seen a boost in buy-to-let property investment. Reasons for this include the poor performance of the stock market coupled with an understanding that there is an increasing demand for affordable accommodation.[1] Here we guide you through all the factors you need to take into account when thinking about a buy-to-let property investment.
Research the property market
According to the Land Registry, property prices increased by just 0.3% between October and November last year.[2] This means that you have a greater chance of purchasing a buy-to-let at a reasonable price. To calculate a property’s likely long-term capital growth, you need to compare what you will pay for the property with its likely worth in five years’ time.
Before deciding to purchase a buy-to-let you need to consider rental yields (the return you can expect to receive on rent). Saville’s Residential Property Forecasts predict that rents will continue to rise nationally in the buy-to-let market until 2024, with an average 15.4% increase due to demand for rental accommodation.[3] However, there is significant variation nationally and the rental yields in the area you are looking at must be your prime consideration. The North East recorded the highest rental yields this year, with Liverpool at 10%.
Is there already a tenant in the property?
If you are buying a property that is already being let this is called ‘to sell subject to the tenancy’. This means that when you purchase you become responsible for the tenancy agreement that is already in place. The tenant will continue to live in the property but will pay rent to you. The advantage is that you are saved the trouble of finding a new tenant and paying the associated costs. However, there are a number of steps you must take to protect yourself. You will need to see the tenancy agreement in order to understand what type of tenancy is in place (e.g. an individual contract or a joint tenancy agreement),[4] the length of the tenancy period, notice periods for both parties, how much rent is paid, when rent is due, any other obligations on both parties and whether there are any special clauses in place. Our specialist property solicitors can advise you to ensure your interests are protected.
Ask the seller for other information about the tenant and tenancy. You need to know whether rental payments are up-to-date, where the deposit is held and the amount of deposit paid. Find out whether any written correspondence has been exchanged between the two parties to establish whether there have been any disagreements. It is also essential to confirm that the tenant named on the tenancy agreement is the same person who is actually occupying the property.
Make sure that the property’s Energy Performance Certificate (EPC) shows a rating of at least E. If the property is below this standard then you will not be able to legally renew the tenancy agreement until improvements to the property are made, and this will need to be factored into your budget.
If the property is being sold with vacant possession upon completion matters are usually straightforward. However, if a tenant refuses to leave then the completion process can lengthen considerably. If this situation arises, our experienced conveyancing solicitors are able to support and advise you.
Consider your budget
There are expenses associated with the buy-to-let property purchase, including:
- Landlord’s insurance.
- Legal costs.
- Mortgage arrangement fees.
- Property survey and valuation.
- Stamp Duty Land Tax (SDLT) which is payable on properties worth more than £125,000. An extra 3% is paid on buy-to-let properties.
- Land Transaction Tax (LTT) at 3% for buy-to-let properties in Wales worth over £40,000.
Landlords have a range of ongoing legal responsibilities which entails costs like:
- Tenancy agreement. A tenancy agreement is legally binding and protects your interests, so it is important to get it right.
- Energy Performance Certificate (EPC). Most rental properties require an EPC with a rating of at least E.
- Costs to improve the property to ensure it meets current building regulations and legal safety standards. [5]
- Gas Safety Certificate from a registered Gas Safe Engineer.
- Electrical safety inspection must be carried out.
- Fire alarms and carbon monoxide detectors must be fitted and a fire extinguisher or fire blanket provided. There must be clear escape routes and furniture must meet the Furniture and Furnishings (Fire Safety) Regulations 1988.
- House in Multiple Occupation licence (HMO). This may be needed if more than 5 people from more than one household will rent your property :[6]
- Tax on rental income less allowable expenses. From April 2020 landlords cannot offset mortgage interest costs against tax.[7]
- Letting agency fees if you decide to rent through an agency.
- Ongoing building maintenance costs and mandatory annual safety checks.
Where to find more advice
Purchasing a buy-to-let property can be more complicated than a traditional purchase, so it is important to speak to one of our specialist conveyancing solicitors early on. At Insight Law we have extensive knowledge of the local buy-to-let market, giving you the confidence that you are in trusted hands. After you have purchased your property, we can draft tenancy agreements and continue to protect your property investment by ensuring ongoing legal compliance.
To find out how we can help you with your buy-to-let property investment, talk to us straight away through our website’s live chat function or by phoning 02920 093 600 (Cardiff) or 0117 925 6257 (Bristol).
[1] The Property Teacher, Why is Buy-to-Let so Popular? http://www.thepropertyteacher.co.uk/buy-let-popular/
[2] NAEA: PropertyMark, UK house prices rise by 0.4%, Land Registry Data shows, https://www.naea.co.uk/news/january-2020/uk-hpi-november-2019/
[3] BuyAssociation, How the UK rental market might change over the next 5 years, https://www.buyassociation.co.uk/2019/11/19/how-the-uk-rental-market-might-change-over-the-next-five-years/
[4] Gov.uk, Private renting for tenants: tenancy agreements, https://www.gov.uk/private-renting-tenancy-agreements/tenancy-types
[5] Gov.uk, Renting out your property (England and Wales), https://www.gov.uk/renting-out-a-property
[6] Legislation.gov.uk, The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018, http://www.legislation.gov.uk/uksi/2018/221/made
[7] Which? Buy-to-let mortgage interest tax relief explained, https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782