A Beginners Guide To Buy To Let
After a few emails from friends and family I have finally decided to put together a beginners guide to buy to let.
So how does the buy to let work? Well basically it’s exactly the same as buying a house - you find a property you like, you pay a deposit and then you mortgage it. Actually it’s not that simple and the mortgage type does vary a little. But basically the main aim is to get the monthly rent payments to cover the mortgage costs plus a little more. Most lenders will look for the gross rent to cover at least 130% of your mortgage payments.
Easy right? Well actually no it’s not that easy - the first major trapping is the mortgage itself; if house prices fall (as the have been) or you struggle to rent the property then you would either have to inject cash yourself or even worse have to sell the property for a loss.
Another thing you don’t want to forget about is periods when you can’t get a tenant; during these periods you will be responsible for covering the rent to make mortgage payments. Another matter to consider is having a budget set aside for repair work, legal issues or furnishing the property.
Fool.com suggest taking on more properties in your portfolio to cover the possibility of having an empty property but this also means you are ramping up your financial risk, debt and maintenance work.
You can reduce your risk by having more several properties, allowing you to ride out periods when you don’t have tenants in one property, for example. But obviously this means you have to take on more debt and it will take some time, possibly a few years, to find and buy a small portfolio of properties.
Fool.com
Using a Buy To Let Agent
So you have your property and now you need to fill it with a tenant; personally I use buy to let agents to help me save time but obviously there is a cost involved with this (10%-15%). However there are a number of websites on the internet that can help cut out the middle man and help you find a tenant. If you do choose to use an agent make sure that they are registered with a proper industry association, such as the Association of Residential Letting Agents (ARLA).
Property Tax
Any profit that you make from your property is subject to capital gains take. You also have to pay tax on the rent you receive, after deducting for interest payments, letting fees and so on. Again, personally I have an accountant to who takes care of everything for me and believe me; they are worth their weight in gold.
Landlords Insurance
Finally you will need landlords insurance (a topic we have discussed in depth in the past.)