So, you’ve found the perfect property as your next – or first – buy-to-let.
It’s in fantastic condition, perhaps even brand new, and the place is ready to go and ready to rent. There are no furnishings to buy, no kitchen appliances needed, and nothing to paint or repair: all that’s left is to find a tenant, watch the rent come in, and enjoy the proceeds. Or is it?
There’s a lot to consider when buying a rental property to be sure you’ve accounted for every expense. Not only the initial purchase costs, but also mortgage repayments, fixed-rate terms, ongoing maintenance, income tax, allowable expenses, and any service charges or ground rents. Not to mention a contingency plan for when the unexpected inevitably happens.
If that sounds like a lot, it is! And that’s why we created this guide: so you can get your figures right for a sustainable and profitable investment.
LEGAL COSTS
It costs money to buy a rental property, from conveyancing and mortgage application fees to LBTT and the Additional Dwelling Supplement.
These costs are unavoidable, so budget for them early on, then check the statement from your solicitor well before completion to avoid scrabbling around for funds on the big day.
IMPROVEMENTS
If you’re going to renovate a property before renting it out, make sure you’ve costed everything fully and have all the money available to pay for the works. Starting a project while expecting the funds at a later date is a risky strategy unless you have a guarantee when that money will arrive.
With any renovation project, it’s important to neither over- nor under-improve. Think about your target market and the likely wear and tear on your property, then balance your expenditure with long-term durability and the aspirations of your audience.
Overspending for the area or likely tenant is nothing more than money down the drain. At the same time, it’s costly, time-consuming and quite boring if you have to keep replacing cheap appliances because they stop functioning, or if your rental income goes down because the specification can’t stand up to life.
Not sure what’s best for your buy-to-let? We’re here to help you strike the perfect balance between attracting the best tenants, improving the value of your property and avoiding wasting money.
MORTGAGE PAYMENTS
Mortgages are efficient and low-cost borrowing that reduces your capital outlay and allows you to buy more and/or higher value property. However, whether or not you have a tenant living in your buy-to-let, your mortgage will still need paying, and interest rates are not set in stone.
Mortgages are still excellent value, which makes higher borrowing an extremely attractive proposition. But when interest rates are low, even a slight increase in the base rate can cause a significant difference in your repayments. So keep that in mind when deciding how much debt you’re happy to hold, against how much equity will give you comfort and breathing space.
You should also consider how long you’re thinking of holding a property when choosing a mortgage. Fixed rates are great for budget planning, but they almost always come with a penalty for repaying the loan inside the fixed-rate period.
So think about how far into the future you want to commit yourself. If you’re certain you wish to hold a property for the long term, a 5 or 10-year fixed rate could be a good move. But if you’re less certain, a 2-year tie-in might be better for you.
On renovation projects, some lenders will allow you to draw down extra funds at the same fixed rate after works are complete and the value of the property has increased. As with all buy-to-let borrowing, talk to an expert to fully understand your options.
MAINTENANCE & REPAIRS
It’s easy to forget just how many allowances you need to make for things like ongoing maintenance, repairs and legal compliance. Whatever type of property you buy, whether it’s a freehold house or a leasehold apartment, it will need looking after.
Annual gas safety certificates and five-yearly electrical certificates are mandatory and should form part of your calculations, along with any other service contracts for equipment and appliances that require regular maintenance.
Depending on the sort of property you are buying, annual service charges could be extremely low, or fairly high. A converted flat in a Victorian house with just a communal hall to repaint every few years won’t have much of a service charge, but you should check how well the building has been looked after. A lack of maintenance up until now could mean a hefty repair bill down the line.
For apartments in buildings with facilities like residents gardens, lifts, a concierge or cleaning of windows and communal areas, you’ll usually attract a higher rent and more affluent tenants to go with your higher service charge.
However, those service charges are coming whether or not your property is occupied, and these apartments often sell to landlords who look at long-term capital gains over initial yield.
For freehold properties, the lack of a service charge doesn’t mean that regular maintenance won’t be required. Our gorgeous weather will still affect the exterior paintwork, and the interior will still be subject to wear and tear.
Looking after your rental properties will not only keep them popular with tenants, it will help you achieve a higher rent and ensure the value of your property keeps up with the rest of the market.
TAX
To avoid that last-minute sinking feeling each January 31st, it’s extremely wise to work out your likely tax at the beginning of a tenancy. You can then put a sum aside each month so it’s ready for when you submit your return.
The rules around allowable expenses are different for residential tenancies and holiday lettings, but there are nonetheless several costs you can claim including agents’ fees, service charges, insurance, maintenance & repairs and accountants fees. And while mortgage interest relief has been phased out, the new mortgage tax credit still benefits the majority of landlords.
For furnished lettings, you can also claim for the costs of replacing furniture or appliances, but you cannot claim for improvements to your property beyond wear and tear.
Full information is available at: https://www.gov.uk/renting-out-a-property/paying-tax
AGENTS FEES
You have many choices when it comes to choosing whether or not to use a letting or managing agent, from how many of their services you wish to use, to how much you’d rather do yourself.
You could ask your agent to simply find a tenant and then leave you to it. You might want the rent collection handled while you deal with repairs, safety checks, service charges, etc. Or you might prefer everything done for you so you can get on with your life while all the administration and maintenance is taken care of.
Whichever option you choose, make sure that you are fully informed of the costs and have taken them all into account in your calculations. It’s wise to consider this before you buy: think carefully about the sort of landlord life you want and the sorts of responsibilities you wish to retain. Balance the costs against your time and your lifestyle to discover exactly what works for you.
What’s next for you?
Whether you’re letting your property yourself, employing an agent to find you a tenant, or using a full management service, make sure you thoroughly cost your purchase, legal, improvement, maintenance and tax expenses.
Do you have a buy-to-let in Fife that deserves the care of experts? Give us a call on 07909093141 or drop us a message at richard.cook@fifeproperties.co.uk – we take as much pride in your rental investment as if it were our own.
