Here are five things buy-to-let investors need to think about:
1. Property appealYour priority should be to find a property that you can rent out easily, rather than looking for a home you’d like to live in. Properties that tend to be in demand from tenants usually have good transport links, and access to amenities such as shopping centres and restaurants.
If you want to appeal to families, then you’ll need to pick a property which is in a catchment area for good schools and which has a garden. Find out more buy-to-let tips.
When applying for a buy-to-let mortgage, remember that lenders will take your income and personal circumstances into account, as well as rental income, when assessing your mortgage application.
2. Changes in buy-to-let lending rules
Prior to the introduction of new rules in January 2017, lenders typically required landlords to receive 125% of their mortgage liabilities in rental income, but some lenders may now require it to be 145%. They will often also apply a ‘stress test’ of a minimum interest rate of 5.5% for the first five years of the loan.
3. Buying costsRemember that it’s not just the cost of the property itself you need to consider when buying a property to let out. You’ll also need to factor in stamp duty, including the 3% surcharge on second homes introduced in April last year, any mortgage arrangement fees, survey and conveyancing costs, and furniture if you’re planning to let the property furnished.
4. Void periodsAll landlords hope that tenants will continuously occupy their buy-to-let properties, but it’s essential to be financially prepared for any periods when the property isn’t rented out. Try to build up a rainy day fund to cover these times so that you’ll be able to make your mortgage payments every month, even when you don’t have tenants.
5. Ongoing costsProperties require maintenance, and as a landlord it’s your responsibility to make sure any property you let out is in a good state of repair. There will also be the cost of complying with legislation, such as gas safety checks, and installing smoke and carbon monoxide detectors.
If you aren’t managing the property yourself, you’ll need to pay for letting agent fees, which are usually charged as a percentage of the rental price. Don’t forget that there will usually be tax to pay on your rental income too. Changes to buy-to-let tax rules being phased in from April 2017 mean the tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of income tax.
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