“Buy to let” 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 and there has been a modest recovery in the private rented sector since then.  The increased availability coupled with attractive rates of interest for buy to let purchasers, has 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 small business.

Research your market

When looking for a suitable property you should do thorough research. You can do this yourself or employ a specialist letting agent to help you find the area and property you are looking for.  If you do plan on researching the market yourself, you will need to gather information from local estate agents, newspapers, employers and local authority regarding the demand for and supply of, rented housing.

Attracting tenants

So you’ve now researched and have a good idea of where you would like to buy a property.  You will now need to think about the type of tenant you are aiming to attract to your property.  Will you be hoping to attract single people or families, as they will have different requirements from the home they choose to rent?  You should also look at how close the property is to local amenities such as shops, transport and schools, and access whether these are the types of amenities that will be important to your prospective tenants.  So if you are aiming to let your property to a family with young children, how close the nearest schools are, will be very influential on where they choose to rent.  It is also important to remember that your property should have features that are attractive to would be tenants, rather than would be buyers.

Managing your property

Your responsibilities

When you have chosen a property, you will need to decide who will manage it for you.  If you manage it yourself, you will be responsible for:

• Finding tenants
• Checking tenant references
• Collecting rent
• Maintaining the property
• Dealing with problems

Your legal responsibilities

You will also need to be aware of your legal responsibilities as a landlord such as:

• Carrying out repairs
• Ensuring that all furniture and furnishings meet the desired fire safety requirements
• Ensuring the safety of gas and electrical appliances

You should also familiarise yourself with the landlord and tenant law, to understand your responsibilities as a landlord and the rights your tenants enjoy.  The department of the Environment, Transport and the regions (DETR) have published a highly useful guide for landlords in England and Wales called “Assured and assured shorthold tenancies” which is free from the Department of the Environment, Transport and the Regions and can be obtained by calling 0870 1226 236 or downloading from www.communities.gov.uk.

When your property is empty

You should remember that there may be periods of time when you are unable to find tenants for your property and it will be sitting empty, with no rental income coming in.  Obviously you will still be expected to continue repaying your mortgage so you will 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.

Managing your property

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

Management agents

Given the number of different responsibilities you could face as a landlord and the limitations on your own time, with other work commitments or family life, you may wish to use a managing agent to look after your property for you. This will cost you approximately 10% - 15% of your monthly income and recommend you shop around for the best deal from your local management agents.

Choosing a Mortgage

You will need to ask yourself how much you can afford to pay, and how you will pay for it.  If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow.  Typically lenders allow people to borrow up to 80% of the property’s value.  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 25% to 50% greater than your monthly mortgage payments.

Choices of mortgage

When you choose your mortgage it will be between a repayment mortgage or an interest only mortgage.  With an interest only mortgage, some lenders require you to have a suitable investment product in place.  If you have a repayment mortgage, some lenders may also advise you to arrange life insurance to run alongside your mortgage.  You may be able to choose between a fixed rate and a variable rate mortgage.  A fixed rate mortgage will give you some certainty about your mortgage repayments while variable rates could move up and down.  You should also remember that your mortgage payments could rise if interest rates rise, depending on the type of mortgage you have.

The costs to expect

As well as your mortgage payments you will need to pay for:

• Building 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
• Mortgage repayment increases due to interest rate rises, which you may not be able to recover immediately from rent increases

Your tax liability

Last but not least, your tax liability as a landlord.  Before you can calculate what your income from your property will be after taking into account all necessary expenditure, you should recognise that 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 will have to pay the following taxes:

• Income tax
• Stamp duty when you purchase your property
• Capital gains tax when you sell the property

You can find out more about the tax treatment of income from rented property in Taxation of Rents; A guide to Property Income IR150 and can be found on www.hmrc.gov.uk

The information contained within this section is for informative reasons only and the responsibility for purchasing a Buy to let property rests with the investor.