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Better buy-to-let

Published: 02/08/2022

Have you wondered about becoming a landlord but aren't sure whether it's still worth it or even your kind of thing? Well, you're in the right place!

For anyone with a genuine passion for property, being a landlord is a very natural fit to supplement your income, build financial freedom and nurture your inner designer and entrepreneur.

Providing comfortable and stylish homes that people enjoy living in is a genuine source of satisfaction and accomplishment for many of our landlord clients - they take real pride in what they do and find the experience truly rewarding, personally and professionally.

It's also true that the buy-to-let landscape has shifted significantly in recent years. Changes in taxation, stamp duty, tenancy legislation and energy efficiency standards have put more responsibility on landlords, but buying to let remains a sound long-term investment strategy.

With that in mind, this article covers all you need to know about starting and growing your own lettings portfolio.

BRUSH UP ON BUY-TO-LET FINANCE AND TAX

Budgeting correctly is essential for any successful business, so here’s a quick rundown of lending criteria, stamp duty costs and tax allowances for landlords.

  • Buy-to-let mortgages are primarily calculated on the sales value of a property along with the projected rental income, rather than on your personal income (although you'll generally need to earn around £25,000 per year to qualify).
  • You can usually borrow a maximum of 75% of a property's value, subject to the monthly rental income being at least 125% of the monthly mortgage payments.
  • As a rule, buy-to-let mortgages are interest-only, which means you only pay off the interest (and not the capital) but have lower monthly payments.
  • Lenders tend to charge higher arrangement fees for buy-to-let mortgages than standard residential loans.
  • As well as the usual Stamp Duty liability, investment property is subject to the second homes Stamp Duty supplement on the total purchase price (3% in England, 4% in Scotland and Wales).
  • New tax rules mean you pay tax on the entire rental income with a tax credit available of 20% of your annual mortgage interest payments (this change affects higher rate taxpayers the most, and also puts some lower rate taxpayers into the higher bracket).
  • You can also claim back the cost of letting agent and management fees, insurance, repairs, maintenance, accountants fees, utility bills, council tax and certain legal fees.
Knowing the basics of buy-to-let mortgages, buying costs, and tax will help you assess the viability of any investment property accurately and swiftly.

LEARN ABOUT LANDLORD LEGISLATION
The rules and regulations covering lettings are famously ever-changing, with around 150 pieces of legislation to get to grips with. There are also some best practices you should follow to minimise the potential for disputes.

Here's a small taster of things to remember:

  • ID checks to confirm your tenants are legally allowed to rent your property, along with professional referencing
  • Take out buildings, public liability and landlords contents insurance as a minimum
  • A proper tenancy agreement signed by everyone who'll be living at the property
  • A detailed inventory, including photographs, to be signed by your tenants
  • Protecting security deposits in a government-approved scheme and registered on time
  • Regular mid-tenancy inspections to monitor the way your property is cared for and to spot any problems
  • Keeping certificates for gas, electricity and energy efficiency up to date.
  • Checking the government's website for policy changes to stay on the right side of the law.
This might seem like a lot - ok, it is a lot - but with an experienced managing agent by your side, you can leave all that to them while you concentrate on the fun stuff, like growing your portfolio.

THINK ABOUT YOUR BUY-TO-LET STRATEGY
There are various ways to be a landlord, but the number one rule to keep your buy-to-lets occupied and in demand for years is to tailor them to your market.

Start by asking local letting agents which homes they need more of, then consider the following:

  • Singles, couples, students, professional sharers and families with children have different requirements and expectations around location, accommodation and specification.
  • Landlords with older homes and low EPC (Energy Performance Certificate) ratings could sell up to avoid the costs of improvements, creating opportunities for new business models.
  • Renovating means you'll need extra cash upfront, but you could increase your yield and equity fast.
  • Buying new might mean paying a higher purchase price, but you'll get better insulation, modern fittings, lower running costs and less maintenance in return.
  • HMOs (houses in multiple occupation), serviced accommodation and holiday lets can be significantly more profitable, but they're also more work, and lenders usually require landlords to have previous experience.
CONSIDER SETTING UP A COMPANY FIRST
When you set up a limited company before purchasing any property, every buy-to-let you add to your portfolio can benefit from the different - and often more favourable - tax policy.

  • All mortgage interest can be claimed back against tax as an allowable expense.
  • No Capital Gains Tax is payable on profits left in the company – making it cheaper to sell one of your buy-to-lets and reinvest the money to expand or upgrade your portfolio.
  • You don't pay any stamp duty when you purchase a limited company that owns buy-to-let property.
  • Mortgage lending to limited companies isn’t so widely available, but more lenders are entering the market.
  • Each director of a limited company can take tax-free dividends up to £2000 per year, with anything over that amount subject to income tax.
  • You can make family members directors to pass on assets more easily and minimise their inheritance tax liability.
While there are clear benefits to owning your buy-to-lets through a company, it isn't necessarily the best route for everyone, so speak to a tax adviser first to make sure you pick the right strategy for you.

BECOME A LOCAL LEGEND
As a landlord, you're free to invest in property anywhere, but there are many advantages to growing a portfolio close to where you live, including:

  • swooping on properties the minute they hit the market
  • creating lasting relationships with local estate agents and being first in line when new properties become available
  • having your ear to the ground about upcoming properties from your neighbours or local businesses
  • building an expert knowledge of the local rental market and knowing which streets rent best to which type of tenant
  • feeling connected to your portfolio and being able to visit tenants, meet contractors or inspect your property more easily
Perhaps the biggest day-to-day advantage of keeping your portfolio close together is that, even if you buy every property through a different estate agent, you can keep all your rental homes with the same local managing agent.

Are you thinking of becoming a landlord in Berkhamsted or Tring?
For some expert advice on the rental market in the local area and the best type of property to invest in, give our award-winning lettings department a call – they would love to help you find your first buy-to-let and to be part of your landlord journey.

Tring office: 01442 820420
Berkhamsted office: 01442 863000