Thinking about investing in a property to let out? We look at what you should consider before taking this big step.
The new stamp duty increase of 3% for second home buyers announced in November 2015 brought a dramatic hike of 28,700 buy-to-let purchases in March 2016 prior to the deadline, before a 51% year-on-year drop in applications to just 4,200 in April 2016. Certainly there are risks with renting out a second home, considering the ever-unpredictable property market, but it is still possible to benefit from your investment if you do the following:
Do the maths
The new rules on tax and stamp duty, and the complexity of selling on your property may make you think twice about becoming a buy-to-let landlord. Compared to the potentially more lucrative alternatives like funds, trusts or shares, it is an especially difficult time to consider investing in buy-to-let. A second homebuyer previously paying stamp duty of £2,500 on a property worth £250,000 now has to pay an additional £7,500 - a significant increase with the new 3% surcharge. Further tax changes in April this year mean landlords are now unable to offset all buy-to-let mortgage interest against income tax. This means they will soon have to pay tax on the full amount, less a 20% tax credit. Yet, investors are encouraged by the rising housing market and low mortgage rates to buy second properties as an income investment, especially when compared with low savings rates and stock market swings. You will need to do your homework, but understanding what the new rules mean for you will help you to make a considered decision about buy-to-let investments.
An important part of researching buy-to-let will be establishing the right property and the right location. Think about who your potential tenants may be, what sort of place they may like to live in, and in which area. Consider what sort of property you can afford and want to buy and combine with a promising location that has good transport links, decent schools and suitable facilities. Look at investing for income with buy-to-let, not short-term capital growth, and work out the annual rent received as a percentage of the purchase price to establish the rental yield. Aim to get a substantial rental return after mortgage payments, costs and tax, and over time you will see the benefit from the income by being able to invest elsewhere, or pay off the mortgage at the end of its term.
Who is running the place?
You have done your sums, considered all your research, and your chosen buy-to-let property looks promising, but are you up for the real hands-on hard work of being a landlord? A landlord is expected to provide services around the clock, and on some properties and with some tenants, this may soon take its toll. Employing an agent to rent out and manage your property may be an appealing option, as they then deal with all maintenance issues and problems that may arise. Of course, you can save on the fee by doing it yourself, but you will need to give up your time to handle viewings, advertising and repairs, source the right documents, such as tenancy agreements, and expect to deal with all queries. A well-maintained property and happy tenants will mean fewer gaps in rental income, as they are likely to stay longer.
It is essential with any investment that you consider the disadvantages as well as the advantages before making any decision. Property investing can bring income and capital gains, but it is important to remember that the housing market can fluctuate, so you need to expect and be able to deal with any potential changes. Buy-to-let may not appear the most attractive prospect right now due to several recent tax changes resulting in potential lower returns, but careful planning ahead could bring huge rewards.