Buy-to-let investments

Your questions answered

Q: What is buy-to-let?
A: This is a form of residential investment where you buy a property, usually with the aid of a mortgage, and rent it out. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties. Prior to the current credit crunch the increased availability of loans at attractive rates of interest for buy-to-let purchasers also increased the appeal of owning rental property. 

When you buy a property to let out, you are becoming a landlord. And owning investment property is not like owning your own home. Instead you are effectively running a business. 

Q: How do I go about researching the market?
A: You should carefully research the market where you want to buy your property. You can either do this yourself or employ a specialist letting agent to help you find the area and property you are looking for. If you research the market yourself, you will need to gather information from estate agents, local papers, local employers and even the local authority, about the demand for and supply of, rented housing. 

Q: What considerations should I have about tenants?
A: You need to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements? It is important to remember your property should have features that are attractive to would-be tenants, rather than would-be purchasers.  

Q: How do I choose a location for the property?
A: You need to consider how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school-age children, how close the nearest schools are, will be an important influence on where they choose to rent. 

Q: What type and size of property should I consider?
A: Think carefully about buying a property whose size is attractive to households looking for rented accommodation in the location you have identified. As well as the size, type and location of your property, what about its condition? Have you assessed whether the property will require expensive maintenance. Generally speaking, older homes require more attention.

Q: If I manage a property myself, what will
I be responsible for?
A: If you manage it yourself, you will be responsible for, finding tenants, checking tenants’ references, collecting the rent and maintaining the property and dealing with any problems.

Q: What are my legal responsibilities?
A: Your legal responsibilities as a landlord include, carrying out repairs, ensuring the safety of gas and electrical appliances and ensuring that the furniture and furnishings meet fire safety requirements. You should also consider familiarising yourself with landlord and tenant law, to understand your responsibilities as a landlord, and the rights your tenants enjoy. The Department of Communities and Local Government (DCLG) have published a useful guide for landlords in England and Wales called "Assured and assured shorthold tenancies.”  

Q: What happens if my property is empty?
A: During any periods when you are unable to find tenants for your property and it is empty, you will still be expected to continue to repay your mortgage. So you need to think about how you will meet your mortgage repayments in these circumstances. This could particularly apply if you choose a property in an area where the supply of rental property exceeds demand from tenants. 

Q: What maintenance of my property would
I be responsible for?
A: As well as managing your property, you are responsible for maintaining it. Besides repairs and regular maintenance, properties can benefit from routine improvements which maintain their attractiveness with would-be tenants. You may find that your property is in need of an overhaul after a tenancy finishes. Naturally, you will have to finance this yourself. What is more, your property is likely to be empty and you will not receive a rental income, while your property is being improved. 

Q: Should I use a managing agent?
A: Given the number of different responsibilities you face as a landlord and the limitations on your own time, you may find it prudent to use a managing agent to look after your property for you. This will cost you a percentage of your monthly rental income. 

Q: What size of mortgage could I obtain?
A: This will depend on your own personal situation and how much you can afford to pay. If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow. The size of the loan is usually linked to the expected rental income. As a guide, your lender will expect your monthly rental income to be between 25 per cent and 50 per cent greater than your monthly mortgage payments. 

Q: What mortgage should I choose?
A: A buy-to-let mortgage is specifically designed for the purpose of financing a property that is to be rented out. Mortgage lenders will look at the market value of the rent a property could attract as well as your income and credit worthiness when assessing a mortgage application.
When you choose a mortgage, your choice will be between a repayment mortgage or an interest-only loan. You may be able to choose between fixed rate and variable rate mortgages. Fixed rate loans will give you some certainty about your mortgage repayments whilst variable rate loans could move up or down. You should also remember that your mortgage payments could rise if interest rates rise, depending on the type of mortgage you have. But before choosing your mortgage, you should consider taking professional advice to discuss your options. Buy-to-let mortgages are not regulated. 

Q: What other costs do I need to consider?
A: You will need to pay for buildings insurance, consider contents cover, if your property is furnished, maintenance costs, periods when you are receiving no rental income because the property is empty or the tenants have fallen behind with their payments and mortgage repayment increases because of interest rate rises, which you may not be able to recover immediately from rent increases.

Q: What taxes could I have to pay?
A: The profits from renting property are taxable. However, you will be able to offset some of the costs you incur as a landlord against tax. You may have to pay the following taxes, income tax, Stamp Duty when you buy your property and Capital Gains Tax when you sell it.