Buy to let guide

How does buy-to-let property investment work?

Once you have bought a property, there is the potential to earn profit in a number of ways:

• Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs (repairs, agents fees, mortgage repayments etc).
• Capital growth – the profit you earn if you sell your property for more than you paid for it.
• Mortgage paid – if carefully planned, the rent could pay off the entire mortgage if the investment is left to run for the full mortgage term!

Remember to think about ‘all’ aspects of the residential property market when entering the buy-to-let world.

Considerations & Risks

Buy-to-let’s can come with a lot of work, commitment and planning in order to be a successful landlord and a landlord that potential tenants will respect and want to stay with.  An empty property or a tenant not paying their rent can pose one of the biggest risks to your investment as any mortgage repayments have to be paid by you regardless.  Risks like these can happen regardless of having a professional property management company like Thomas Morris looking after the day-to-day running of them.  It is always recommended to make sure that there are contingency funds in a dedicated bank account to cover the surprises and risks associated with buy-to-let investing.

Minimising Risk

We recommend you allow Thomas Morris to find a tenant for you as we have the ability to carefully vet and assess each applicant in order to find the best possible tenant.  A credit check, previous landlord references, work references and affordability acceptance will help reduce the risks of non-payment of rent or major damage being caused to your investment property.  These are major risks posed to the unsuspecting landlord.  On top of these risks, there are laws surrounding the minimum term of not receiving rent that has to pass before legal evictions can be issued which also come with additional payments to a legally qualified solicitor.

Rental Payments

The amount of rent you can ask depends on a number of things such as the condition of the property, its location (the most important factor), other properties on the market at the time and general market conditions outside your control.  Speak to one of Thomas Morris' letting specialists to discuss these aspects prior to investing as we can potentially save you a lot of time and money in the long term.

If your potential tenant passes the referencing, Rent Guarantee Insurance can be obtained, which is a great way of covering any periods of non-payment and legal costs towards eviction.  It is subject to terms including a excess period, so you will still need the contingency fund.

If you struggle to find tenants because you have the type of property that isn’t in high demand and are unable to ask the required level of rent you expected then you may not be able to cover your mortgage repayments. 

Property Maintenance

There will always be day-to-day repairs and upkeep to the property which will reduce the overall rental received so these must be factored in to your plan.

Major repairs or difficult tenants may increase your costs unexpectedly so a minimum contingency fund should always be maintained in the bank account to cover them. These could include things such as new kitchen appliances if not insured, boilers, non-payment of rent for up to 6 months and solicitors costs.

Landlord Insurance

It is always recommended to have both buildings and contents insurance and rental payment insurance in place. There are specialist products that cover the rental industry and these should be sought as they may include public liability insurance if a tenant gets hurt, cover for damage to your belongings and even cover for things like hotel accommodation in the event the property becomes uninhabitable. Speak to a Thomas Morris specialist about the insurance products available.

We also recommend to tenants that they also take out their own contents insurance as items belonging to them will not be covered under the landlord’s insurance.

Mortgages & Charges

If you are renting out a property that you have previously lived in you must always get your mortgage lender’s permission to do so.  When you buy your property and rent it out you will have to cover the usual costs of buying. These could include; Stamp Duty, Solicitor’s fees, Survey Fees, Agents Letting & Management Fees.

When you sell the property you will have legal costs and further agent’s fees to pay for finding a buyer.

Tax Responsibilities 

Stamp Duty Land Tax (SDLT)

For the purchase of a single property, where no other property is already owned, this charge only applies to properties that cost over £125,000. If the property being purchased is a second or additional property, the SDLT is increased by 3% and charges for properties that cost below the £125,000 threshold are also incurred. This tax is payable on both freehold and leasehold properties purchased outright or with a mortgage.  Use our stamp duty calculator to get an indication of how much this could be.

Income Tax

Income tax is generally payable on rental income but Buy-to-let landlords may be able to offset certain ‘allowable expenses’ incurred in the process of letting out a property in order to minimise it. 

Further information is from the .gov Website, subject to change and can be accessed via: https://www.gov.uk/renting-out-a-property/paying-tax
It is always recommended to consult a qualified tax account.

National Insurance

You’ll also have to pay Class 2 National Insurance if what you do counts as running a property business, eg if all of the following apply:

• Being a landlord is your main job.
• You rent out more than one property.
• You’re buying new properties to rent out.

You don’t pay National Insurance on your rental income if you’re not running a property business - even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

Capital Gains Tax

When you eventually sell your investment property and if you make a profit, you will be liable to pay Capital Gains Tax.   Further information can be found at: https://www.gov.uk/capital-gains-tax

Overseas Landlord Tax