Buy-to-let investments are enjoying a mini boom. Rents are rising because many young people can’t afford to buy. But should investors be piling in when house prices are falling and interest rates are set to rise? Here, Lauren Thompson explains everything a buy-to-let landlord needs to know…
SHOULD I BECOME A LANDLORD?
Buy-to-let involves buying a property and letting it to tenants. But it should be seen as a long-term investment to provide regular income, not a get-rich-quick scheme. And it is not stress-free. Dealing with tenants and lettings agencies can be a headache. You should also be aware of the risks. There might be times when the property is empty and you have to meet the mortgage payments out of your savings. As recent years have proved, house prices do not always rise. In March 2002, prices were growing by 26.2 pc a year, according to Nationwide. But in November 2007, they began to fall. Since then, the total drop has been 11.4 pc. Almost a third of landlords will be in negative equity — owing more on their mortgage than their property is worth — if house prices fall by 5 pc in 2011 and a further 5 pc in 2012, according to credit agency Standard & Poor’s.
Against this, though, would-be landlords must weigh rising rents and yields. The yield is the amount of money a landlord receives in rent over one year, shown as a percentage of the property value. If you paid £100,000 for a property and the annual rent was £5,000, the yield would be 5 pc. The average yield across England and Wales was 5.1 pc in April compared to 4.8 pc last year, according to estate agency LSL Property Services, though this varies throughout the country. While rents hit an all-time high last month, 11.8 pc of tenants were in arrears. Average rents are highest in London, at £988 a month, but the high cost of housing means yields are 5 pc. But in the North-West, where rents average £560 a month, yields are 6.5 pc. Rents are expected to keep rising as many young people are unable to get a mortgage and there is a shortage of homes they can afford.
WHERE AND WHAT SHOULD I BUY?
A common mistake novice landlords make is to buy a house they would like to live in themselves, rather than choosing a location and property that will provide the best return. ‘Go to a lettings-only agent, who should be more than happy to brief you on the types of properties that are easy to let and how much rent you can expect,’ says Kate Faulkner, author of the Which? Guide To Renting & Letting. For example, students will want to live near a university, families near good schools and professionals near a train station. The National Landlords Association says that houses of multiple occupation (HMOs) can provide the best returns. These are properties let to three or more unrelated people — often students, young professionals or people on housing benefit. Landlords might need to get an HMO licence from the local council. Rules differ among councils, but you will normally be charged a fee of between £300 and £1,000 every five years and your property will be inspected to ensure it meets safety standards. Planned changes to housing benefit could lead to increased demand for this type of property. From April 2012, changes to the ‘shared accommodation rate’ paid could see about 88,000 25 to 34-year-olds forced to move from one-bedroom flats to shared accommodation. Letting your property to people on housing benefit can produce returns of around 10 pc or even 15 pc. This is because the sort of properties required are often cheap to buy, in less desirable parts of towns and cities. However, these tenants can be more risky and unreliable. Steve Perrons, managing director of property firm Perrons Davis, specialises in letting homes to people on housing benefit. All his tenants pay their rent via a guarantor (usually a parent) who is responsible for paying rent and any damage to the property. If, for example, a tenant steals a boiler worth £2,000, the guarantor would be liable for the bill. ‘I also ensure there is a maximum shortfall of just 5 pc between the amount they receive in housing benefit and the rent payable,’ he says.
HOW DO I GET A BUY-TO-LET MORTGAGE?
You’ll need a specialist buy-to-let mortgage because banks and building societies calculate whether you can afford the mortgage differently to standard home loans. For starters, you will need a good credit history and a deposit of at least 20 pc. Then you will also need to demonstrate you will receive enough rental income to cover 125 pc of the mortgage interest payments. For example, if your mortgage were £150,000 and you took a Coventry BS mortgage at 3.29 pc, your monthly interest-only payments would be £411. To cover this your monthly rent would need to be £513. The difference is factored in to cover other costs, such as maintenance, letting agent’s fees and safety tests. David Hollingworth, of mortgage broker London & Country, says: ‘Some lenders use a flat mortgage rate when working out how much they will lend. ‘For example, The Mortgage Works, part of Nationwide, uses 4.99 pc and Northern Rock uses 5.99 pc, even if your initial rate is lower.’
