It’s no secret that investing in property can be extremely lucrative, but it’s not for the faint-hearted. With the ever-changing landscape of government legislation and tax changes, it’s important to be fully prepared and informed.
Staying up-to-date with the latest regulations and understanding the implications of tax changes is essential for navigating the property market successfully. Being knowledgeable about the market, having a solid financial plan, and being prepared for potential risks are key to making the most of the opportunities in the property sector.
This guide will outline the fundamental aspects you should take into consideration before embarking on property investment.
Have a plan
When it comes to investing in a Buy to Let property, there are countless options to choose from. Before delving into the various avenues available, it’s crucial to have a clear understanding of your objectives.
Are you investing for long-term growth and not in need of immediate income, aiming to build a pension nest egg or a rainy day fund? Are you retired and seeking a regular income to supplement your retirement funds?
Or, are you considering renovating a property, releasing the profits through refinancing, and then reinvesting those funds in additional properties to expand your portfolio?
Your end goal for property investing will play a crucial role in determining the type of property you should buy and the type of finance you need to arrange.
Understand the costs
When purchasing a buy-to-let property, it’s important to have a good understanding of both the upfront costs and the ongoing costs associated with property ownership.
here are some more upfront costs to consider when buying a buy-to-let property in the UK:
- Deposit: Most buy-to-let mortgage lenders require a minimum deposit of 25% deposit of the property’s purchase price, although this can vary depending on the lender’s criteria and the rental value of the property. It’s important to budget for a substantial deposit, which may be higher than 25% in some cases
- Stamp Duty: Stamp Duty Land Tax (SDLT) is a significant upfront cost to consider when purchasing a buy-to-let property in the UK. It’s worth noting that an additional 3% SDLT surcharge is levied on second homes and investment properties, which may increase the overall stamp duty liability.
- Survey fees: Apart from the valuation report required by the mortgage lender, you may also opt for a more comprehensive survey of the property, which can help identify any structural or maintenance issues. Survey fees can vary depending on the type and scope of the survey.
- Mortgage valuation fees: Some mortgage lenders may charge a valuation fee for assessing the property’s value for lending purposes. This fee is separate from any survey fees and is typically paid upfront.
- Solicitor costs: Legal fees for a solicitor or conveyancer to handle the legal aspects of the property purchase, including searches, paperwork, and other legal requirements.
- Mortgage broker fees: If you engage a mortgage broker to help you find the best buy-to-let mortgage, they may charge a fee for their services, which is typically paid upfront.
In addition to the upfront costs, there are also ongoing costs to consider when buying a buy-to-let property in the UK. These ongoing costs can impact your cash flow and overall profitability as a landlord. Some of the regular ongoing costs to consider include:
- Property repairs and maintenance: As a landlord, you may need to allocate funds for regular repairs and maintenance of the property, including fixing appliances, repairing structural issues, or addressing general wear and tear.
- Refurbishment costs: If you plan to renovate or update the property to attract tenants or maintain its value, you’ll need to budget for refurbishment costs, such as upgrading fixtures and fittings, repainting, or replacing flooring.
- Exterior maintenance: This includes maintaining the property’s exterior, such as landscaping, gardening, and keeping common areas clean and well-maintained.
- End of tenancy cleans and inventories: When a tenant moves out, you may need to allocate funds for professional end of tenancy cleaning and inventory checks to assess the property’s condition and address any damages.
- EPC certificates and gas safety certificates: As a landlord, you are required to obtain an Energy Performance Certificate (EPC) and an annual Gas Safety Certificate for the property, which may incur ongoing costs.
- Letting agent’s fees: If you engage a letting agent to manage the property on your behalf, you may need to pay ongoing fees for their services, which can include advertising, tenant screening, and property management.
- Insurance: Landlord insurance is necessary to protect your investment property, and the cost of insurance premiums should be factored into your ongoing costs.
- Service charge for flats: If you own a leasehold flat, you may be responsible for paying a service charge to cover the cost of maintaining communal areas and other shared amenities.
Calculate the tax
When buying a buy-to-let property, it’s important to be aware of the upfront and ongoing tax implications. Some key tax considerations for buy-to-let properties in the UK include:
- Stamp Duty: Stamp Duty Land Tax (SDLT) is a one-time upfront tax payable when purchasing a property. The rate of SDLT depends on the purchase price of the property and whether it’s your first property or an additional property, such as a buy-to-let property. Since April 2016, an additional 3% surcharge applies to the standard SDLT rates for second homes and buy-to-let properties.
- Income Tax on Rental Income: As a landlord, you’re required to declare your rental income and pay income tax on it. The amount of income tax payable will depend on your tax status, including whether you’re a basic rate taxpayer or a higher rate taxpayer. Since April 2017, there have been changes to the rental income tax relief, which has resulted in higher tax liabilities for some landlords.
- Tax Relief Changes: The changes in rental income tax relief mean that landlords can no longer deduct all of their mortgage interest expenses from their rental income before calculating their taxable profit. Instead, mortgage interest relief is being phased out, and landlords can only claim a basic rate tax reduction on their mortgage interest expense.
