The once thriving buy-to-let market in Britain had the wind knocked out of it in 2016 when former Chancellor George Osborne introduced a raft of measures to curb the industry.
A series of reforms were brought in which had a punitive effect on landlords. These included a stamp duty surcharge on additional properties, making it more expensive to start or add to a property portfolio, as well as the removal of mortgage interest tax relief, which further squeezed profits.
Thousands of buy-to-let landlords quickly exited the market. Figures released in 2018 by IMLA, the mortgage lender trade body, showed that the amount of new money borrowed to invest in buy-to-let properties had plunged by 80%, from £25bn in 2015 to just £5bn in 2017. The number of new buy-to-let mortgage completions fell by 13% in the year to August in 2018, according to UK Finance, the banking trade body, with just 6,000 new deals completed that month. But it’s not all doom and gloom for landlords. Demand for rental property remains strong, and while yields have fallen, there is still money to be made in the buy-to-let sector. Experts insist there are reasons to be optimistic about the future of buy-to-let.
If you’re thinking of becoming a landlord, research which regions in Britain produce the highest yields (there’s an interactive map in the original article here). A calculator (on the same webpage) will also show you how much money you can make from your property purchase, based on rental income and mortgage interest.
Buy-to-let investors often talk about rental yield, as this is an indicator of whether the properties are making money or not. It’s an easy figure to calculate – simply divide the annual rental income by the amount of money you paid for the property. So, if you paid £300,000 for a house and earn £18,000 a year (£1,500 a month) in rent, the yield would be 6%. Of course, these are gross yields and do not take into account the costs associated with letting, such as buildings insurance, general maintenance and mortgage repayments.
The interactive map shows that the highest rental yields can be found in the north of England and Scotland, with East Ayrshire and Hartlepool yielding 8.1%, and West Dunbartonshire 7.8%. The lowest yields are almost all in London, where landlords can expect more modest returns of around 3%. Telegraph Money will be updating the figures on the webpage on a bi-annual basis, using data provided by property market analysts Hometrack. The data currently displayed refers to prices for the first six months of 2019.
Step-by-step guide: how to get started as a buy-to-let landlord
1. Research the market
Identify an area where there is demand for the kind of property you intend to buy, and where you can charge enough rent that will make your investment financially viable. Where there are students there is generally a steady and ever-replenishing supply of tenants.
2. Decide who will manage the property
If you plan to manage the general day-to-day running of the property yourself it helps to live fairly close by. If you’re going to employ a letting agent, however, it doesn’t matter if you live hundreds of miles away. It’s a good idea to invite at least three agents to value your property, suggesting what would be a reasonable rent to charge. Ask them to bring examples of similar properties they manage, or have let recently. Agents typically charge around 8% to 12% to let a property, and between 10% and 15% to manage it.
3. Get a 25% deposit together for a mortgage
Buy-to-let mortgages are similar to standard mortgages, but with some key differences. For instance, the fees tend to be bigger, interest rates are higher, and the minimum deposit is usually 25% of the property’s value. The rough rule of thumb is that the rent you receive per month should equal at least 125% of what you pay out for your mortgage, so you should get £125 for every £100 you spend.
4. Get references from your tenants
You should ask prospective tenants for bank statements from the last three months, utility bills from their last property, and references from their current employer and previous landlord. Bear in mind that there are legal checks you’ll need to make before you can rent out your property, such as carrying out a legionella risk assessment. Landlords must also put their tenant’s deposit into a government-backed tenancy deposit scheme (TDP).
5. Keep track of all your spending
Since April 2017, the system of calculating tax bills on rental income has changed, and by April 2020 landlords will not be able to deduct mortgage expenses from rental income in order to reduce their tax bill. If you are a basic rate taxpayer you will pay 20% income tax on your rental profits, but do not have to pay National Insurance. The first £1,000 of income from property rental is tax-free under the government’s “property allowance”.
All landlords have to fill out a self-assessment tax return, including information on the income received and their expenses (which is why it’s important to keep receipts). The sorts of expenses you can deduct from the rent you earn include the cost of general maintenance, managing agent fees, and insurance.
[Source: Telegraph Property, 27 September 2019]
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