Laura Noble, Licensed Conveyancer at Coodes Solicitors, answers key questions for anyone considering investing in a buy to let.
In light of the current Stamp Duty Land Tax (SDLT) holiday and low interest rates, many people are choosing to invest their savings in a buy to let property. There are many things to consider when buying a property for investment purposes.
A buy to let is a property that has been bought for the purpose of renting it out to tenants, as opposed to being lived in by the buyer. Investors can then make money through rent paid by their tenants.
If you are considering a buy to let, there are many things to think about.
1. What mortgage will I need?
Buy to let mortgages differ from standard residential mortgages. When looking at affordability, lenders consider the rental income rather than the income from your job. As a general rule, lenders will want assurances that the rental income will amount to 125% of the monthly interest repayments on the loan. For example, if the mortgage repayment is £1,000 a month, the lender will want to see a rental income of £1,250 a month.
Deposits for buy to let purchases are usually larger than the standard 10% required for a residential purchase. Most buy to let mortgage lenders require a minimum 25% deposit.
2. Can I comply with the legal standards?
Becoming a landlord means that you will need to comply with certain legal standards. Lenders usually require you to enter into an assured shorthold tenancy with the tenant. This type of tenancy provides the tenant with a legal right to live in the property, generally for a fixed term of six or 12 months, with the option to continue ‘month to month’ after that.
Tenancy agreements can be complex and place various obligations on landlords, such as a requirement to insure the property, which will also be a requirement of the mortgage lender. The agreement will also include how much rent the tenant must pay and when, who is responsible for repairs, notice of eviction, when rent can be increased, how long the tenancy lasts and the tenant’s right to have their deposit protected.
3. Can I fulfill my legal responsibilities to tenants?
A landlord has a responsibility to ensure the property is safe. They must also deal with repairs to the property’s structure and exterior, maintain the heating and water system, make sure furniture provided meets fire safety regulations, ensure the gas and electrics are safe and provide the tenant with certain paperwork by law.
There are a number of legal responsibilities that you will take on if you become a landlord. Ensure you understand what is involved and are confident you can meet the responsibilities to your tenants before you invest.
4. Do I need advice on the tax implications?
Changes to tax legislation in recent years means that certain taxes may now be payable when renting our properties. Capital Gains Tax may be payable if and when you come to sell the property. Income Tax may also be payable on the rental income alongside additional SDLT on the purchase price. You should seek specialist tax advice when considering Income Tax or Capital Gains Tax.
5. Do I need a letting agent?
The Deregulation Act 2015 made dramatic changes to the law surrounding the renting of properties for both landlords and tenants. This is why many landlords choose to engage the services of a letting agent to manage the property and attend to the legalities on their behalf. However, the agents will take a percentage of the monthly rent for doing so. Should you wish to manage the letting yourselves, our specialist Buy to Let Team can help you set up the tenancy. If you need advice to deal with a difficult situation with a tenancy, our Personal Disputes team has a wealth of expertise in this area.
For advice on buy to let properties, please contact Laura Noble in the Residential Property team at 01326 213035 or email@example.com.