Buy-to-Let Pros & Cons
15 March 2017
Before you consider buying a buy-to-let property and becoming a landlord, it’s important that you understand the full advantages and any disadvantages.
A ‘buy to let’ is when you decide to buy a property and rent it out. Usually, the mortgage on the property will be paid for by the rental income. You therefore have a second property with the mortgage being paid down. At the end of the term you have a mortgage free property which you may decide to sell and make a profit, or continue to rent to gain additional personal income. It sounds like a perfect solution to increase your income.
According to the Council of Mortgage Lenders over 1.7 million mortgages were advanced between 1999 and 2015. Whilst the market has been buoyant, some people believe it has also contributed towards increased house prices in certain areas and a lack of supply generally.
This is because if an investor buys a house to rent, the property is taken out of the market for some years. The market then contracts as there are less ‘first time buyer’ houses available, meaning demand is high but supply low. The high demand with low supply naturally pushes house prices up as individuals increase offers in a hope to secure a property. As house prices rise, supply reduces which then forces many to rent. More people renting increases the market for investors and the cycle continues.
In an attempt to combat and stabilise the housing market, the former Chancellor George Osbourne introduced an increase in Stamp Duty Land Tax for individuals who owned more than one property, raising the bar to 3%.
With the increase in Stamp Duty Land Tax, the loss of high rate tax relief on buy to let mortgage interest, and making income on second properties exempt from the lowered Capital Gains Tax rates, the prospect of becoming a landlord can seem less attractive. Many believe it’s too early to determine if George Osbourne’s tactics have been successful, whereas others believe the increase in Stamp Duty Land Tax has also contributed towards a difficult housing market.
If you decide to become a landlord and have navigated through the requirements, considered your tax position and obtained good advice and a mortgage to suit your needs, there are other factors you should also consider. It’s vital that at each stage you take independent legal advice upon the type of tenancy, understand your legal requirements, your tax position and your responsibilities.
If you have an Assured Shorthold Tenancy created after the 6th of April 2007, as a landlord you must put the deposit in a tenancy deposit protection scheme within 30 days of receiving the deposit. The scheme protects the deposit and if the tenant has complied with the requirements of the Tenancy Agreement at the end of the tenancy they will receive their deposit back. If you do not agree that the tenant should receive their deposit back at the end of the tenancy there is a free dispute resolution procedure which should be followed.
What Am I Responsible For?
As a landlord you are usually responsible for repairs of the property, including:
- the property’s structure and exterior
- basins, sinks, baths and other sanitary fittings, including pipes and drains
- heating and hot water
- gas appliances, pipes, flues and ventilation
- electrical wiring
- any damage the tenants cause by attempting repairs
You are also usually responsible for repairing common areas, such as staircases in blocks of flats.
What Certificates Do I Need Before I Can Rent?
You should obtain a Gas Safety Certificate and ensure this is checked and updated annually.
As a landlord you should follow Fire Safety Regulations and provide smoke alarms and carbon monoxide alarms on each floor of the property.
You are also required to check the electrics at the property and ensure the system is safe and compliant.
What Checks Do I Need on the Tenants?
If you intend to let your property through a letting agent you should ask what checks they undertake on the tenant. As a minimum you should ensure you have a credit reference check, bank statements, affordability checks and, if possible, references. Your letting agent will be able to provide you with a complete list of requirements before you rent your property.
Speak to a Specialist
Before you consider renting, talk to a tax advisor to understand your personal situation, and a financial advisor who can assist with a mortgage product to suit your needs. Also speak to letting agents to understand what packages they offer and what background checks are undertaken. Obtain a few quotes on rental income for the proposed property and also consider the extent of repairs you will be liable for.