- Limited Company Ownership: Some landlords choose to purchase buy-to-let properties through a limited company to take advantage of potentially lower tax rates. However, owning properties through a limited company has its own tax implications, including corporation tax on rental profits and potential capital gains tax implications.
- Higher Tax Bracket: The additional rental income from your buy-to-let property may push you into a higher tax bracket, resulting in higher income tax rates and potentially other tax implications. It’s important to consider this when planning your property investment strategy.
- Allowances and Deductions: There are various allowances and deductions that landlords can offset against their rental income, such as allowable expenses, repairs and maintenance costs, and other tax allowances. It’s crucial to work with a qualified accountant to understand all the available allowances and deductions and optimise your tax position.
Location is one of the most important factors to consider when buying an investment property. It’s essential to approach it with a strategic mindset, focusing on factors that will yield the best returns on your investment. Some key considerations related to location when buying an investment property include:
- Rental Returns: The potential rental income is a critical factor to consider. Research the rental market in the area, including the average rental rates and demand for rental properties. Look for areas with strong rental demand and higher rental yields to ensure that your investment generates positive cash flow.
- Long-Term Growth: Consider the potential for long-term growth in the area. Look for areas with strong economic fundamentals, such as low unemployment rates, robust job growth, and a stable local economy. Research development plans, infrastructure projects, and upcoming transportation improvements, as these can positively impact property values in the long run.
- Commuter-Friendly Locations: Properties located in areas with good transportation links and easy access to key amenities, such as schools, hospitals, shopping centers, and public transportation, can be attractive to tenants and have strong rental demand. Consider properties in commuter-friendly locations, which are convenient for working professionals who need to commute to nearby cities for work.
- Growth Areas: Look for areas that are expected to experience growth in the future, such as upcoming neighborhoods or areas undergoing regeneration or revitalization. These areas may offer potential for capital appreciation as the property values may increase over time.
- Local Amenities: Consider the availability and proximity of local amenities, such as parks, recreational facilities, shopping centers, schools, and public transportation. Properties located in areas with good amenities can be more attractive to tenants and may have better rental prospects.
- Research and Due Diligence: Conduct thorough research and due diligence on the location, including crime rates, flood zones, planning permissions, and local property market trends. Consider working with a qualified real estate agent who has local market knowledge to guide you in making informed decisions.
Renovate- BRRRR strategy
The BRRRR strategy (Buy, Renovate, Refinance, Rent, and Repeat) can be a viable approach for adding value to a buy-to-let property through renovation. It involves buying a property, renovating it to increase its value, refinancing to release equity, renting it out, and then repeating the process to acquire more properties. It’s important to seek specialist advice and choose the right type of finance that offers flexibility for this strategy.
You’ll also need to budget for the deposit, stamp duty, associated buying costs, and renovation expenses. Thorough research, planning, and working with qualified professionals are key to successfully implementing the BRRRR strategy.
Choosing the right financial arrangement
There are dozens of different mortgage or financial arrangements for buying a buy-to-let property, and the most suitable method for you will depend on your circumstances and intention for the property. Here are a few things you’ll need to consider when choosing the best way to finance you Buy to Let purchase
- Limited Company vs. Personal Name: You can choose to buy the property in your own name or through a limited company. Buying in a limited company can provide certain tax benefits and may be more suitable for investors with multiple properties, while buying in your personal name may be simpler in terms of administration.
- Type of Let: The type of let you plan for the property, such as regular Assured Shorthold Tenancy (AST), holiday let, or student let, can impact the mortgage options. Some lenders have specific mortgage products tailored for different types of lettings.
- Repayment Method: You can choose between capital repayment or interest-only mortgages. With capital repayment, you make regular payments that include both the interest and the principal, and over time, you will pay off the mortgage in full. With interest-only, you only pay the interest on the mortgage, and the principal remains unchanged. At the end of the mortgage term, you will need to repay the principal in full, which can be done through selling the property, refinancing, or using other means
- Cash Flow vs. Mortgage Clearance: Capital repayment mortgages generally result in higher monthly payments but will guarantee that you clear the mortgage at the end of the term. Interest-only mortgages, on the other hand, have lower monthly payments, which can provide more cash flow for other investments or expenses, but there is no guarantee that you will clear the mortgage at the end of the term.
- Bridging or development finance: Other types of finance, such as bridging finance or development finance, may be worth considering if you are planning on keeping the property for a short time or if you intend to renovate and remortgage shortly after. A guide to Bridging Finance
When purchasing a buy-to-let property, approach it pragmatically with your head, not your heart. Do thorough research, including understanding the local property market, and be prepared to negotiate.
Building positive relationships with local estate agents can be beneficial in negotiations. Set a budget and be realistic in your offers, avoiding lowball offers. If the seller is unwilling to lower the price, consider negotiating on other terms. Stay calm and patient during negotiations and be prepared to walk away if necessary.
Buying at auction is a great way to find a bargain. However, it’s important to remember that once the hammer goes down and you’ve won the bid, you are likely to be instantly liable for 10% of the purchase price.
Ensuring you have appropriate funding in place is key, and it’s usually advisable for those with experience. Being a cash buyer is preferable, but bridging finance is also commonly used or standard residential mortgages can also be used, although less often.