WHAT ARE THE BEST DEALS?
Many buy-to-let lenders have rejoined the market after disappearing during the credit crunch, leading to lower interest rates. A year ago, the average interest rate was 5.3 pc, today it is 4.97 pc — a saving of £42 a month on an interest-only mortgage of £150,000, according to comparison site Moneyfacts. However, landlords can still expect to pay large arrangement fees, sometimes of between 2 and 3.5 pc of the mortgage, and interest rates are around 1 percentage point higher than ordinary residential mortgages. If you have a 35 pc deposit, you can get a two-year fixed-rate with Coventry BS at 4.35 pc with a £999 fee. Monthly interest-only payments on a £150,000 mortgage would be £544. If you have a 40 pc deposit and want a variable rate, Woolwich (the mortgage arm of Barclays) offers a lifetime tracker pegged at 3.49 points above Bank of England base rate, giving a current rate of 3.99 pc. The fee is £1,500 or 1.5 pc of the mortgage — whichever is greater. Monthly payments would be £499. Those with a 20 pc deposit can get a variable offset mortgage with Yorkshire Bank at 4.99 pc with a £999 fee, giving monthly payments of £624.
SHOULD I USE A LETTING AGENT?
Letting agents can find tenants, draw up contracts, collect rent and maintain the property. Most charge from 10 pc of every month’s rent paid for finding tenants and getting them checked in and out (known as ‘letting-only’) to 15 pc or more for full management of the property, including arranging maintenance. A good agent will have the necessary expertise to ensure the property is being let legally and smoothly. Make sure they are a member of the National Approved Letting Scheme or of the Association of Residential Letting Agents, the Royal Institution of Chartered Surveyors, the Property Ombudsman or the UK Association of Letting Agents. Be sure to ask for a clear breakdown of all their fees, including VAT, before signing anything. For example, most charge a fee for renewing a contract if a tenant wants to stay on for another year. Don’t be afraid to negotiate.
WILL I HAVE TO PAY ANY TAX?
The taxman will want his share of your investment when you buy, during the rental period and when you sell. Stamp duty is payable as normal on buy-to-let properties. The rates are 1 pc on properties bought for more than £125,000, 3 pc above £250,000 and 4 pc above £500,000. The highest rate is charged on the whole value of the property. You must also pay income tax on the rent, in line with your basic or higher-rate tax bands (so 20, 40 or 50 pc). You will, however, be able to offset mortgage interest payments, letting agency costs and maintenance expenses against the taxable rental income. For example, if you are a higher-rate taxpayer paying tax at 40 pc and you receive £1,000 a month rent, but you pay £500 for the mortgage and £100 for the letting agent, you would be charged tax on only £400 of rental income. So you would pay £160 of your monthly income to the taxman. If you sell the house, you might also have to pay capital gains tax (CGT) on profits. This does not apply when you sell your main home. CGT is charged at 18 pc (28 pc for higher-rate taxpayers) of all gains over £10,100. Anita Monteith, spokesman for the Institute of Chartered Accountants in England and Wales, says: ‘Investing in buy-to-let will mean filling in a self-assessment tax return every year. There are a lot of tax implications.’
SAFETY AND RED TAPE
Landlords also face paperwork and additional expenses. If you get it wrong, you could be letting illegally. Since October 2008 all rental properties must have an energy performance certificate (EPC). It costs around £50 and you can choose an energy assessor from www.epcregister.com. Landlords must carry out an annual safety check by someone registered on the Gas Safe Register and give a copy of the certificate to the tenant every 12 months. All properties built after June 1992 must have a mains-operated, inter-connected smoke alarm fitted on every floor. Properties older than this should have battery-operated alarms. Any furniture, including sofas and beds, must have a fire resistance label showing it meets 1988 regulations. You must ensure your tenant’s deposit is ring-fenced in one of three schemes. The Deposit Protection Service is free to use, but you must hand over the cash. With My Deposits or The Tenancy Deposit Scheme you keep the cash, but pay a premium to the scheme
From The Daily Mail 25/05/2011