Buy-to-Let Guide

Buy-To-Let is a joint initiative by the Association of Residential Letting Agents, and the Mortgage lenders. The scheme is designed to help private individuals to invest in property To Let without being penalised by mortgage surcharges or paying commercial rates of interest. Mortgage lenders in the Buy-to Let scheme will take account of rental income likely to be achieved from a property.

What's so different?

Historically, borrowing on income producing property has been viewed by lenders as a commercial proposition. So, mortgages on property to let, even for private individuals, have attracted higher rates of interest than the standard mortgages offered to owner-occupiers.

In addition until now, rental income has usually been disallowed when assessing a borrower's ability to meet mortgage payments. Now the view of many lenders and all other housing professionals is that growth in the private rented sector must be encouraged. Not only does it lag well behind the private rental sectors of all the advanced economies, the lack of choice between renting and buying is, in fact, bad for the economy and a contributory factor to the boom and busts of the housing market over the last decades.

But the changes in lending criteria and the lowering of interest rates for private investors has only been made possible by the strong presence of professional letting agents in the lettings market.

What are the returns from letting a property?

Gross returns - the Rent received before taking account of the cost of letting - such as management fees, maintenance service charges ground rents and insurance varies between 5% and 10%. This can be less for very expensive properties.

The average rental return in this area today hovers around the 5 - 7% mark, and capital appreciation is likely to match inflation for the foreseeable future over a period of years.

As a rule of thumb, the gross rents should be between 130% and 150% of the monthly mortgage payments.

What difference does a Letting Agent make?

Buying a property To-Let is not the same as buying your own home. Mortgage lenders will want to know that a qualified agent has been advising on the selection of properties suitable for letting.

The experienced agent will know the local market, whether there is a demand for say, two bedrooms flats, or four bed roomed houses, or for properties close to schools or transport links or secluded properties with gardens. Also the agent will know the standard of decoration, furnishing, fixtures and fittings required.

Then there is the selection of well-covenanted tenants who will pay their rent on time and leave the property on time and in proper state; and there is the management of the tenancy. Knowing that the management of any inherent risk is in the hands of a professional agent enhances the credit worthiness of Buy-to Let propositions put to mortgage lenders.

How to Buy-to-Let

Armed with suitable advice, Buy-to-Let investors can start on a property search; or a letting agent may do this for them, instruct their own sales department or work regularly with the best estate agents in their area.

Once a property has been found, the letting agent will confirm whether or not it has letting potential, the range of the likely rent that can be achieved in current local market conditions and advise on the need - or otherwise for re-decoration and new fixtures and fittings to attract good tenants and to reduce the risk of lengthy void (empty) periods.

How are the mortgages arranged through the Buy-to-Let initiative?

Broadly, there is little difference between arranging a Buy-to-Let mortgage for investor landlords and a standard mortgage for owner-occupation. Buy to let mortgages are subject to the usual status checks. Loans can be arranged for terms of between 5 and 45 years and for up to 80% of the value of the property (subject to current conditions).

Through the Buy-to-Let initiative, rents achievable from an investment property can be taken into account, provided an agent is to be responsible for both letting and managing the property.

The Do's and Don'ts of Buying-to-Let

DO Think of Buying-to-Let as a medium to long term investment

DO Seek advice from Redbrick Lettings on the local market property demands

DO Double check your sums. Ensure that the Rent will cover borrowings and costs and make allowance for void periods?

DO Decorate, fit out and furnish to high quality standards, especially kitchens and bathrooms to attract the best tenants and you will find that they will let quickly every time.

DO Use Redbrick Lettings as your letting agent. They hold Professional Indemnity Insurance to the required standards, have trained staff who are kept up to date with the latest legal and regulatory requirements.

DON'T Let personal taste influence your judgement. Be sure the property you choose meets market requirements.

DON'T Purchase anything with potential maintenance

DON'T Think that the running of an investment property to let can be left to friends or relatives in your absence. Tenants require a full management service.

DON'T Use off-the-shelf tenancy agreements from HMSO or Law stationers, or forget to issue the right notices or fail to have a proper Inventory and Conditions report made before the Tenant moves in. Leave all documentation to a professional agent.

DON'T Furnish the property with second-hand furniture or cast-off soft furnishings. These will probably contravene the Furniture and Furnishing Regulations.

What happens after Buying-to-Let

We will introduce and vet prospective tenants; prepare the tenancy agreements; advise on and arrange the inventory and condition reports and notify/change s to utility suppliers and Council Tax; collect the rent and pay the balance to the Landlord's account.

We can also pay bills on behalf of the Landlord and regularly inspect the property, recommending, overseeing and accounting for necessary maintenance, repair and redecoration when needed.

Are there any special conditions?

Generally, lenders will expect Landlords to use the services of a professional letting agent, such as Redbrick Lettings to let and manage the property and for rental agreement to be drawn up as Assured Shorthold Tenancies or other contracts as appropriate.

Can a Buy-to-Let investment be protected?

Insurance cover is now available for Rental Protection, in the event of a defaulting tenant, and for legal expenses in addition to the normal building and contents insurance. We can supply details of both on request.

What other costs should be taken into account?

Our commission and management fees, Insurance (Building/Contents/Rental and Legal Expenses Cover), the costs of keeping the property in a marketable condition, service charges and ground rents - if a leasehold property. (The Tenant is responsible for ALL Utility accounts, Council Tax & TV License fees etc.. )

Tax and allowances

Deductions against tax on rents received may be claimed for the costs of maintenance, such as insurance, cleaning, gardening, agent's commission and other reasonable management expenses (but not improvements).

Initial cost of furniture, fittings and fixtures is not allowable, but the actual cost of any subsequent replacement may be claimed; or alternatively, a wear and tear allowance of 10% of the rents received may be deductable.

Note: This section is for guidance only. The responsibility for the financial decision to Buy-to-Let can only rest with the Investor. Most Letting agents will not accept responsibility for the validity of investments, costs incurred or for mortgage arrangements made, although those who are registered as financial advisors may do otherwise.

It should be noted that as with any investment, returns and capital values can go down as well as up; and the investor should be fully aware of the terms and conditions applied by the chosen mortgage lender. Letting agents must present their own written 'Terms of Business' for letting and managing properties.

Redbrick Lettings are members of the Property Ombudsman (TPO's) for Lettings and Property Management.

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